Petroleum Economics

Learning Outcomes

• To know the criteria for economic evaluation

• Identify deliverables of economic evaluation
• To understand flow of money in a project.
• To identify stages of upstream project evaluation
• To overview field life cycle
• To introduce fundamental unit costs
 WHY DO ECONOMIC EVALUATION?
Purpose of Economic Evaluation
• Bidding to National Oil Companies to
secure new petroleum acreages
• Farming-in into existing acreages
• Unitization agreements
• Sale and exchange of petroleum assets
• Project financing in the form of loans
• Propose new fiscal terms to National Oil
Companies
• Evaluation of changes in governmental
regulations which affect petroleum sector
Your Deliverables
• Advise management/decision makers
on the economic merit of the project:
– monetary value and return to the
company
– understanding of the impact of each
major economic parameter on the
decision
– selection of optimal development
options
– recommendation of of fiscal terms
and/or negotiation parameters
 FLOW OF MONEY IN A PROJECT

Absorbing Money Generating Money

PROJECT

(Sources of Funds)
• Re-investment

DEBTHOLDERS
• Debt Repayment
• Bank loans • Interest Payment

SHAREHOLDERS
• Dividends Payment
• Share issue
• Farm-out
 ECONOMIC ANALYSIS WORK-FLOW

Technical Inputs Economic Results

Reserves Time Value of Money
Production Economic Indicators
Capex eg. NPV, IRR
Opex
Economic Model
Net Cash Flow
Tax & Capital Allowance
Fiscal Arrangement

Economic
Assumptions
Risk &
Price
Cost Escalation
Sensitivity
Inflation Analysis
Exchange Rate
 ECONOMIC ANALYSIS WORK-FLOW

Technical Inputs Economic Results

Reserves Time Value of Money
Production Economic Indicators
Capex eg. NPV, IRR
Opex
Economic Model
Net Cash Flow
Tax & Capital Allowance
Fiscal Arrangement

Economic
Assumptions
Risk &
Price
Cost Escalation
Sensitivity
Inflation Analysis
Exchange Rate
 OVERVIEW OF UPSTREAM PROJECT EVALUATION

Field Life Cycle

Acquisition Exploration Development Production Abandonment

Data Review

Seismic/Drilling/Studies

Project Screening

Project Planning

Feasibility Study/Conceptual Design

Activities

Detailed Design

Procurement

Fabrication/Installation

Drilling

Hook-up & Commissioning

Revisit/New Opportunities

1st Production Well/Field Abandonment

Contract Years
 OVERVIEW OF UPSTREAM PROJECT EVALUATION

Acquisition Exploration Development Production Abandonment

Acquisition Cost including

• Sunk Cost
• Acquisition Cost
 OVERVIEW OF UPSTREAM PROJECT EVALUATION

Acquisition Exploration Development Production Abandonment

Exploration Costs depend on

• Rig costs
• Time to drill wells
• Well Depth
• Number of exploration wells
• Seismic
 OVERVIEW OF UPSTREAM PROJECT EVALUATION

Acquisition Exploration Development Production Abandonment

Development costs depend on

• Development concept
• Field Size
• Water Depth ( offshore )
• Facilities
• Number of Wells
• Wells costs
• Pipeline costs
 OVERVIEW OF UPSTREAM PROJECT EVALUATION

Acquisition Exploration Development Production Abandonment

Production costs depend on

• Type of operations
• Maintenance
• Workover
 OVERVIEW OF UPSTREAM PROJECT EVALUATION

Acquisition Exploration Development Production Abandonment

Abandonment costs depend on

• Timing
• Salvage value
 OVERVIEW OF UPSTREAM PROJECT EVALUATION

Technical Data Input for Economic Evaluation

• Project Costs
 Exploration – seismic, G&G, exploration well, etc.
 Development – Study, production facilities, pipeline, development wells, base
camp, roads, etc.
 Production – maintenance, workover, manpower, etc.
 Abandonment – decommissioning.
 OVERVIEW OF UPSTREAM PROJECT EVALUATION

Technical Data Input for Economic Evaluation

• Reserves or Expected Ultimate Recovery ( EUR )

• Production Forecast ( Oil or Gas )

60
Build-up Plateau Decline
Period Period Period
50

40
Production

30

20

10

0
Production Year
 OVERVIEW OF UPSTREAM PROJECT EVALUATION

Sample of A Field Life Cycle Project

Production
Period

eg. Total Production

Productuion (Mstb) / Costs (US$MM)

= 50 MMSTB
Exploration Development
Period Period

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

eg. Dev. Capex
eg. Expl. Capex
= US$ 260 MM
= US$ 10 MM eg. Total Opex
= US$ 50 MM

Surplus
Opex
Developm ent Capex
Exploration Capex
• Unit Finding Cost (UFC)
• Unit Development Cost (UDC)
• Unit Operating Cost (UOC)
• Unit Technical Cost (UTC)
= Exploration Capex / Total Production
= Development Capex / Total Production
= Total Opex / Total Production
= [Total Capex + Total Opex ] / Total Production
= UFC + UDC + UOC
= $ 10/50MMSTB = $0.20/BBL
= $260/50MMSTB = $5.20/BBL
= $ 50/50MMSTB = $1.00/BBL
= $0.20 +$5.20 + $1.00 = $6.40/BBL
Thank You