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By Puput Aryanto Risanto
Introduction to Project Economics
in Oil and Gas Upstream Industry
By Puput Aryanto Risanto
24 December 2015
Oil & Gas Industry
Upstream : Searching and Finding Oil & Gas
reserves, Developing the Facilities, and
Producing Oil & Gas in the form of Crude Oil &
Natural Gas. Commonly known as Exploration
& Production (E&P).
Midstream : Delivering Crude Oil and NaturalMidstream : Delivering Crude Oil and Natural
Gas from E&P industry for further processing,
either by pipeline, truck, oil tanker, or LNG
tanker.
Downstream : Processing crude oil & natural
gas in a refinery or petrochemical plant into
usable product or raw materials for other
industry and marketing them to the consumers.
Upstream Oil & Gas Life Cycle
AcquisitionAcquisition
• Activities to obtain a right to explore a block/area
through concession/contractual system
ExplorationExploration
• Activities to search for oil & gas deposit on the
certain location beneath the earth surface
AppraisalAppraisal
• Activities to define the oil & gas volume and
characteristic more precisely after discovery
DevelopmentDevelopment
• Activities to build the subsurface & surface
facilities to produce oil & gas safely and efficiently
ProductionProduction
• Activities to extract, process, and export oil & gas
as per contract agreement
AbandonmentAbandonment
• Activities to plug wells permanently, remove surface
facilities, and restore the field as per initial state
Project Economics Definition
Project : a piece of planned work or an activity that is finished
over a period of time and intended to achieve a particular
purpose (Cambridge Dictionary).purpose (Cambridge Dictionary).
Economics : the branch of knowledge concerned with the
production, consumption, and transfer of wealth.
Project Economics : A method to evaluate the economic
value, i.e. return of investment, of a project.
Project Economics in Oil & Gas Upstream Industry is used to
evaluate the value of exploration and production of oil and
gas within the contract period.
Since the oil & gas project have unique characteristic
compare to other industry, the method is also different.
Why Need “Project Economics”
Upstream Industry Characteristic :
High risk in all aspects (personnel safety, environment,
asset, investment, reputation).
High expenditure, can reach billions US$.
Long period between start of business until revenue
generated, can be more than 10 years, even longer
until break even point.until break even point.
Limited operation/production period, either by contract
duration or economic production threshold.
Many uncertainties (reserves amount, production rate,
cost, oil/gas price).
High reward and strategic value.
All factors above must be quantified whether a
project is worth to execute (profitable) or not.
Project Economics Purposes
To determine the economic value of a project for :
Acquiring new petroleum block / area
Acquiring existing block from other company
Contract negotiation
Analyzing the profitability of a new project
Developing new field or optimizing existing field
Determining the cash flow for project financingDetermining the cash flow for project financing
Checking project performance
Analyzing the impact of new or revised rules and regulation
To support decision making of :
Which project need to be prioritized with limited resources
What is the optimal field development option
Whether a project need to be revised, postponed, or even
cancelled if some parameter changes
How to calculate project economics
Project economic value is measured by calculating the
cash balance over project period.
Cash balance is commonly called NET CASH FLOW
(NCF).
In a simple formula :
Cash Inflow (revenue/income) comes from sales of oil
NET CASH FLOW = CASH INFLOW – CASH OUTFLOW
Cash Inflow (revenue/income) comes from sales of oil
and/or gas during production period.
Cash Outflow (expenditures/spending/outcome) comes
from all expenditures starting from acquisition until
abandonment.
It is important to note that Cash Inflow only come in
production period while Cash Outflow come in all stages,
even during production period.
So it is important to consider the timing of cash flow or
value of cash relative to time.
Time Value of Money
Cash flow (in or out) occurred in a different time.
While the currency amount is the same, different timing
could give different value.
Example : 10 years ago, fuel price is US$ 0.5/liter. Now,
fuel price is US$ 1/liter. 10 years ahead, fuel price may
be US$ 2/liter.
In a simple world, present money is less valuable than
past money, but present money is more valuable thanpast money, but present money is more valuable than
future money.
In economic analysis, the time different of cash flow is
calculated by “discounting technique”
Where r = interest rate and n = number of period
Formula :
Future Value Present Value
discounting
FV PV
r r r
Future Value = Present Value x (1+r)n
Time Value of Money (EXAMPLE)
Discount factor = (1 + r)
n
Discounted Cash Flow (DCF) = Present Value (PV)
YEAR N Cash ($ million) Discount Factor @ 10% Discounted Cash ($ million)
2015 0 -100 1.000 -100.000
2016 1 -50 1.100 -45.455
2017 2 30 1.210 24.793
2018 3 100 1.331 75.131
Net Present Value (NPV) is total present value over a period.
By 2020, this project is expected to generate $ 80 million value,
or called Real Term (RT) value. So, project value is $ 80 million
RT2020.
However, in 2015 term, it worth only $ 20.9 million to the
Company , or called Money of the Day value (MOD) value. In
this case, project value is $ 20.9 million MOD (NPV10)
2019 4 70 1.464 47.811
2020 5 30 1.611 18.628
TOTAL 80 NPV = 20.909
Profitability Indicator
An index to measure the value of a project.
