The document provides a comprehensive overview of petroleum economics, covering elements such as project evaluation, risk assessment, and economic analysis procedures. Key topics include capital and operational expenditures, cash flow analysis, oil price classifications, and inflation impact on profitability. It also discusses decision-making criteria and various evaluation measures to assess the economic viability of petroleum projects.

1. Oil & Gas Petroleum
Economics

2. Table of Contents
• Introduction to petroleum Projects
• Project economics
• Characteristics of petroleum Industry
• Risk and Uncertainty in Petroleum Industry
• Economic Analysis Procedure
• Crude oil characteristics

3. Table of Contents
• Crude oil price
• Crude Oil Bench markers
• Cost type ,Taxes and Royalties
• Reserves estimation
• Production forecasting using decline curve
analysis
• Solved examples
• Petroleum Projects economic Indicators

4. Table of Contents
• Petroleum Projects evaluation
• Solved examples
• Depreciation & Depletion
• Solved examples
• Decision Making
• Expected Minatory Value ( EMV)

5. Project
economics
•All oil industry projects have several
economically important issues and
charactrized by :
– Capital intensive,
– long project life time,
– Extreme uncertainty

6. Project economics
•Economic analysis is a decision
making tool which provides:
–An estimate of future cash flows,
–Assessment of profit or loss,
–Assessment of investiment risk

7. Project economics
• The main elements required for a cash
flow analysis are:
• expenditure estimates,
•capital expenditure (CAPEX)
•operational expenditure (OPEX),
– income estimates

8. Characteristics of petroleum
industry:
• Non renewable resource
• Long pre-production period between the
cost and revenue Uncertainty
• and high risk
* Geological risk * Engineering risk
* Economic risk * Political risk

9. Risk and Uncertainty in
Petroleum Industry
• ·Exploratory wells may or may not turn out to be
productive or economically feasible.
• An oil or gas field may not generate revenue as
expected.
• Future of oil and gas prices could move
unpredictably.
• ·Unforeseen events such as political unrest and
regional conflict

10. Elements of any economic
evaluation
• Elements of any economic evaluation
are:
• (1)Income
• (2)Expenditures
• (3)Time

11. Economic Analysis
Procedure
• 1. Setting economic objectives.
• 2. Formulating scenarios for project
development.
• 3. Identify elements of risk and uncertainty.
• 4. Collecting all available data used in
analysis.
• 5. Performing economic calculations.
• 6. Choose the optimum operation.

12. Economic Decision
Criteria
• · Payout period
• · Profit to investment ratio
• · Present worth net profit
• · Present worth index or profitability
index
• · Discounted cash flow return on
investment

13. Main elements in a
discounted cash-flow
model
• ·Cash – flow
• ·Profit
• ·Net Present Value
• ·Internal rate of Return
• ·Other decision criteria
• - Expected Monetary Value
• - Pay back time
• - Break even oil price

14. Crude Oil Classifications
and oil price
• 1- Due to its location of its origin
• ·West Texas Intermediate, WTI
• ·Brent
• ·Arabic Light
• 2-Dut to oil viscosity
• ·Light
• ·Intermediate
• ·Heavy

15. Crude Oil Classifications
and oil price
• 3- Due to sulfur content
• · Sweet (sulfur content < 0.5 % by
weight)
• · Sour (sulfur content > 0.5 % by
weight)

16. CRUDE OIL
Characteristics and the oil
price
• High API means high gasoline content
which indicates high price
• ·Sweet oil: oil has sulfur content lower than
0.5% by weight and has high price
• ·Sour oil: oil has sulfur content higher than
0.5% by weigh and has lower price

22. CAPEX
• Capital expenditure may include the
following:
– pipelines,
– offshore structures,
– well drilling programmes,
– data collection programmes,
– primary process facilities,
– onshore processing facilities,
– ...

23. OPEX
• Operational expenditure may include the
following:
– staff costs,
– daily energy requirements,
– transportation tariffs,
– in-fill drilling programmes,
– data acquisition,
– maintenance,
– facility upgrades,

24. Project incomes
•Income may include the following:
–oil sales,
–gas sales,
–pipeline tariffs,
–disposal of assets.

25. Inflation
• How prices are changing with respect to time
?
• normally quoted as an annual percentage rate
• different types of items have different
inflation rates
• positive rates imply rising prices
• negative rates imply falling prices

26. Simple compound
inflation
 n
R
I 
 1
100
I is the inflation index
R is the inflation rate per annum
n is the number of years
Year Inflation index
0 100.00
1 110.00
2 121.00
3 133.10
4 146.41
5 161.05
6 177.16
7 194.87
8 214.36
9 235.79
10 259.37
11 285.31
12 313.84
13 345.23
14 379.75
15 417.72
16 459.50
17 505.45
18 555.99
19 611.59
20 672.75
Inflation rate R
= 10%

27. What is time value of
money ?
• $100 will buy more today than in one year
time due to inflation
• If I invest $100 in a bank today, with an
interest rate of 10%, then in one year time it
will be $110
• So $100 today is worth more than $100 in one
year time (if inflation rate is positive)

28. Discount rates ÷ Discount
factors
• If you promise to pay me $100 in 5
years time, how much should I lend to
you ?
• How much is $100 in 5 years worth
today - what is its Present Value

