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Decision-making criteria used

• NPV ( Net present value )


• EMV ( Expected monetary value)
• DPI (Discounted Profit to Investment ratio)
• IRR (Internal rate of return)
• ROR (rate of return)
• Payout time
• Saving Index
• Sensitivity Analysis
Key performance drivers
EROI: The Key Variable in Assessing Alternative Energy Futures?
Upstream Country Frameworks
and Risk/Reserve Position
(An Inverse Relationship for Private
Favorable Investment)
Worldwide risk
Non-attainment area of capital
high risk/reserve “Equilibrium”:
Government GOM Deep position and favorable capital will
Policies policies flow to high
U.S
(Commercial Norway risk/policy
Framework) E. Canada constrained
Angola location but
China with
Colombia
Venezuela substantial risk
Brazil FSU premiums
India Mexico Saudi Arabia
Favorable
Risk/Reserve Position
Source: Michot Foss © 1999
Decision Making Tools

 Monte-Carlo (Reserves)
 Decision Trees (EMV)
 Scenario Planning
 Portfolio Theory (investment)
 Option theory (Development)
 Analytic hierarchy process
 Preference theory (Cost of information)
Multi-stage Decision Process
R
P GOVERNMENT TAKE E
R (Bonus, price discounts royalty, taxes) N
G O T
R F
O I
S T CONTRACTOR TAKE
S

ENTITELEMENTS
R

CONTRACTOR
OPERATING COSTS
E
V C
E O
N DEVELOPMENT COSTS
S
U
E T
S S
EXPLORATION COSTS
Global competitive framework

 Competition between
countries
 Competition between
companies
 Competition between
projects within
companies
 Competition with other
energy resources
 Competition with other
industries
Capital Market
Impact of exploration Risk
Figure 7: Minimum dry hole cash flow requirements per barrel
Reserves Bcf 29 58 145 290 580 870 1,160
Reserves Mboe 5 10 25 50 100 150 200
POS Dryholes MUS$ ……… (Exploration C osts =$/boe)……………
50% 1.0 40 8.0 4.0 1.6 0.8 0.4 0.3 0.2
33% 2.0 80 16.0 8.0 3.2 1.6 0.8 0.5 0.4
25% 3.0 120 24.0 12.0 4.8 2.4 1.2 0.8 0.6
20% 4.0 160 32.0 16.0 6.4 3.2 1.6 1.1 0.8
10% 9.0 360 72.0 36.0 14.4 7.2 3.6 2.4 1.8
5% 19.0 760 152.0 76.0 30.4 15.2 7.6 5.1 3.8
Note: dry hole cost per well assumed MUS$ 20 including G&G
Government take at different prices
Figure xxxx: Maximum Government Take at $ 7/mmbtu gas price
Crude oil price $/barrel 50.00
Gas price as % of crude oil % 80.00%
Boe/kcf 6.25
Heating value m mbtu/kcf 0.950
Gas price $/mm btu 6.08
Reservoir Size Bcf 1,000 1,000 1,000 1,000 1,000
Costs $/boe 15.00 12.00 10.00 8.00 5.00
Gross Revenue M US$ 5,776 5,776 5,776 5,776 5,776
Capex (40%) M US$ 960 768 640 512 320
Opex (60%) M US$ 1,440 1,152 960 768 480
Total Costs M US$ 2,400 1,920 1,600 1,280 800
Divisible Incom e M US$ 3,376 3,856 4,176 4,496 4,976
Corporate Take (CT) M US$ 2,400 1,920 1,600 1,280 800
Governm ent Take (GT) M US$ 976 1,936 2,576 3,216 4,176
Corporate Take (CT) % 71% 50% 38% 28% 16%
Governm ent Take (GT) % 29% 50% 62% 72% 84%
Government Revenue:
at difference cost and price structure

Figure xx: T ake at different o il prices F igure xxx: GT at different structures


cos t
90%
100%
80% 78% 83%
80% 91% 95%
72% 80% 87% 89 %
70% 83% 8 3%

Government Take (%)