It is used to rank the project attractiveness if several
investment opportunities existed.
There are 3 common indicator :
NPV = Net Present Value
IRR = Internal Rate of Return
PIR = Profit to Investment Ratio
IRR (Internal Rate of Return)
The discount rate which makes the Present Value
(PV) of net cash receipts equal to the Present Value
of the investment. In other word, IRR is the discount
rate which makes NPV = 0.
Rate (%) NPV
0 80.000
2 65.889
100.000
IRR Chart
2 65.889
4 53.054
6 41.356
8 30.677
10 20.909
12 11.960
14 3.748
15 -0.104
16 -3.799
18 -10.746
20 -17.149
-40.000
-20.000
0.000
20.000
40.000
60.000
80.000
0 5 10 15 20 25
NPV($million)
Interest Rate (%)
IRR = 15%
PIR (Profit to Investment Ratio)
An index to measure investment efficiency.
Formula :
YEAR N Cash ($ million) Discount Factor @ 10% Discounted Cash ($ million)
2015 0 -100 1.000 -100.000
2016 1 -50 1.100 -45.455
2017 2 30 1.210 24.793
PIR = NPV
discounted CAPEX
In above table, Capital Expenditures is (-100) at 2016 plus (-50) at 2017.
Undiscounted CAPEX is 150, while discounted CAPEX is 145.455
PIR = 20.899 / 145.455 = 0.14
It means 1 unit of investment will generate profit / additional value of
0.14 unit.
2018 3 100 1.331 75.131
2019 4 70 1.464 47.811
2020 5 30 1.611 18.628
TOTAL 80 NPV = 20.909
Profitability Indicator Comparison
NPV
Measure project
value
Indicate whether a
project creates
value (+NPV) or
erodes value
(-NPV)
IRR
Do not measure
project value
Handy indicator of
project screening
against company
PIR
Measure project
value ratio
Indicate
investment
efficiency(-NPV)
NPV@10 20
million indicates a
project give
additional value of
20 million compare
to investing in a
bank which give
10% rate per year
against company
benchmark
If benchmark is
14%, a project
which give IRR
lower than 14%
should be
excluded from
consideration
efficiency
PIR 0.14 indicates
a project give a
profit of 0.14 per 1
unit of investment
Economics Evaluation Flow
Technical Input
• Recoverable
Reserve
• Production
Profile
• Development
Option
Cost Input
• Capital Expenditures
(CAPEX)
• Operational
Expenditures (OPEX)
• Abandonment
Expenditures (ABEX)
• Cost Phasing
Assumption
• Oil/Gas
Price
• Cost
Escalation
• Inflation
• Exchange
Rate
Economic
Result
• NPV
• IRR
• PIR
Sensitivity
Analysis
• Recover-
able
Reserve
• CAPEX
• Oil/Gas
Note :
Recoverable Reserve : Amount of Oil and/or Gas which can be recovered/lifted/produced,
expressed in Million barrels (MMbbls) for oil & Billion Cubic Feet (BCF) for gas
Production Profile : Production rate per day, expressed in barrels per day (bpd) for oil or
Million standard cubic feet per day (MMscfd) for gas
Development Option : Type of Facilities (both wells & surface) to produce oil and/or gas
OPEX : cost during production phase
ABEX : cost to remove facilities in the end of field life
Cost Phasing : spread of total cost per unit of time, normally year
Option • Cost Phasing Rate • Oil/Gas
Price
Sensitivity Analysis
A method to measure project robustness as a result of changes
in project input / variables.
Key variables normally are production profile, oil/gas price, and
CAPEX.
First, define a BASE CASE for key variables.
Then change one key variable while maintaining other
variables, i.e. change CAPEX by +/- 20% while maintaining
production profile and price, then recalculate NPV.production profile and price, then recalculate NPV.
Production profile is related to recoverable reserve :
Since recoverable reserve is difficult to predict exactly, the industry
specialist measure it in optimistic, base, and pessimistic scenario.
Optimistic is often called P10 (10% probability of happen).
Base case is called P50 (50% probability of happen).
Pessimistic is called P90 (90% probability of happen).
The result will be plotted on “tornado chart” or “spider plot”.
Project is called robust if any change in key variables still result
project economic (NPV, PIR) which meet criteria.
Project Example : PetroCilacap
PetroCilacap GoletKedhuk B.V. (Company) was
awarded a contract for exploration & production from “Nyi
Roro Kidul” Block, offshore Indian Ocean, 50 km south of
Cilacap, Middle Java Indonesia in 2010 for 25 years (until
2035).
Exploration was done on 2011 with oil discovery on “Pari”
field after successful drilling on Pari-1 well.
Appraisal was done on 2012-2014 after 2 appraisal drilling
on Pari-2 and Pari-3. Estimated recoverable reserve inon Pari-2 and Pari-3. Estimated recoverable reserve in
P90-P50-P10 is 17-24-31 MMbbls with negligible gas.
