3. Financial estimation of capital investment program

It is offered to make a decision on the further capital investment to satellite oil reserves for the further development of the company and receiving profit. The company plans the drilling program on satellite reserves for the period second half 2005 - 2010. The basic speciality of satellite wells is the company already has developed the major part of licensed territory: the central production facilities (CPF), the pipeline from CPF to terminal, living modules, other equipment of an oil production infrastructure have been constructed. So cost of the capital investment related to processing and oil transportation, and also operation cost of satellite wells will be considerably less that positively affect on final financial results.

3.1. Calculation of break-even success and finance estimation of one well

As it was specified earlier, there are formulas for an estimation of the expected well cost which allow to help the investor with acceptance the decision about drilling, and, as consequence, acceptance the decision about investment. Let’s calculate the factor of break-even success for some one selective well. Capital cost of well construction can be different depending on a kind of drilling (vertical, directional and etc.), depths of drilling, kind of a drilling platform (ground, ice), distance from gathering and other features. Capital investment to one well is average from $5MM up to $10 MM. This value is risk capital of the company. The recovery volume of well is estimated by the geological department with various options which will be considered below. One well of this territory can produce within the limits 150 - 500 thousand tons. Economic benefit is multiplication recovery volume and the oil price.

Let’s consider the worst script of events:

Risk capital: $10 MM;

Recovery volume: 150 thousand tons;

Price of oil: 20 dollars/ barrel taking into account oil transportation and tax payments;

Rate barrel / ton: 7,44.

SP = $10 MM / (150 thous.tons х 7,44 х 20 dollars/barrel + $10 MM) = 31%.

Geologists of the company made seismic investigation and determined that average probability of success in this area exceeds 50 %. As this value of probability exceeds the worst script 31 % so it is possible to ascertain that conditions of well drilling in this area allow investing resources to drilling.

Let’s estimate efficiency drilling of one well # 13 which should be drilled and put into operation in 2006.

Figure 3.1 Forecast production profile

Table 3.1 Forecast production volume

2006-2017			P10 (High)	P50 (Base)	P90 (Low)
Cumulative production (tonn)			599,264	428,447	230,187
Cumulative production (MMB)			4,461	3,189	1,713

Forecast capital expenses are:

Drilling & completion $ 4,90 MM

Engineering $ 0,03MM

Development $ 2,10 MM

Total $ 6, 32 MM

It is planned, that operating and overhead expenses will be $150 M in the 1^st year and then will be increased on 3 % of inflation.

The recovery dynamics with various probabilities of oil recovery is shown in the figure 3.1. The finance indicators (cash flows, NPV, IRR, index of profitability) evidently show attraction of the well drilling project (see table 3.2, 3.3 and figure 3.2).

Table 3.2 Net cash flow for different probabilities

Net Cash Flow	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017
P – 10	- 1,541	8,830	8,734	5,981	4,195	3,146	2,446	1,846	1,504	1,243	1,034	850
P – 50	- 1,541	7,756	5,360	3,525	2,617	1,969	1,502	1,165	960	788	628	496
P – 90	- 1,806	6,123	2,336	1,062	696	513	317	214	113	79	0	- 45
P – 50 (dicsount)	- 1,401	6,410	4,027	2,408	1,625	1,111	771	543	407	304	220	158

Figure 3.2 Cash flow profiles with and without discount (10%)

Table 3.3 Financial result

Financial result 2006 - 2017	P10 (High)	P50 (Base)	P90 (Low)
NPV	24.79	16.58	6.95
IRR	568%	472%	278%

Profitability index with discount 10%				3.65
Profitability index without discount 10%				4.66