58%
60%
60% 69 %
50%
42% 58 %
40%
28% 40%
30% 20%
45%
22%
20% 17%
20% G o ve rn m e nt Ta k e a t $5 0/ b a rre l
10% 20% G o ve rn m e nt Ta k e a t $1 50 / b a rre l
50 75 100 125 150
Oil Prices=($/boe) 0%
Co rp ora t e Ta k e (CT) Gove rn me n t Tak e (G T) 15 12 10 8 5
C o s t =($ /b o e )
NPV of reserve over production cycle
Effective production cycle on NPV
Bidding mechanism
Price Discounts
Slabs Slabs Weight Bidder 1 Bidder 2 Bidder 3
>0-50 50 0.400 100% 95% 85%
>50-75 75 0.300 50% 45% 75%
>75-100 100 0.150 40% 35% 50%
>100-125 125 0.100 25% 20% 25%
>125<=150 (150 cap) 150 0.050 15% 10% 20%
Weight 1.000 0.6425 0.5925 0.6750
Prices
Zonal Discount 75% Bidder 1 Bidder 2 Bidder 3
Current Price 25 18.8 17.8 15.9
50 37.5 35.6 31.9
75 46.9 44.1 45.9
100 54.4 50.6 55.3
125 59.1 54.4 60.0
150 61.9 56.3 63.8
Modern tragedy of Contradictory Laws
Co
ll ec it y
bil
M
tiv
e we
sta
i na
al
or l lb
ein Su ic
La al g
ys s
ws Ph Law
Se Integral ge a
lf-C U s
en ick
ter
ed System Qu

Interest/gambling
Economic
Trade

Laws

Divine laws (Perpetual)


Capitalist laws (Today)
" PULITZER PRIZE " winning photo taken in 1994 during the Sudan famine.
The picture depicts a famine stricken child crawling towards an United Nations food
camp, located a kilometer away.
The vulture is waiting for the child to die so that it can eat it. This picture
shocked the whole world. No one knows what happened to the child, including the
photographer Kevin Carter who left the place as soon as the photograph was taken.
Three months later he committed suicide due to depression.
Basic types of growth patterns
Growth
c
natural curve
(natural resources)
linear curve
(machines)
exponential curve b
(money)
Interest growth
vs
Natural growth
a

Time
Types of taxation Structures
Regressive Vs Progressive
Petroleum Fiscal
Petroleum Fiscal Systems
Systems

Concession
Concession Production Sharing
Production Sharing Service
Service
Agreements
Agreements Agreements
Agreements Agreements
Agreements

Pure
Pure Risk
Risk Hybrid
Hybrid
Service
Service Service
Service
Greatest Threat to Life: Food Scarcity
We are eating oil!!!!!
from planting, irrigation, feeding and harvesting,
through to processing, distribution and packaging.
In addition, fossil fuels are essential in the
construction and the repair of equipment and
infrastructure needed to facilitate this industry,
including farm machinery, processing facilities,
storage, ships, trucks and roads
Pesticides (Gas)

"You are basically treating the agricultural environment


as if it was a factory where you are making televisions
or VCRs,if nature is not a machine, if organisms are not
machines, then to treat them as if they are, is going to
create big problems." Martha Crouch
POWER SHIFT:
PEOPLE GLOBAL FINANCE

MARKET Globalization CAPITALIST


Deregulation ECONOMY
ECONOMY Concentration
Small & Local Large & Global

People Global Financial System

Ownership

Culture & Global Corporation


Rules Ownership
Choice

Culture &
Rules
Choice
Local
Enterprises
People

Source: Life after the Dominance of Capital, by David C. Korten


http://www.bke.hu/~kg_korny/altern/korten/kortpres.html
Framework of integrated human ecosystem
External Political &
Economic Conditions