29. Inflation - Interest in reverse
 
V
d
PV n


1
1
PV is the Present Value
d is the discount rate per annum
n is the number of years
V is the Value in n years
is known as the discount factor
 n
d

1

30. Present Value
Year Cash Flow d.f. PV of CF
$M 2% $M
0 -200.00 1.00 -200.00
1 -100.00 1.02 -98.04
2 60.00 1.04 57.67
3 250.00 1.06 235.58
4 252.51 1.08 233.28
5 255.03 1.10 230.99
6 257.58 1.13 228.72
7 231.82 1.15 201.82
8 174.40 1.17 148.85
9 130.40 1.20 109.11
10 97.80 1.22 80.23
11 73.36 1.24 59.00
12 55.01 1.27 43.38
13 41.26 1.29 31.90
14 30.95 1.32 23.46
15 23.21 1.35 17.25
16 17.42 1.37 12.69
17 13.06 1.40 9.33
18 9.80 1.43 6.86
19 7.35 1.46 5.05
20 5.51 1.49 3.71
-250.00
-200.00
-150.00
-100.00
-50.00
0.00
50.00
100.00
150.00
200.00
250.00
300.00
0 5 10 15 20 25
Years
PV
$M
 
V
d
PV n


1
1
Discount rate = 2%

31. Net present value
-400.00
-200.00
0.00
200.00
400.00
600.00
800.00
1000.00
1200.00
1400.00
1600.00
0 5 10 15 20 25
Years
NPV
$M
• The NPV is the most commonly used
method to assign a present worth, in
todays money, for a project that will
yield profits (and losses) in future years



m
i
i
PV
NPV
0

32. Optimum abandonment
year
-600.00
-400.00
-200.00
0.00
200.00
400.00
600.00
800.00
1000.00
1200.00
0 5 10 15 20 25
Years
N
PV
$M
Year Cum. PV PV of Aban. NPV
$M $M $M
0 -200.00 -25.00 -225.00
1 -298.04 -26.96 -325.00
2 -240.37 -110.49 -350.85
3 -4.78 -122.72 -127.50
4 228.50 -136.32 92.17
5 459.49 -151.42 308.06
6 688.21 -168.20 520.01
7 890.02 -152.68 737.34
8 1038.87 -169.60 869.28
9 1147.99 -188.38 959.61
10 1228.22 -209.30 1018.92
11 1287.22 -232.43 1054.78
12 1330.59 -321.70 1008.90
13 1362.49 -357.33 1005.15
14 1385.95 -396.92 989.02
15 1403.19 -440.90 962.30
16 1415.88 -489.74 926.14
17 1425.21 -544.00 881.21
18 1432.07 -604.27 827.80
19 1437.12 -671.21 765.90
20 1440.82 -745.57 695.25
The adandonment year is
selected by finding the
year that maximise the
NPV
Optimum

33. Other economic measures
• Net Value
• Pay Back Time
• Accounting rate of return
• Profit investiment ratio
• Present value profit ratio
• Growth rate of return
• Internal rate of return

34. Economic Yardsticks
• Measures that do not consider the time value of money
• Profit
• Payout time
• Cost to find and develop reserves
• Measures that do consider the time value of money
• Net Present Value
• Rate of Return
• Discounted Profit to Investment Ratio
• Profit
• Net cash flow = Revenue – expenses

35. Economic Yardsticks
• Expenses = initial investment + operating cost + taxes
• Net cash flow = profit
• Payout time
• Time from investment to positive cumulative
net cash flow

36. Economic Yardsticks

37. Solved Example:
• A refinery inNorth Africa is shut in after it can no
longer flow naturally. After several years a
recompletion is proposed at a cost of US$750,000.
The recompletion includes a fracture stimulation
and installation of gas lift. We estimate that the
well can be successfully returned to production
with a predicted production stream as given on
the following table.
• Calculate the total profit, payout time, and cost
to find and develop reserves.

38. Solved Example:

39. Solved Example:

40. Solved Example:

41. Time Value of Money

43. Time Value of Money

44. Profitability Index

45. Which Yardstick To Use

46. Economic Optimization

47. Second Solved Example

48. Second Solved Example

49. Second Solved Example

50. Third Solved Example

51. Third Solved Example

52. Third Solved Example

53. Third Solved Example

54. Depreciation

55. Depreciation Methods
• 1- Straight line Method
• 2-Decline Method
• 3-Double Decline Method
• 4- Sum-of-the-Year Method
• 5- Sinking Fund Method

56. Project Risk & Uncertainty
• Certainty: Only one possible outcome
• Uncertainty: Recognition that more than a
singly outcome is possible
• Risk: Possibility of incurring economic loss
• High Risk: Possibility of incurring a large loss
• Outcome: One of the possible events that can
take place

57. Project Risk & Uncertainty
• Probability: Chance between 0% and 100%
that an outcome will occur
• Types of Risk
• · Technical Risk
• · Economic Risk
• · Political Risk

58. Project Risk & Uncertainty

59. Project Risk & Uncertainty

60. Project Risk & Uncertainty

61. Decision Tree

62. Decision Tree

63. Decision Tree

64. Decision Tree