(CONFIDENTIAL)

SCHOOL OF CHEMICAL & ENERGY ENGINEERING

FACULTY OF ENGINEERING

FINAL EXAMINATION SEMESTER II

SESSION 2019/2020

COURSE CODE : MKPP 1113

COURSE : PETROLEUM ECONOMICS AND MANAGEMENT

PROGRAMME : MKPP

MODE OF EXAM : NORMAL (ONLINE)

TIME : 3 HOURS

DATE : 19 JULY 2020

INSTRUCTIONS TO STUDENT:

ANSWER ALL QUESTIONS

CHEATING IS STRICTLY PROHIBITED DURING EXAMINATION

THIS EXAMINATION PAPER CONSISTS OF 5 PRINTED PAGES INCLUSIVE OF THIS PAGE

(CONFIDENTIAL)
QUESTION 1 (20 Marks)
CLO CO2
(a) (b) (c)
Marks
10 5 5

(a) How do you determine whether the de-bottlenecking activity for the surface facilities is
economically worthwhile or not? (5 Marks)

(b) Explain the typical project phases for any project in oil and gas industry that are managed into
phases which reflect changing skill requirements, level of uncertainty, and commitment of
resources. (5 Marks)

(c) Explain the aims and features of the evolution of Malaysia Petroleum Contract Agreements by
stating the contract type, and the cost recovery and profit sharing elements. (10 Marks)

QUESTION 2 (20 Marks)

CLO CLO2
(a) (b)
Marks
15 5

The average production rate for an oil field is 55,000 bbl/day. The cumulative production for the
previous period is 20 MMSTB, and the current period cost banks are fully recovered, and it used 75%
of the cost oil ceiling. Assume the current oil price is USD 40/bbl.

(a) From the total revenue for the current period of one year, calculate the share of the crude oil
entitlements in USD to: (i) Government, (ii) Petronas, and (iii) Contractor, based on Malaysia
PSC:
(i) 1976 PSC (3 Marks)
(ii) 1985 PSC (7 Marks)
(iii) 1997 R/C PSC with R/C = 1.25 (5 Marks)

(b) Based on different PSCs used in (a) above, give comments on the percentage of crude oil
entitlements for each party. (5 Marks)

2
QUESTION 3 (20 Marks)
CLO CLO4
(b)
(a)
Marks (i) (ii) (iii)
2 12 4 2

(a) Calculate the oil company’s hurdle rate, if the company capitals are from bank loan, company
bond and internal profits. The costs of bank loan, selling bond, and using internal profit are 10%,
18%, and 5%, respectively. The bank loan represents 30% of the total capitals, 40% of bond and
30% of internal profit. Given that the company risk premium is 6%. (2 Marks)

(b) The same oil company in (a) above has a consession aggreement with a host government of an
oil field. The gross revenues, capital expenditures and operating expenditures are given in Table
1. The consession fiscal terms are: Government’s royalty rate = 10 %; Income tax rate = 35 %;
Depreciation for CAPEX = 5-years, straight line, commencing when production begins.

Table 1: Consession fiscal terms for the cash flow

Year
Parameter
1 2 3 4 5 6 7
Field’s Gross
Revenue 150 250 450 350 250 200
(USD Mil.)
CAPEX
100 100 80
(USD Mil.)
OPEX
20 20 20 20 20 20
(USD Mil.)

(i) Determine the yearly net cash flow for the oil company. (12 Marks)

(ii) Determine the net present value (NPV) at the company’s hurdle rate. (4 Marks)

(iii) Explain the meaning of NPV results to the oil company. (2 Marks)

3
QUESTION 4 (20 Marks)
CLO CLO3
(a) (b)
Marks
10 10

Expert Oil Company has an exploration target for which its geoscientists have identified an exploration
well location and, potentially, two appraisal well locations. In the event of the discovery after drilling
exploration well, the company decide whether to drill an appraisal well. If the first appraisal well is
having an oil, the company well decide whether to drill second appraisal well. The probability of
dicovery for exploration well is 20%, and the probability for each appraisal well of having oil is 40%.
The probabilities of having large, medium and small reserves are 30%, 40%, and 30% respectively.
The financial estimates are given in Tables 2 and 3.

Table 2: Cost of the wells

Cost of exploration well RM 20 million
Cost of first appraisal well RM 16 million
Cost of second appraisal well RM 14 million

Table 3: Profits from various field sizes.

Appraisal well Appraisal well
Field size
with oil with no oil
Profit from large field (net of
RM 500 million RM 400 million
operating expense)
Profit from medium field (net
RM 300 million RM 200 million
of operating expenses)
Profit from small field (net of
RM 125 million RM 100 million
operating expenses)

Based on the above:

(a) Draw the decision tree to show whether the oil company will decide to drill the exploration well,
and then will decide whether to drill the two appraisal wells. (10 Marks)

(b) Should the oil company drill the exploration well and the two appraisal wells? State your
justification. (10 Marks)

4
QUESTION 5 (20 Marks)
CLO CLO1
Marks 20

The production performances of the well using two different well completions are given in Table 4.
The average oil price is $45/bbl, average operating cost is $15/bbl, and the difference in costs of
drilling and completion with 4 in. and 3 in. tubing is $6,000,000.

Table 4: Production rates for 3-inch and 4-inch tubings

Production rates, bbl/day
Year
3-inch tubing 4-inch tubing
1 5,750 9,300
2 5,200 8,650
3 4,600 7,750
4 4,000 6,700
5 3,300 5,600

By using incremental cash flow analysis, which tubing size should be selected. Given that the
minimum rate of return (MROR) is 12%. (20 Marks)