SCHOOL OF ENERGY, GEOSCIENCE, INFRASTRUCTURE & SOCIETY

G10EE

Energy and Petroleum Business Economics

Group Assignment

Investment in the oil sector is generally perceived to carry a higher level of risk with
respect of other business sectors. For example, the 80% failure rate is often
associated with the activity in exploration drilling. Accordingly, oil companies need to
use an appropriate discount rate to evaluate their investment projects. Similarly, they
may decide to vary the discount rate used for analysing different projects. In general,
oil companies use discounting of cash flow as a universal technique for project
evaluation. In this regard, the Net Present Value (NPV) is widely used as a measure
of project economic performance.

In this exercise, you must:

 Carefully describe the construction of a cash flow model for a particular
project.
 Illustrate the main steps of the economic analysis used by an oil company to
decide whether to undertake or not an investment project.
 Explain the common risk factors associated with the oil market and, therefore,
analyse the significant sources of risk as faced by a petroleum industry.
 Identify and explain the various procedures, which are available to a
petroleum company to help reduce its exposure to risk.
 In your analysis consider and properly discuss the aspects related to the
specific location of the project.

Submission
Your submission will be a maximum of 1000 words. You must write this essay in
groups of two or three people. Please ensure that your student registration number
and module code are stated on every page of your assignment (either in the header
or footer) and that your assignment is stapled in the top left hand corner. Your
assignment must be uploaded via the Turn-It-In tool on Vision prior to the date of
submission.