UNIVERSITI TEKNOLOGI PETRONAS FINAL EXAMINATION JANUARY 2016 SEMESTER COURSE : — PCB3023- PETROLEUM ECONOMICS DATE : _ 8T MAY 2016 (SUNDAY) TIME : 2,30 PM—5.30 PM (3 hours) INSTRUCTIONS TO CANDIDATES ‘Answer ALL questions from the Question Booklet. Begin EACH answer on a new page in the Answer Booklet. Indicate clearly answers that are cancelled, if any. Where applicable, show clearly steps taken in arriving at the solutions and indicate ALL assumptions. Do not open this Question Booklet until instructed. There are FIVE (5) pages in this Question Booklet including the cover page. Universiti Teknologi PETRONASPCB 3023 Explain how you could derive NPV[0.10] from a project cash flow and what does it indicates on the project. [5 marks] Discuss the important application of NPV as a project parameter. [4 marks} Describe the term inflation in relation to prices and how it is normally measured. [4 marks] |. The Oil Company projected to have a cash flow as shown in TABLE Q.1 with the interest rate of 12%. TABLE Q.1 ‘Cash Flow (RM) -6000 ~5500 -2000 1500 2500 2500 4000 4000 4000 4000 -8000 a =] a| olco| ~]o| en} a |es}r0] /8 i. Calculate the values for NPV [5 marks] ii. Calculate value of payback period, maximum capital outlay, terminal cash surplus and profit to investment ratio [7 marks}PCB 3023 Describe TWO (2) roles of host government or contracting oil company within Production Sharing Contract (PSC) and Concession Contract (CC). [4 marks] Illustrate TWO (2) key differences between CC and PSC. [2 marks] Risk Sharing Contract (RSC) was first introduced in Malaysia in addition with Production Sharing Contract (PSC) which focuses on production and recovery rates in marginal fields. Highlight TWO (2) differences between RSC and PSC in terms of production entitlement, cost recovery, contractor's profit and abandonment scheme. [8 marks] |. ABIG Company offers you investment options as follow: Option 1: RM1250 to invest in the bank with 5% interest rate. Option 2: Invest in a fund, which guarantees to make 10 annual payments of RM250, starting in one year. Option 3: Lend to MONSTER Company which is setting up a new business and promises to repay RM3500 in 10 years’ time. i. Propose your selection based on NPV, justify. [8 marks] ii. Suggest your investment selection if the interest rate increases to 12%. [8 marks]3. PCB 3023 The listed Oil Company decided to have an initial investment of RM 1500 in the stock market. It is expected to have return of RM 4000 and RM 3000 in year 10 and 9 with extra cost of about RM 900 in year 3. If the interest rate per annum is 12%: i. Caloulate the Net Present Value (NPV) and Profitability Index (Pl) for the project. [10 marks] ji. Using graphical method, evaluate the Internal Rate of Return (IRR) value. [10 marks] iii, Suggest your recommendation for the investment. [3 marks} Screening process classify a project into a “good” or “no-good” before further ranking. Suggest whether to rank by NPV, IRR or Pl and justify which project is preferable according to FIGURE Q3. [7 marks] Discount Rate FIGURE Q3PCB 3023 ‘A drilling company is considering bidding on a RM 150 million turnkey contract for drilling offshore oil wells. The company estimates that it has a 65% chance of winning the contract at its bid price. If the company is awarded the contract, it has three options. 1. use the existing rig to drill the wells, 2. buyanewrig, or 3. subcontract the drilling to another drilling company. The contract allows for sub-contracting the activities. The probabilities and payoffs for each option are given in TABLE Q4. The cost of preparing the contract proposal is RM 1.5 million. If the company does not bid on this tender, it has an opportunity to make a guaranteed profit of RM 10 million elsewhere. i. Construct a decision tree for this situation [10 marks] ii, Advise the contractor if he should bid? Justify. [5 marks} TABLE Q4 Probability NPV (RM million) Using Existing Rig High Profit 0.35 60 Medium Profit 0.45 30 Loss 0.20 -20 Buying New Rig High Profit 0.55 36 Medium Profit 0.35 25 Loss 0.10 10 Subcontract Medium Profit 4.00 30 - ENDOF PAPER -