PE

 -­‐  3712  Petroleum  Economics  Fall  2018  

Assignment  1  
 
 
Q1.  An  engineer  has  generated  an  oil  production  forecast  for  a  group  of  wells.  According  to  this  
forecast,  the  wells  produce  30,000  barrels  in  the  first  year.  Starting  the  second  year,  production  
declines   by   2,000   barrels   per   year   for   four   years.   Starting   the   sixth   year,   production   declines   by  
3,000  barrels  per  year  for  another  four  years.  Calculate  the  present  value  of  the  revenues  if  the  
oil  price  is  $75  for  the  first  five  years  and  $80  per  barrel  thereafter.  Also,  calculate  the  equivalent  
annual  value  of  these  revenues.  Assume  an  interest  rate  of  8%  per  year.  
 
 
Q2.  An  oil  company  has  installed  an  offshore  production  facility  for  $10  million  in  year  1.  The  
annual  maintenance  cost  of  the  facility  is  $60,000  per  year  for  the  2nd  year,  increasing  by  $10,000  
per  year  for  the  next  9  years.  In  the  12th  year,  a  major  overhaul  is  conducted  at  a  cost  of  $500,000.  
The  overhaul  has  helped  in  keeping  the  maintenance  costs  fixed  at  $150,000  per  year  for  the  
remaining  10  years.  At  the  end  of  22  years,  the  facility  is  sold  for  a  sum  of  $2  million.  If  the  market  
interest  rate  is  8%  per  year,  calculate  the  present  value  of  all  the  costs  over  the  22-­‐year  period.  
Also,  calculate  the  equivalent  annual  cost  of  the  facility.