01/04/2017

Koya University
College of Engineering
School of Chemical and Petroleum Engineering
Department of Petroleum Engineering
Third Stage Cash Flow Calculation
Petroleum Economics
Cash Flow Calculation
Farhad Abdulrahman
Assistant Lecturer

Cash Flow Terms and Concepts

• Net Cash Flow (NCF) is the foundation of all • Revenues: funds received by the coy during the
investment decisions. period under consideration.

• Only cash can be used to acquire assets and to make
profit distributions to investors.
• Negative cash flow over an extended period of time
reduce an organization’s ability to satisfy its financial
obligations.
• Costs and Expenses: money spent by doing business
that must be paid from the revenues received by the
coy.
• Tangible Costs: Expenditures for items such as well
equipt, casing, wellhead etc . These costs are charged
against income through depreciation.

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Terms and Concepts (contd.) Other Terms/Concepts

• Intangible costs: Expenditures not represented by
physical equipment. They are not capitalized for tax
purposes.
• Depreciation: decline in value of equipment due to
wear and tear of normal use.
• Royalty: right to oil and gas in place that entitles its
owner to a specific fraction in kind or cash.
• Overheads: Costs not directly assigned to any unit of
production but are incurred as a result of general
operations (Administration and Management, Debt
interest).
• Income Taxes: The net revenue before income tax
(net revenue after expenses) is determined by
subtracting total expenditures before income tax from
total revenue. The council, state and federal taxes are
subtracted from the net revenue before income tax to
give after tax net cash flow.

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Expenditures The Total Capital Costs (CAPEX):

• The total original cost of installed facilities which
• The total expenditures incurred in producing cannot be deducted for tax purposes, but for which
oil and gas wells are divided into two groups: depreciation is allowed by the tax authorities.

• It includes all expenditures required to drill, complete

the well and to provide the well with production
1. The Total Capital Cost / Capital Expenditures facilities required to lift the oil and gas from the bottom
(CAPEX) of the well to the surface and also to transport HCs
from the well head to the treatment plant.
2. The Total Operating Cost / Operational Expenditures
(OPEX)
• Additionally, it includes are all future expenditures
required to keep the well on production (other than
operating costs)
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Capital Expenditure (CAPEX) Capital Expenditure (CAPEX) (contd.)

• One-time costs • Classification by purchased items:

• Occurring at the beginning of projects
▪ Facility costs
• Classification by purpose: ▪ Wells/ Drilling costs
• Exploration costs ▪ Pipeline costs
• Appraisal costs ▪ G&G costs (mainly seismic)
• Development costs ▪ Signature bonus
• Running Business costs
• Abandonment costs Note: Classification and wording differ from company
• Acquisition costs to company.

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CAPEX Expenses Operational Expenditures (OPEX)

• CAPEX are classified as tangible or intangible • The expenditure incurred by producing from
expense: an oil or gas well after it has been drilled and
completed is called the operating cost. It is
divided into two categories:
– Tangible expenses are cost of physical equipment
and are tax deductible only by depreciation.
– Direct operating costs
– Intangible expenses are expenditures not
represented by physical equipment. These items – Taxes
are not capitalised for tax purposes (eg: land
survey, site development, access roads…etc)

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Operating Costs - OPEX (contd.)

Operational Expenditures (OPEX)
• Direct Operating Costs: These are costs (expenses)
directly chargeable to individual leases. Labor and • Occur periodically
material costs for operation, maintenance, workovers, • Are necessary for day-to-day operations
gas processing plants, salt-water disposal systems and • Consist typically of:
– Utilities
injection plants.
– Maintenance of facilities
• Taxes: Vary widely throughout the world. – Overheads
– Severance taxes: They include conservation and production – Production costs, e.g, Treatment Costs, Interventions,
taxes. They are charged by governments and are based on Secondary recovery costs, Water treatment & disposal
production volume costs.
– Insurance costs
– Ad valorem taxes: These include property taxes.

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Contingency and Allowance NEW PROJECT CASH FLOW PROFILE

• Contingency: Budget for the unknown unknowns
• Allowances:
▪Budget for the known unknowns (stuck)
▪are probable extra costs
▪ E.g. for material, identified risks, foreseeable
market or weather conditions, new technology,
growth.
▪ The value is often taken from the 10% probability
budget estimate.

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Net Cash Flow (NCF) Calculation Net Cash Flow (NCF) Calculation
NCF = Gross Revenue • NCF = Gross Revenue
- Royalty - Expenses (OPEX, Overhead, Royalty, Taxes )
- Operating Expenses (Well Repairs/Work-over ) - Depreciation
- Overheads (Internal Costs) - Depletion
- Capex - Capex
- Taxes (Property/Severance/Conservation) - Production Or Not. = Taxable Income
- Income taxes

= Net Revenue after expenses For Accountant = NET PROFIT

- state and federal income tax + Depreciation
+ Depletion
= Net Cash Flow
For Economist = NET CASH FLOW

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Example 1.0 Solution Example 1.0

From volumetric calculations, the recoverable reserves for Revenue = 15 million x $18 = $ 270.00 million
a proposed well are 15 million barrels of oil. A joint Royalty (20% of Revenue) = ˗ 54.00 million
venture agreement between the host government and the
IOC allows the host government 51% of the project OPEX = ˗ 30.00 million
revenue after tax profit. Depreciation = ˗ 50.00 million
Before tax profit = 136.00 million
Determine the host government take if the following
economic conditions prevail: Tax (75%) = ˗ 102.00 million
After tax profit = 34.00 million
Oil price = $18/bbl; OPEX = $ 30 million; Royalty=20%; JVA ( 51%) = ˗17.34 million
Depreciation = $ 50 million; Tax rate = 75%. HG take = 173.34 million

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Commercial Evaluation Scenarios

Depreciation, Depletion and Amortization
A B C
Project Rev. $1,000,000 $1,000,000 $1,000,000
• Depreciation, Depletion and Amortization are
Operating Cost - 200,000 - 200,000 - 200,000 the means of recovering investment in certain
Depreciation - 50,000 - 50,000 - 000,000
types of property before tax basis.
Taxable Income 750,000 750,000 800,000

Income Tax (50%) 375,000 375,000 400,000

• Methods of Computing Depreciation
Net Revenue 375,000 375,000 400,000
1. Straight Line
+ Depreciation 50,000 00,000 00,000 2. Double Declining Balance
3. Sum of the Years Digits
CASH FLOW 425,000 375,000 400,000

A = Depreciation taken and added

B = Depreciation taken but not added
C = Depreciation NOT taken

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End

Next: Measures of Profitability and

Performance / Time Value of
Money

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