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2015ARKH-P5-Field Development Evaluation(80s)

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Petroleum Field Evaluation Process

Introduction to Economic Analysis

Cash Flow Analysis (1)

1 – Out flows:

Exploration/Appraisal costs

Development costs

Tariffs

Operating cost

Taxes

2 – In flows:

Oil and Gas revenue

Production is the part of the reserves produced daily. The barrel (bbl) is commonly used to quantify the oil quantities. Cubic meter or Standard cubic feet are used for gas project.

3 – Project economics:

Depend of the petroleum contract

41

Petroleum Field Evaluation Process

Introduction to Economic Analysis

Cash Flow Analysis (2)

4 – Investment cost - CAPEX:

The costs incurred during the development of the project: seismic acquisition and treatment, studies, exploration and development wells, hardware and facilities for producing the field ….. And installations removal

Costs are highly sensitive to the field environment: in the range of 1 $/bbl in the middle east, 7 $/bbl in the north sea.

5 – Operating cost - OPEX:

Cost associated with the ongoing operation of the installation: logistic, personnel, products, tariffs …

Cost are fixed or variable.

Operating costs range can be as low as 2 US$/bbl up to 4 or 5 US$ for a small field. Costs were dramatically reduced over the last 10 years but have recently drastically increased due to overheated industry

42

Petroleum Field Evaluation Process Introduction to Economic Analysis

Main Economic Indicators

NPV – Net Present Value

IRR – Internal Rate of Return

MCE – Maximum Capital Exposure

PAYBACK – Also known as PAYOUT

43

CASHFLOWS

Cashflow = Cash inflow – Cash outflow

150

100

Yearly cashflows

50

(Cashflows annuels) 0

-50

-100

-150

+

years

-

Cumulated cashflows (Cashflows cumulés)

Project value

+

years

-

44

TIME VALUE OF MONEY : DISCOUNTING

Discounting :

Measures the depreciation of « future » compare to « present » Preference to have money « NOW » rather than in « FUTURE »

It is the process of finding the present value of an amount of cash at some future date :

Present value : V0

Amount of cash in year « n » : Vn

V

0 =

V

n

/ (1 + a%)n

 

 

 

« a » is the discount rate, it represents the time value of money, it is equivalent to a yearly interest rate

The discount rate :

Represents the cost of the capital money

Is choosen by the investor/company

Depends on the country where the Project takes place (Risk consideration)

45

DISCOUNTING

X %

+

C %

Components of discounting

Risk bonus

Remuneration of the risk

Depends on the project (and its environment)

Cost of time

Remuneration of privation of immediate availability

Does not depend on the project

The Discount rate "a" is arbitrarily chosen by the investor

EM - MDI / ONGC - Economics & management of E&P

46

 

PRESENT VALUE

Vn

V0 = (1 + a)n

V0

: present value

Vn

: value year « n »

a

: discount rate

Example : Vn = 1million $, n = 10 years and a = 10 %

V0 = 0,385 million $

47

NET PRESENT VALUE ( NPV )

It is the cumulated yearly discounted cashflows

K=n

Fk

 

 

 

NPV (a) = Σ

 

 

 

 

 

NPV : Net Present Value

K=1 (1 + a)k

 

 

a

: Discount rate

 

 

 

n : Total nb of years

 

 

 

Fk

: Cashflow for year k

 

 

 

 

 

Single independant project : accept project if NPV > 0

Choice between several projects : choose project with highest NPV

48

VALUE CREATION

NPV

IRR

Project NPV

Discount rate

Company discount rate

Value is created if :

Project NPV(a) > 0

Project IRR > Company discount rate

49

PAY-OUT TIME – MAXIMUM CAPITAL EXPOSURE

Cumulated cashflows

 

 

Pay-out time

 

 

 

years

Maximum Capital Exposure

Pay-out :

Maximum Capital Exposure :

Period of time at the end of which the

 

It is the maximum negative value of the

cumulative net revenues equal the total

 

 

cumulated cashflows

expenditures

 

 

Generally, it occurs during the First Oil

Essentially, it is the time required to get the

 

 

year

investment back

 

 

 

It does not take into account the time value of

 

 

the money. One can calculate discounted pay-

 

 

out if required

 

 

50

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