Social Ecological
Process Interactions Process
Demography Primary
Technology
Human Land use Natural production
Land cover
Economy Systems Production Systems Populations
Institutions ‫انسانى قوانين‬ Consumption ‫فطرى قوانين‬ Organic matter
Culture Disposal Nutrients
Information Disturbances
‫فطرى اور انسانى‬
‫قوانين كا ربط‬
External Biological, Geological
& Physical Conditions
Biggest tragedy of our time is that modern priests (economists) do
not know that something must be physically possible before it can be
economically possible.
Why so much automation?
Oil is not priced rightly

Real Price Present Price


1 E n e r g y c o n te n t 5 ,8 0 0 ,0 0 0B T U /B a rreCostsl component $/bbl
2 H u m a n O u tp u t 2 5 0 B T U /H o u r Exploration 2
3 H um an E nergy 2 3 ,2 0 0H o u rs / B a rrDevelopment
el 4
4 H um an wa ges 8 U S $ /H o u r
Production 3
5 H um an cost 1 8 5 ,6 0 0U S $ /b a rre l
Distribution 2
6 E x c h a n g e ra te 8 0 R s /U S $
7 C o n v ers io n f a cto r 1 5 8 .9 8 7L itr e /b a r re Taxes
l 4
8 R e p la ce m e n t V a lu e 1 ,1 6 7 U S $ /lit re Profit 3
9 R e p la ce m e n t V a lu e 9 3 ,3 9 1R s /litr e Sale price 18
A big part is our habit of treating consumption of our stocks of non-renewable resources as pure
income -- and likewise treating our unsustainable draw of renewable resources as pure income. For
example valuing forest products as equal to the cost of extracting them, is like valuing our life
savings by the cost of driving to the bank to withdraw them.
Divine Economic Constitution:
Economic Democracy

Earning Side Usage Side


‫آمدنى‬ ‫مصارف‬

Business Usury Individual (‫ )فرد‬State (‫)حكومت‬


Frugality & Sharing Distribution
‫بيع‬ ‫ربا‬ ‫عفو‬ ‫سدباب تكاثر‬

ْ‫(ُكم‬Hashar
‫ت َلعَّل‬
ِ‫ل‬
ّ ‫ال اَيا‬
‫ِل‬7)‫سُمِبي‬
َ‫في َلُك‬
ّ ِ ‫ها ا‬
‫ل‬ َُ ‫قوّيَن‬
‫ن‬ ‫كِف ُُيب‬
َ ‫ضَعَةْفَوَو َكلَذِلُين‬
ّ‫واْلِلِف اْل‬
‫ن َُق‬َ‫ب‬ َ‫نذا ُالينّذِف َُهقو‬ ََ ‫ما‬ َ ُ ‫كِن‬
‫زو‬ َ ‫نلويَنْك‬ َُ‫ذيَأ‬
ْ ِ ‫واَيّل‬
‫س‬ ‫ََو‬
(Baqra 279) ْ
‫م‬ ُ
‫ك‬ ‫من‬
‫سوِل ِِه‬ ُ ‫باَر‬
‫ياء‬ َ
َ َ
ِ
‫ن‬
‫غَو‬ ّْ
‫ر‬ ّ‫ل‬
‫ل‬ َ
ْ‫ال‬ ‫ن اا‬
َ‫ن‬َ
‫م‬
َ ‫رّم‬ ّ
ْ
‫ي‬ ٍ‫حَب‬
‫ب‬ َ ‫ةْر‬
ً َ‫و‬
‫ح‬ََ
‫ل‬ ‫عْاُ ِب‬
‫دو‬ َ‫ننو‬ُ‫َذْي‬219)
َ ‫كوَبْأ‬‫لُلوَيْااُْلَف‬
ّ‫ل‬
‫يَتْفَع‬ ْ‫ا‬ ‫لَكّلْم‬
ّ ‫حإن‬
َِ ‫َأ َف‬
‫جَهّنَم َفُتْكَوى ِبَها‬ َ ‫عَلْيَها ِفي َناِر‬ َ ‫حَمى‬ (Baqra
ْ ‫ب َأِليمٍ َيْوَم ُي‬ (34) ٍ ‫نَعَذا‬ َ‫رو ِب‬ ‫شَفْرّك ُهم‬
ّ‫َفَبَتَت‬
But
Allah
They
“… if ask
in you
has
order doallowed
you thatnot
how stopmuch
wealth taking
business
maytheynot usury,
should and
become then
spend; be ready
forbidden
confined Say: "What for
to usurythe waris
with
beyond
‫ما‬َ ْ
‫ا‬ ‫قو‬
Allahُ
your
‫ذو‬ ُ ‫ف‬
َ
and ْ
‫م‬ ُ
‫ك‬ ِ
‫س‬
His ُ
‫ف‬ ‫لن‬َ ْ
‫م‬
Messenger ُ
‫ت‬ ْ
‫ز‬ َ
‫ن‬ َ
‫ك‬ ‫ما‬َ ‫ذا‬
َ َ
‫ه‬ ْ
‫م‬ ُ
‫ه‬ ُ
‫ر‬ ‫هو‬ ُ ُ
‫ظ‬ َ
‫و‬ ْ
‫م‬ ُ
‫ه‬ ُ
‫ب‬ ‫جنو‬ ُ َ
‫و‬ ْ
‫م‬ ُ
‫ه‬ ُ
‫ه‬ ‫با‬ َ ِ
‫ج‬
rich
(Baqra amongst275)needs." you”. Thus Allah makes clear to you His
34-35)(Baqra‫ن‬
revelations: In order that you (Tauba may ponder. َ ‫زو‬219) ُ ‫ُكنُتْم َتْكِن‬
Economics: A life blood system of Society