Development study was conducted on 2014-2015 with
result of offshore platform consist of Wellhead Platform
(WHP) bridge-linked to Central Processing Platform (CPP)
with oil pipeline to Onshore Refinery at Cilacap.
Company expect to have the first oil (start of production)
by end of 2017.
If this project fulfill Company economics criteria, they will
sanction the project by 2015.
Technical Input
Estimated Recoverable Reserve / Estimated Ultimate
Recovery (EUR) = 24 million barrels
WHP bridge-linked to CPP with oil pipeline to Onshore
Refinery at Cilacap.
Production Profile (peak 10,000 bpd for 2 years)
12,000.00
Production Profile
0.00
2,000.00
4,000.00
6,000.00
8,000.00
10,000.00
12,000.00
BarrelsPerDay
Year
Cost Input
Year 0.1 CAPEX OPEX ABEX
2010 0.621 5,000,000.00
2011 0.683 25,000,000.00
2012 0.751 50,000,000.00
2013 0.826 10,000,000.00
2014 0.909 10,000,000.00
2015 1.000 50,000,000.00
2016 1.100 200,000,000.00
2017 1.210 80,000,000.00 2,000,000.00
2018 1.331 10,000,000.00
2019 1.464 10,000,000.00
2020 1.611 10,000,000.00
2021 1.772 10,000,000.00
Time reference is 2015
All value is RT as per
indicated Year
Rate = 0.1 (10%)
CAPEX 2010 is
acquisition cost
CAPEX 2011 is
exploration cost
CAPEX 2012-2014 is
appraisal cost2021 1.772 10,000,000.00
2022 1.949 10,000,000.00
2023 2.144 10,000,000.00
2024 2.358 10,000,000.00
2025 2.594 10,000,000.00
2026 2.853 10,000,000.00
2027 3.138 10,000,000.00
2028 3.452 10,000,000.00
2029 3.797 10,000,000.00
2030 4.177 10,000,000.00
2031 4.595 10,000,000.00
2032 5.054 10,000,000.00
2033 5.560 10,000,000.00
2034 6.116 10,000,000.00
2035 6.727 100,000,000.00
appraisal cost
CAPEX 2015-2017 is
development cost
First oil is 2017
OPEX is fix throughout
field life despite
production decrease
over time
ABEX is only on the
last contract year
Assumption
Oil price is $50 per barrel flat
No cost escalation & exchange rate considered
Uptime 90%, meaning productive day is 0.9 x 365 days
Company Criteria for Project Economics :
Positive NPV
PIR > 0.2
Refinery
WHP bridge-linked CPP
Offshore Pipeline
“Nyi Roro Kidul”
Block
PetroCilacap GoletKedhuk B.V.
Evaluation : COST / EXPENDITURES
Year 0.1 CAPEX OPEX ABEX DCF CAPEX DCF OPEX DCF ABEX
2010 0.621 5,000,000.00 8,052,550.00
2011 0.683 25,000,000.00 36,602,500.00
2012 0.751 50,000,000.00 66,550,000.00
2013 0.826 10,000,000.00 12,100,000.00
2014 0.909 10,000,000.00 11,000,000.00
2015 1.000 50,000,000.00 50,000,000.00
2016 1.100 200,000,000.00 181,818,181.82
2017 1.210 80,000,000.00 2,000,000.00 66,115,702.48 1,652,892.56
2018 1.331 10,000,000.00 7,513,148.01
2019 1.464 10,000,000.00 6,830,134.55
2020 1.611 10,000,000.00 6,209,213.23
2021 1.772 10,000,000.00 5,644,739.30
2022 1.949 10,000,000.00 5,131,581.182022 1.949 10,000,000.00 5,131,581.18
2023 2.144 10,000,000.00 4,665,073.80
2024 2.358 10,000,000.00 4,240,976.18
2025 2.594 10,000,000.00 3,855,432.89
2026 2.853 10,000,000.00 3,504,938.99
2027 3.138 10,000,000.00 3,186,308.18
2028 3.452 10,000,000.00 2,896,643.80
2029 3.797 10,000,000.00 2,633,312.54
2030 4.177 10,000,000.00 2,393,920.49
2031 4.595 10,000,000.00 2,176,291.36
2032 5.054 10,000,000.00 1,978,446.69
2033 5.560 10,000,000.00 1,798,587.90
2034 6.116 10,000,000.00 1,635,079.91
2035 6.727 100,000,000.00 14,864,362.80
TOTAL 430,000,000.00 172,000,000.00 100,000,000.00 432,238,934.30 67,946,721.58 14,864,362.80
Evaluation : Production REVENUEYear 0.1 Oil rate Uptime Prod/Year Revenue DCF Rev
2010 0.621
2011 0.683
2012 0.751
2013 0.826
2014 0.909
2015 1.000
2016 1.100
2017 1.210 2,000.00 0.9 657,000.00 32,850,000.00 27,148,760.33
2018 1.331 10,000.00 0.9 3,285,000.00 164,250,000.00 123,403,456.05
2019 1.464 10,000.00 0.9 3,285,000.00 164,250,000.00 112,184,960.04
2020 1.611 9,000.00 0.9 2,956,500.00 147,825,000.00 91,787,694.58
2021 1.772 7,000.00 0.9 2,299,500.00 114,975,000.00 64,900,390.11
2022 1.949 5,000.00 0.9 1,642,500.00 82,125,000.00 42,143,110.46
Rate is 0.1
(10%)
Oil rate in
barrels per
day
Production/
Year is oil
rate per day
x uptime x
365
Revenue is2022 1.949 5,000.00 0.9 1,642,500.00 82,125,000.00 42,143,110.46
2023 2.144 4,000.00 0.9 1,314,000.00 65,700,000.00 30,649,534.88
2024 2.358 3,500.00 0.9 1,149,750.00 57,487,500.00 24,380,311.84
2025 2.594 3,000.00 0.9 985,500.00 49,275,000.00 18,997,645.59
2026 2.853 2,800.00 0.9 919,800.00 45,990,000.00 16,119,214.44
