UNIVERSITI TEKNOLOGI PETRONAS, FINAL EXAMINATION pleats) aig COURSE ; PCB3023 - PETROLEUM ECONOMICS DATE 4 6™ JANUARY 2016 (WEDNESDAY) TIME 4 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. Pon > Where applicable, show clearly steps taken in arriving at the solutions and indicate ALL assumptions. 5. Do not open this Question Booklet until instructed. Note i, There are SEVEN (7) pages in this Question Booklet including the cover page and appendix. ii, Graph paper will be provided Universiti Tel ogi PRTRONASd. PCB 3023 Differentiate between tangible and intangible expenses. Which one is normally allowed be to be claimed immediately? [5 marks] Double declining balance is one of the methods to claim expenses for acquiring major assets in developing a field. A total of USD 105,000 will be spent to purchase a mini compressor and its salvage value is at USD 5,000. Assuming that the declining rate is at 200%, generate a table to find the base annual value for depreciation and respective capital allowance before reaching the salvage value. [10 marks} A company is considering an investment option with expected annual net cash flow (USD million) shown in TABLE @1. Derive the future value at the end of year 5, assuming a constant compound rate of 7.5% for the whole period. [8 marks} TABLE Q1 ~ [Year0 [Year 1 [Year2 |Year3 Year4 | Year5 Netash Flow | -200 | 80 | 700 | 80 7 | 60 Explain the significance of Profit Investment Ratio, [2 marks]PCB 3023 Pure Service and Risk Service are two types of contracts under the contractual systems. Highlight their similarities. [4 marks] Input variables for cash flow calculations in a production sharing contract are given in TABLE Q2a and the first three years of annual production, capex and opex are as shown in TABLE Q2b. Computational logic are attached in the Appendix. TABLE Q2a OiPrice | Royaily | Cost Ceiling | Contractor's | Declining _] Tax Rate (USDibb)) Rate Profit Rate | Balance Depreciation Rate | 30.0 10% [20% 30% 25% 40% TABLE Q2b Year1 |Year2_|Year3 Annual Oil Production (bb!) | 20,000 _| 60,000 _| 100,000 Capex (USD) 300,000 | 400,000 | 0 Opex (USD) 1000. 1000 1000 Determine: i. the net cash flow after tax in the first year. [8 marks} ji. the unrecovered cost in the second year. [5 marks] iii, the total capital allowance in the third year [6 marks] Investment credit is an additional allowance on tangible capital expenditure in the cost recovery. However, it does not directly help increase the Contractor's take. Justify. (2 marks]PCB 3023 3. a. The listed Oil Company decided to have an initial investment of RM 1500 in the stock market. Itis expected to have return of RM-4000 and-RM 3000 in year 10 and 9 with extra cost of about RM'900 if year 3. If the interest rate per annum is 12%: i. Calculate the Net Present Value (NPV) and-Profitability Index (PI) for the-project. [8 marks} ji, Caloulate the Internal Rate of Return (IRR) value [8:marks] ii, Suggest your recommendation for the investment, [4 marks] b. Screening process classifies a project into"a “good"’or “ho-good” before further ranking. Suggest whether to rank by NPV, IRR or Pl and justify which project is preferable according to FIGURE @3. [5 marks} Pt Deco FIGURE Q3PCB 3023 ¢. An investment company decides to invest in a small but growing oil contractor company with cost of RM 6 million. The return prospect for five consecutive years is RM 1 million, RM 1 million, RM 2.5 million, RM 3 million, and RM 3 million. Part of the agreement is that the investment company must pay the contractor company an amount of RM 2 million at year 6, The required return is 15%. Should you proceed with the project? Justify. [5 marks]4 a 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 has three options if it is awarded the contract: 1. use the existing rig to dil the wells, 2. buy anew rig, or 3. subcontract the drilling work 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. Construct a decision tree for this situation [10 marks} ii, Advise the contractor if it should bid? Justify [5 marks] TABLE Q4 | __ Probability NPV (RM milion) Using Existing Rig | High Profit 0.35 60 Medium Profit 0.45 30 Loss 0.20 -20 Buying New Rig High Profit 0.55 35 Medium Profit 0.35 25 Loss 0.10 -10 Subcontract Medium Profit 1.00 _30_ Describe FIVE (5) sources of uncertainty and risk in oil and gas investment. [5 marks] - ENDOF PAPER -PCB 3023 APPENDIX Computational Logic for National Oil Company Revenue Oil Production x Oil Price Royalty Royalty Rate x Revenue Cost Ceiling Cost Ceiling Rate x Revenue Capex + Opex (Obtain from Input Cost Incurred Variable} Cost Bank Cost Carryforward + Cost Incurred. Cost Recovered Min(Cost Bank and Cost Ceiling) Unrecovered Cost Cost Bank~ Cost Recovered Profit Revenue ~ Royalty ~ Cost Recovered NOC Profit NOC Profit Rate x Profit NOC Entitlement (Cash in) Noc Profit Income Before Tax NOC Entitlement (Cash in) Taxable Income Income Before Tax Tax Paid Tax Rate x Taxable Income Income After Tax Income Before Tax ~Tax Paid Cash Out Tax Paid Net Cash Flow After Tax NOC Entitlement (Cash In) ~Cash Out Computational Logic for Contractor Revenue Oil Production x Oil Price Royalty Royalty Rate x Revenue Cost Ceiling Cost Ceiling Rate x Revenue Capex + Opex (Obtained from Input Cost Incurred Variable) Cost Bank Cost Carryforward + Cost incurred. Cost Recovered Min{Cost Bank and Cost Ceiling) Unrecovered Cost Cost Bank ~ Cost Recovered Profit Revenue ~ Royalty ~ Cost Recovered Contractor Profit Contr. Profit Rate x Profit Contr. Entitlement (Cash in) Cost Recovered + Contr. Profit Income Before Tax Contr. Entitlement (Cash In) ~ Opex Capital Allowance Depreciation Rate x Capex Taxable Income Income Before Tax — Capital Allowance Tax Paid Tax Rate x Taxable Income Income After Tax Income Before Tax ~ Tax Paid Cash Out Opex + Tax Paid + Capex Net Cash Flow After Tax Contr. Entitlement (Cash In) ~ Cash Out