Individual
Distribution
(Arteries)

State
Collection &
Re-distribution
(Veins)
Lifecycle is no more sustainable
100%
Stacked presentation of work done over time in
Wood
United States by labor, Domesticated animals, Fuels
80% as a percentage of Total Horsepower in the Economy
Labor
6000 products
60% Oil is capitalism's crack cocaine
La (Fertilizers &
b or
pesticides!!!!)

40%
Energy is
Fuel
Domesticated now
20% Animals life blood of
economy
Animals
0%
1850 1870 1890 1910 1930 1950 1970
World oil & Gas Outlook
Major problem of Humanity:
Operating under incompatible Systems
Biology/nature
Mechanics/cancer

Matter (‫)ماده‬ Money (‫)دولت‬


Natural (Real) Economy Financial (Shadow) Economy
Operates under Operates under unconstrained
physical/biological constraints compound interest rate growth

Organic Resources Taxes (‫)محصول‬


‫حياتى اشياء‬
(Manpower, animals, plants) Gov. Deficit (‫زر‬ ‫)افراط‬
Inorganic Resources
Money (‫)كرنسى‬
‫نامياتى اشياء‬
(Natural Resources)
Credit (‫)قرض‬
Profound change in the underlying dynamics:
•Money and credit rather than goods/services had become the real economy
•Energy and automation has become real contributor rather than manpower and animals
Impossible (Financing Decisions)
8%
cc
Interest
Year Kg (Gold, Sliver or any other commodity) Rate (8%)
10 1
200 1 Kg 4,838,950
400 Mass in year 1 23,415,433,085,206
600 of earth 113,306,100,207,918,000,000
800 No of 548,282,506,567,769,000,000,000,000
Kgs in
1000 earths 2,653,111,407,564,170,000,000,000,000,000,000
year 2000
1200 12,838,272,344,326,700,000,000,000,000,000,000,000,000
1400 62,123,752,631,416,000,000,000,000,000,000,000,000,000,000,000
1600 300,613,707,008,236,000,000,000,000,000,000,000,000,000,000,000,000,000
1800 1,454,654,572,742,820,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000
2000 7,039,000,140,947,130,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000
5,972,000,000,000,000,000,000,000
1,178,667,136,796,240,000,000,000,000,000,000,000,000,000

The economist sees economic activity as a function of infinite "money creation",


rather than a function of finite “natural resources".