2027 3.138 2,600.00 0.9 854,100.00 42,705,000.00 13,607,129.07
2028 3.452 2,400.00 0.9 788,400.00 39,420,000.00 11,418,569.85
2029 3.797 2,200.00 0.9 722,700.00 36,135,000.00 9,515,474.87
2030 4.177 2,000.00 0.9 657,000.00 32,850,000.00 7,864,028.82
2031 4.595 1,900.00 0.9 624,150.00 31,207,500.00 6,791,661.26
2032 5.054 1,800.00 0.9 591,300.00 29,565,000.00 5,849,277.64
2033 5.560 1,700.00 0.9 558,450.00 27,922,500.00 5,022,107.06
2034 6.116 1,600.00 0.9 525,600.00 26,280,000.00 4,296,990.00
2035 6.727
TOTAL 23,816,250.00 1,190,812,500.00 616,080,316.88
Revenue is
production /
year x oil
price
($50/barrel)
DCF
Revenue is
Revenue x
Discount
Factor
Evaluation : Discounted Cash Flow Chart
-100,000,000.00
0.00
100,000,000.00
200,000,000.00
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
CashFlow(PerYear+Cummulative)
Ultimate Cash Surplus
$ 115,894,661
-500,000,000.00
-400,000,000.00
-300,000,000.00
-200,000,000.00
CashFlow(PerYear+Cummulative)
Year
Payback Period 12 years
Break Even Point on 2022
Maximum Cash Sink
$ 406,743,066.35
Evaluation : Result
Total DCF Expenditures = DCF CAPEX + DCF OPEX +
DCF ABEX
Total DCF Expenditures = 432,238,934.30 +
67,946,721.58 + 14,864,362.80 = $ 515,050,018.68
Total DCF Revenue = $ 616,080,316
NPV = Total DCF Revenue – Total DCF Expenditures
NPV = 616,080,316 – 515,050,018.68 = $NPV = 616,080,316 – 515,050,018.68 = $
101,030,298.20
PIR = NPV / Total DCF CAPEX
PIR = 101,030,298.20 / 432,238,934 .30 = 0.23
So, NPV is positive and PIR is above 0.2
Conclusion : Project Meets Economics Criteria
However, Company must check its financial ability to
handle maximum cash sink of $ 406,743,066.35
Sensitivity Analysis Calculation
Based on calculation, the result are :
Reserve P10 NPV = -83,793,796.86
Reserve P90 NPV = 285,854,393.26
Price +20% NPV = 224,246,361.58
Price -20% NPV = -22,185,765.18
CAPEX +20% NPV = 14,582,511.34
CAPEX -20% NPV = 187,478,085.06CAPEX -20% NPV = 187,478,085.06
From above figures, it is clear that reserve is the most
sensitive variable. If Company can only realize P10
reserve, the NPV will be negative which does not meet
Company criteria.
While Price is out of Company control, in this case
Company need to further study the reserve value to
ensure that it can produced at P50 value.
Sensitivity Analysis Chart
-200,000,000.00 0.00 200,000,000.00 400,000,000.00
CAPEX
Price
Reserve
Base NPV =
101,030,298-100,000,000.00
-50,000,000.00
0.00
50,000,000.00
100,000,000.00
150,000,000.00
200,000,000.00
250,000,000.00
300,000,000.00
350,000,000.00
-60 -40 -20 0 20 40 60
CAPEX
Price
Reserve
Tornado Chart
X-axis is NPV value
Longer bar indicates
more sensitive
variable
Base NPV = 101,030,298
101,030,298
Spider Plot
X-axis is % variation
Y-axis is NPV value
Steeper line indicates
more sensitive variable
-150,000,000.00
-100,000,000.00
‫ﻛﺎﺳﻴﻪ‬ ‫ﺗﺮﻳﻤﺎ‬‫ﻛﺎﺳﻴﻪ‬ ‫ﺗﺮﻳﻤﺎ‬
Thank You
About the Author
Puput Aryanto Risanto had more than 10 years
experience in oil & gas industry. Currently he is
working for Petronas Carigali Sdn. Bhd. in KL,
Malaysia. Previously he worked for Premier Oil
Natuna Sea B.V. in Jakarta and Total E&P
Indonesie in Balikpapan, Indonesia. His expertise
included project engineering & management, jointincluded project engineering & management, joint
venture management, construction management,
electrical engineering, and recently deepwater
development. This presentation was a small
contribution to the public who was interested to
know more about Oil & Gas industry. He can be
contacted at aryantorisanto@yahoo.com

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Introduction to project economics in oil and gas upstream industry

  • 1. By Puput Aryanto Risanto Introduction to Project Economics in Oil and Gas Upstream Industry By Puput Aryanto Risanto 24 December 2015
  • 2. Oil & Gas Industry Upstream : Searching and Finding Oil & Gas reserves, Developing the Facilities, and Producing Oil & Gas in the form of Crude Oil & Natural Gas. Commonly known as Exploration & Production (E&P). Midstream : Delivering Crude Oil and NaturalMidstream : Delivering Crude Oil and Natural Gas from E&P industry for further processing, either by pipeline, truck, oil tanker, or LNG tanker. Downstream : Processing crude oil & natural gas in a refinery or petrochemical plant into usable product or raw materials for other industry and marketing them to the consumers.
  • 3. Upstream Oil & Gas Life Cycle AcquisitionAcquisition • Activities to obtain a right to explore a block/area through concession/contractual system ExplorationExploration • Activities to search for oil & gas deposit on the certain location beneath the earth surface AppraisalAppraisal • Activities to define the oil & gas volume and characteristic more precisely after discovery DevelopmentDevelopment • Activities to build the subsurface & surface facilities to produce oil & gas safely and efficiently ProductionProduction • Activities to extract, process, and export oil & gas as per contract agreement AbandonmentAbandonment • Activities to plug wells permanently, remove surface facilities, and restore the field as per initial state
  • 4. Project Economics Definition Project : a piece of planned work or an activity that is finished over a period of time and intended to achieve a particular purpose (Cambridge Dictionary).purpose (Cambridge Dictionary). Economics : the branch of knowledge concerned with the production, consumption, and transfer of wealth. Project Economics : A method to evaluate the economic value, i.e. return of investment, of a project. Project Economics in Oil & Gas Upstream Industry is used to evaluate the value of exploration and production of oil and gas within the contract period. Since the oil & gas project have unique characteristic compare to other industry, the method is also different.
  • 5. Why Need “Project Economics” Upstream Industry Characteristic : High risk in all aspects (personnel safety, environment, asset, investment, reputation). High expenditure, can reach billions US$. Long period between start of business until revenue generated, can be more than 10 years, even longer until break even point.until break even point. Limited operation/production period, either by contract duration or economic production threshold. Many uncertainties (reserves amount, production rate, cost, oil/gas price). High reward and strategic value. All factors above must be quantified whether a project is worth to execute (profitable) or not.
  • 6. Project Economics Purposes To determine the economic value of a project for : Acquiring new petroleum block / area Acquiring existing block from other company Contract negotiation Analyzing the profitability of a new project Developing new field or optimizing existing field Determining the cash flow for project financingDetermining the cash flow for project financing Checking project performance Analyzing the impact of new or revised rules and regulation To support decision making of : Which project need to be prioritized with limited resources What is the optimal field development option Whether a project need to be revised, postponed, or even cancelled if some parameter changes
  • 7. How to calculate project economics Project economic value is measured by calculating the cash balance over project period. Cash balance is commonly called NET CASH FLOW (NCF). In a simple formula : Cash Inflow (revenue/income) comes from sales of oil NET CASH FLOW = CASH INFLOW – CASH OUTFLOW Cash Inflow (revenue/income) comes from sales of oil and/or gas during production period. Cash Outflow (expenditures/spending/outcome) comes from all expenditures starting from acquisition until abandonment. It is important to note that Cash Inflow only come in production period while Cash Outflow come in all stages, even during production period. So it is important to consider the timing of cash flow or value of cash relative to time.