“Organisations in the West with money to invest, especially those which like to
consider themselves as being ethical, might have rather more to learn from Islam
than is generally acknowledged. By applying the Islamic approach, a lot of human
misery could have been avoided. Wayne A.M. Visser and Alastair McIntosh
http://www.che.ac.uk/publications/usury.htm
Why so much short-term focus?
Year Production Normal value of Weight of future Quantity Today's Value
(Kgs/year) production @ use @10% required for of future
$ 10/kg future) Production
1 2 3 4 5 (2x4) 6(3x4)
1 100 1,000 1.000 100 1,000
5 100 1,000 0.636 64 636
10 100 1,000 0.361 36 361
15 100 1,000 0.205 20 205
20 100 1,000 0.116 12 116
25 100 1,000 0.066 7 66
30 100 1,000 0.037 4 37
35 100 1,000 0.021 2 21
40 100 1,000 0.012 1 12
45 100 1,000 0.007 1 7
50 100 1,000 0.004 0 4

Islamic method
Kgs/Value in Kgs in Kgs in Value of Value of
year 1 & 50 year 1 year 50 year 1 year 50
are same

Key Economic Theorem: Focus on today; consume


everything as early as possible and don’t bother about future.
FROM THE CAVES, TO THE MOON, TO THE CAVES

Richard C. Duncan, Ph.D. Institute on Energy


and Man, June 27, 1996

Even if the entire mass of the earth were petroleum, it would be


exhausted in 500 years at 5% increase in rate of consumption. For
addition 100 year 157 earths would be required (current production is 10
Backup
Global Primary Energy Consumption
industrialization of agriculture
Briefly, the above graph shows a theoretical depletable resource which follows the 'best
first' concept of resource extraction. The vertical axis is quantity and the horizontal is
time. The gross energy resource "X", is the entire area under the curve. ("X" =
Net Energy production
"A"+"B"+"C"+"D"). Direct energy costs are "D". Indirect energy costs (like tractors and ethanol EROI of 1.2:1 (Net 0.2)
highways and medical insurance and such) are "C". Environmental externalities (in
energy terms) are "B". "A" represents the total net energy of the resource after costs Oil (1930) : 100:1
have been subtracted. At any given point in time the EROI can be calculated by taking a Oil (2009) 10-15:1
ratio of the total area divided by the costs (depending on the boundaries). As can be
seen, net energy peaks and goes to zero way before the total gross energy is depleted.
(This graphic is from an upcoming paper on EROI by a colleague (Kenneth Mulder) and
myself.) http://www.theoildrum.com/story/2006/8/2/114144/2387

Graph source http://www.theoildrum.com/story/2006/8/2/114144/2387


One aspect of energy quality: a comparison of the energy content per unit mass and per unit volume for various sources.

http://www.eoearth.org/article/Ten_fundamental_principles_of_net_energy
E & P B u s i n e s s

G a s / o i lS e r v i c e J V O p e r a tG o or v t / s S t a h t ae r e h o M l d a e r r k s
c o m p a Cn io e ms p a Pn i a e r s t n e r s C o m p a Bn y a n k s F o r c

B l o c k

A s s e t

P r o s pE e x c p t l o D r e r i l l D e v e Olo pp e r A a bt e a n d o n
Foundation of Decision Sciences:
Who benefits? Who Suffers?
To Feed To control

Do
min
ate
To Serve To live

s
D
mo
ani

Dominates
set

To Rule To serve
Range of Project Cost Variations
+40

+30

+20

+10

0 Preliminary Conceptual; Preliminary Basic Detailed


Studies Studies Design Engineering Engineering
Accuracy of estimates
(as % of project cost)

-10

-20

-30

-40
Reserves Development Stages