  • 8. Time Value of Money Cash flow (in or out) occurred in a different time. While the currency amount is the same, different timing could give different value. Example : 10 years ago, fuel price is US$ 0.5/liter. Now, fuel price is US$ 1/liter. 10 years ahead, fuel price may be US$ 2/liter. In a simple world, present money is less valuable than past money, but present money is more valuable thanpast money, but present money is more valuable than future money. In economic analysis, the time different of cash flow is calculated by “discounting technique” Where r = interest rate and n = number of period Formula : Future Value Present Value discounting FV PV r r r Future Value = Present Value x (1+r)n
  • 9. Time Value of Money (EXAMPLE) Discount factor = (1 + r) n Discounted Cash Flow (DCF) = Present Value (PV) YEAR N Cash ($ million) Discount Factor @ 10% Discounted Cash ($ million) 2015 0 -100 1.000 -100.000 2016 1 -50 1.100 -45.455 2017 2 30 1.210 24.793 2018 3 100 1.331 75.131 Net Present Value (NPV) is total present value over a period. By 2020, this project is expected to generate $ 80 million value, or called Real Term (RT) value. So, project value is $ 80 million RT2020. However, in 2015 term, it worth only $ 20.9 million to the Company , or called Money of the Day value (MOD) value. In this case, project value is $ 20.9 million MOD (NPV10) 2019 4 70 1.464 47.811 2020 5 30 1.611 18.628 TOTAL 80 NPV = 20.909
  • 10. Profitability Indicator An index to measure the value of a project. It is used to rank the project attractiveness if several investment opportunities existed. There are 3 common indicator : NPV = Net Present Value IRR = Internal Rate of Return PIR = Profit to Investment Ratio
  • 11. IRR (Internal Rate of Return) The discount rate which makes the Present Value (PV) of net cash receipts equal to the Present Value of the investment. In other word, IRR is the discount rate which makes NPV = 0. Rate (%) NPV 0 80.000 2 65.889 100.000 IRR Chart 2 65.889 4 53.054 6 41.356 8 30.677 10 20.909 12 11.960 14 3.748 15 -0.104 16 -3.799 18 -10.746 20 -17.149 -40.000 -20.000 0.000 20.000 40.000 60.000 80.000 0 5 10 15 20 25 NPV($million) Interest Rate (%) IRR = 15%
  • 12. PIR (Profit to Investment Ratio) An index to measure investment efficiency. Formula : YEAR N Cash ($ million) Discount Factor @ 10% Discounted Cash ($ million) 2015 0 -100 1.000 -100.000 2016 1 -50 1.100 -45.455 2017 2 30 1.210 24.793 PIR = NPV discounted CAPEX In above table, Capital Expenditures is (-100) at 2016 plus (-50) at 2017. Undiscounted CAPEX is 150, while discounted CAPEX is 145.455 PIR = 20.899 / 145.455 = 0.14 It means 1 unit of investment will generate profit / additional value of 0.14 unit. 2018 3 100 1.331 75.131 2019 4 70 1.464 47.811 2020 5 30 1.611 18.628 TOTAL 80 NPV = 20.909
  • 13. Profitability Indicator Comparison NPV Measure project value Indicate whether a project creates value (+NPV) or erodes value (-NPV) IRR Do not measure project value Handy indicator of project screening against company PIR Measure project value ratio Indicate investment efficiency(-NPV) NPV@10 20 million indicates a project give additional value of 20 million compare to investing in a bank which give 10% rate per year against company benchmark If benchmark is 14%, a project which give IRR lower than 14% should be excluded from consideration efficiency PIR 0.14 indicates a project give a profit of 0.14 per 1 unit of investment
  • 14. Economics Evaluation Flow Technical Input • Recoverable Reserve • Production Profile • Development Option Cost Input • Capital Expenditures (CAPEX) • Operational Expenditures (OPEX) • Abandonment Expenditures (ABEX) • Cost Phasing Assumption • Oil/Gas Price • Cost Escalation • Inflation • Exchange Rate Economic Result • NPV • IRR • PIR Sensitivity Analysis • Recover- able Reserve • CAPEX • Oil/Gas Note : Recoverable Reserve : Amount of Oil and/or Gas which can be recovered/lifted/produced, expressed in Million barrels (MMbbls) for oil & Billion Cubic Feet (BCF) for gas Production Profile : Production rate per day, expressed in barrels per day (bpd) for oil or Million standard cubic feet per day (MMscfd) for gas Development Option : Type of Facilities (both wells & surface) to produce oil and/or gas OPEX : cost during production phase ABEX : cost to remove facilities in the end of field life Cost Phasing : spread of total cost per unit of time, normally year Option • Cost Phasing Rate • Oil/Gas Price
  • 15. Sensitivity Analysis A method to measure project robustness as a result of changes in project input / variables. Key variables normally are production profile, oil/gas price, and CAPEX. First, define a BASE CASE for key variables. Then change one key variable while maintaining other variables, i.e. change CAPEX by +/- 20% while maintaining production profile and price, then recalculate NPV.production profile and price, then recalculate NPV. Production profile is related to recoverable reserve : Since recoverable reserve is difficult to predict exactly, the industry specialist measure it in optimistic, base, and pessimistic scenario. Optimistic is often called P10 (10% probability of happen). Base case is called P50 (50% probability of happen). Pessimistic is called P90 (90% probability of happen). The result will be plotted on “tornado chart” or “spider plot”. Project is called robust if any change in key variables still result project economic (NPV, PIR) which meet criteria.
  • 16. Project Example : PetroCilacap PetroCilacap GoletKedhuk B.V. (Company) was awarded a contract for exploration & production from “Nyi Roro Kidul” Block, offshore Indian Ocean, 50 km south of Cilacap, Middle Java Indonesia in 2010 for 25 years (until 2035). Exploration was done on 2011 with oil discovery on “Pari” field after successful drilling on Pari-1 well. Appraisal was done on 2012-2014 after 2 appraisal drilling on Pari-2 and Pari-3. Estimated recoverable reserve inon Pari-2 and Pari-3. Estimated recoverable reserve in P90-P50-P10 is 17-24-31 MMbbls with negligible gas. Development study was conducted on 2014-2015 with result of offshore platform consist of Wellhead Platform (WHP) bridge-linked to Central Processing Platform (CPP) with oil pipeline to Onshore Refinery at Cilacap. Company expect to have the first oil (start of production) by end of 2017. If this project fulfill Company economics criteria, they will sanction the project by 2015.
  • 17. Technical Input Estimated Recoverable Reserve / Estimated Ultimate Recovery (EUR) = 24 million barrels WHP bridge-linked to CPP with oil pipeline to Onshore Refinery at Cilacap. Production Profile (peak 10,000 bpd for 2 years) 12,000.00 Production Profile 0.00 2,000.00 4,000.00 6,000.00 8,000.00 10,000.00 12,000.00 BarrelsPerDay Year
  • 18. Cost Input Year 0.1 CAPEX OPEX ABEX 2010 0.621 5,000,000.00 2011 0.683 25,000,000.00 2012 0.751 50,000,000.00 2013 0.826 10,000,000.00 2014 0.909 10,000,000.00 2015 1.000 50,000,000.00 2016 1.100 200,000,000.00 2017 1.210 80,000,000.00 2,000,000.00 2018 1.331 10,000,000.00 2019 1.464 10,000,000.00 2020 1.611 10,000,000.00 2021 1.772 10,000,000.00 Time reference is 2015 All value is RT as per indicated Year Rate = 0.1 (10%) CAPEX 2010 is acquisition cost CAPEX 2011 is exploration cost CAPEX 2012-2014 is appraisal cost2021 1.772 10,000,000.00 2022 1.949 10,000,000.00 2023 2.144 10,000,000.00 2024 2.358 10,000,000.00 2025 2.594 10,000,000.00 2026 2.853 10,000,000.00 2027 3.138 10,000,000.00 2028 3.452 10,000,000.00 2029 3.797 10,000,000.00 2030 4.177 10,000,000.00 2031 4.595 10,000,000.00 2032 5.054 10,000,000.00 2033 5.560 10,000,000.00 2034 6.116 10,000,000.00 2035 6.727 100,000,000.00 appraisal cost CAPEX 2015-2017 is development cost First oil is 2017 OPEX is fix throughout field life despite production decrease over time ABEX is only on the last contract year
  • 19. Assumption Oil price is $50 per barrel flat No cost escalation & exchange rate considered Uptime 90%, meaning productive day is 0.9 x 365 days Company Criteria for Project Economics : Positive NPV PIR > 0.2 Refinery WHP bridge-linked CPP Offshore Pipeline “Nyi Roro Kidul” Block PetroCilacap GoletKedhuk B.V.
  • 20. Evaluation : COST / EXPENDITURES Year 0.1 CAPEX OPEX ABEX DCF CAPEX DCF OPEX DCF ABEX 2010 0.621 5,000,000.00 8,052,550.00 2011 0.683 25,000,000.00 36,602,500.00 2012 0.751 50,000,000.00 66,550,000.00 2013 0.826 10,000,000.00 12,100,000.00 2014 0.909 10,000,000.00 11,000,000.00 2015 1.000 50,000,000.00 50,000,000.00 2016 1.100 200,000,000.00 181,818,181.82 2017 1.210 80,000,000.00 2,000,000.00 66,115,702.48 1,652,892.56 2018 1.331 10,000,000.00 7,513,148.01 2019 1.464 10,000,000.00 6,830,134.55 2020 1.611 10,000,000.00 6,209,213.23 2021 1.772 10,000,000.00 5,644,739.30 2022 1.949 10,000,000.00 5,131,581.182022 1.949 10,000,000.00 5,131,581.18 2023 2.144 10,000,000.00 4,665,073.80 2024 2.358 10,000,000.00 4,240,976.18 2025 2.594 10,000,000.00 3,855,432.89 2026 2.853 10,000,000.00 3,504,938.99 2027 3.138 10,000,000.00 3,186,308.18 2028 3.452 10,000,000.00 2,896,643.80 2029 3.797 10,000,000.00 2,633,312.54 2030 4.177 10,000,000.00 2,393,920.49 2031 4.595 10,000,000.00 2,176,291.36 2032 5.054 10,000,000.00 1,978,446.69 2033 5.560 10,000,000.00 1,798,587.90 2034 6.116 10,000,000.00 1,635,079.91 2035 6.727 100,000,000.00 14,864,362.80 TOTAL 430,000,000.00 172,000,000.00 100,000,000.00 432,238,934.30 67,946,721.58 14,864,362.80
  • 21. Evaluation : Production REVENUEYear 0.1 Oil rate Uptime Prod/Year Revenue DCF Rev 2010 0.621 2011 0.683 2012 0.751 2013 0.826 2014 0.909 2015 1.000 2016 1.100 2017 1.210 2,000.00 0.9 657,000.00 32,850,000.00 27,148,760.33 2018 1.331 10,000.00 0.9 3,285,000.00 164,250,000.00 123,403,456.05 2019 1.464 10,000.00 0.9 3,285,000.00 164,250,000.00 112,184,960.04 2020 1.611 9,000.00 0.9 2,956,500.00 147,825,000.00 91,787,694.58 2021 1.772 7,000.00 0.9 2,299,500.00 114,975,000.00 64,900,390.11 2022 1.949 5,000.00 0.9 1,642,500.00 82,125,000.00 42,143,110.46 Rate is 0.1 (10%) Oil rate in barrels per day Production/ Year is oil rate per day x uptime x 365 Revenue is2022 1.949 5,000.00 0.9 1,642,500.00 82,125,000.00 42,143,110.46 2023 2.144 4,000.00 0.9 1,314,000.00 65,700,000.00 30,649,534.88 2024 2.358 3,500.00 0.9 1,149,750.00 57,487,500.00 24,380,311.84 2025 2.594 3,000.00 0.9 985,500.00 49,275,000.00 18,997,645.59 2026 2.853 2,800.00 0.9 919,800.00 45,990,000.00 16,119,214.44 2027 3.138 2,600.00 0.9 854,100.00 42,705,000.00 13,607,129.07 2028 3.452 2,400.00 0.9 788,400.00 39,420,000.00 11,418,569.85 2029 3.797 2,200.00 0.9 722,700.00 36,135,000.00 9,515,474.87 2030 4.177 2,000.00 0.9 657,000.00 32,850,000.00 7,864,028.82 2031 4.595 1,900.00 0.9 624,150.00 31,207,500.00 6,791,661.26 2032 5.054 1,800.00 0.9 591,300.00 29,565,000.00 5,849,277.64 2033 5.560 1,700.00 0.9 558,450.00 27,922,500.00 5,022,107.06 2034 6.116 1,600.00 0.9 525,600.00 26,280,000.00 4,296,990.00 2035 6.727 TOTAL 23,816,250.00 1,190,812,500.00 616,080,316.88 Revenue is production / year x oil price ($50/barrel) DCF Revenue is Revenue x Discount Factor
  • 22. Evaluation : Discounted Cash Flow Chart -100,000,000.00 0.00 100,000,000.00 200,000,000.00 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 CashFlow(PerYear+Cummulative) Ultimate Cash Surplus $ 115,894,661 -500,000,000.00 -400,000,000.00 -300,000,000.00 -200,000,000.00 CashFlow(PerYear+Cummulative) Year Payback Period 12 years Break Even Point on 2022 Maximum Cash Sink $ 406,743,066.35
  • 23. Evaluation : Result Total DCF Expenditures = DCF CAPEX + DCF OPEX + DCF ABEX Total DCF Expenditures = 432,238,934.30 + 67,946,721.58 + 14,864,362.80 = $ 515,050,018.68 Total DCF Revenue = $ 616,080,316 NPV = Total DCF Revenue – Total DCF Expenditures NPV = 616,080,316 – 515,050,018.68 = $NPV = 616,080,316 – 515,050,018.68 = $ 101,030,298.20 PIR = NPV / Total DCF CAPEX PIR = 101,030,298.20 / 432,238,934 .30 = 0.23 So, NPV is positive and PIR is above 0.2 Conclusion : Project Meets Economics Criteria However, Company must check its financial ability to handle maximum cash sink of $ 406,743,066.35
  • 24. Sensitivity Analysis Calculation Based on calculation, the result are : Reserve P10 NPV = -83,793,796.86 Reserve P90 NPV = 285,854,393.26 Price +20% NPV = 224,246,361.58 Price -20% NPV = -22,185,765.18 CAPEX +20% NPV = 14,582,511.34 CAPEX -20% NPV = 187,478,085.06CAPEX -20% NPV = 187,478,085.06 From above figures, it is clear that reserve is the most sensitive variable. If Company can only realize P10 reserve, the NPV will be negative which does not meet Company criteria. While Price is out of Company control, in this case Company need to further study the reserve value to ensure that it can produced at P50 value.
  • 25. Sensitivity Analysis Chart -200,000,000.00 0.00 200,000,000.00 400,000,000.00 CAPEX Price Reserve Base NPV = 101,030,298-100,000,000.00 -50,000,000.00 0.00 50,000,000.00 100,000,000.00 150,000,000.00 200,000,000.00 250,000,000.00 300,000,000.00 350,000,000.00 -60 -40 -20 0 20 40 60 CAPEX Price Reserve Tornado Chart X-axis is NPV value Longer bar indicates more sensitive variable Base NPV = 101,030,298 101,030,298 Spider Plot X-axis is % variation Y-axis is NPV value Steeper line indicates more sensitive variable -150,000,000.00 -100,000,000.00
  • 27. About the Author Puput Aryanto Risanto had more than 10 years experience in oil & gas industry. Currently he is working for Petronas Carigali Sdn. Bhd. in KL, Malaysia. Previously he worked for Premier Oil Natuna Sea B.V. in Jakarta and Total E&P Indonesie in Balikpapan, Indonesia. His expertise included project engineering & management, jointincluded project engineering & management, joint venture management, construction management, electrical engineering, and recently deepwater development. This presentation was a small contribution to the public who was interested to know more about Oil & Gas industry. He can be contacted at aryantorisanto@yahoo.com