UNIVERSITI

ETRONAS

FINAL EXAMINATION
SEPTEMBER 201 4 SEMESTER

:
DATE :
TIME :
COURSE

PCB3023 PETROLEUM EGONOMICS

8th

JANUARY 2015 (THURSDAY)

9:00 AM

- 12=00 NOON (3 HOURS)

INSTRUCTIONS TO CANDIDATES

1.
2.
3.
4.

Answer ALL questions from this Questions Booklet.

Begin EACH answer on a new page in the Answer booklet given.
lndicate clearly answers that are cancelled, if any.
Where applicable, show clearly steps taken in arriving at the solutions and indicate

ALL assumptions.

5.

Do not open this Question Booklet until instructed.

Note

i.

There are FIVE (5) pages including the cover page in this Question
Booklet.

ii.

TWO (2) graph papers are provided.

Universiti Teknologi

PETRONAS

PCB 3023
1

. a.

Explain how you could derive NPV[O.10] from a projeet eash flow and what
does it indicates on the project.
[5 marks]

b.

Discuss the important application of NPV as a project parameter.

[4 marks]

c. Descrbe the term inflation in relation to prices and how it is normally

measured.
[4 marks]

d.

A well is estimated a cost RM140,000 is to be drilled on 40-acre spacing.

The productve formation averages 30 ft in thiekness. The time pattern of
the production will give a present-value factor of 0.680 based on 10% cost

of capital. Operating profit will average RM1.8 per barrel. Assuming a

reeovery of 150 barrels per aere-foot, propose the payback (breakeven)
priee of the bonus that could be paid to the land-owner for the lease.

[10 marks]

PCB 3023

2" a.

Describe TWO (2) roles of host government or contracting oil company

within Production Sharing Contract (PSC) and Concession Contract (CC)
[4 marks]

b.

lllustrate TWO (2) key differences between CC and PSC.

[2 marks]

c.

Risk Sharing Contract (RSC) was first introdueed in Malaysia in addition

with Production Sharing Contract (PSC) which focuses on production and
recovery rates in marginal fields. Highlight TWO (2) differences between

RSC and PSC

in terms of

production entitlement, cost recovery,

contractor's profit and abandonment seheme.

[B marks]

d.

A BIG Company offers you investment options as follow:

Option 1: RM1250 to invest in the bank with 5% interest rate.
Option 2: lnvest in a fund, whieh guarantees to make 10 annual payments
of RM250, starting in one year.
Option 3: Lend to MONSTER eompany which is setting up a new business
and promises to repay RM3500 in 10 years' time.

i.

Propose your selection based on NPV, justify.

[8 marks]

ii.

Suggest your investment selection if the interest rate increases

lo 12%.
[8 marks]

PeB 3023

3. a"

The Petrogreen Cement Company decided to have an initiai investment of

RM1500 in the stock market. lt is expected to have return of RM4000 and
RM3000 in year' 10 and g with extra cost of about RM900 in year 3. lf the
interest rate per annum is

i.

12o/o:

ealculate the Net Present Value (NPV) and Profitability lndex (Pl)
for the project.

[10 marks]
lt

Using graphical method, evaluate the lntcrnal Rate of Return (lRR)

value.

[10 marks]
ilt

Analyze and suggest you recommeRdation for the investment.

[3 marks]

b.

Screening process classify

a project into a

"good" or "no-good" before

fufiher ranking. suggest whether to rank by NPV, IRR or Pl and justify

whieh project is preferable according to FIGURE Q3.
[7 marks]
080

-.

ProjectA:-NPV

0/0

Proct B'- NPV

-+ProjectA:-

P
*Project B:- P

060

060

040

030 L
0
010

000

010

020

Discount Rate

FIGURE Q3

PCB 3023

4. a. An oil eompany has mapped a prospectwith 100 mllion barrels resources

and the Probability of Success (POS) is estimated to 10%. The exploration
cost wll amount to RM20 million and if a discovery is made, the NPV will
be RM90 millon.

i.

ealculate the Expected Monetary Value (EMV) using

decision

tree.

[5 marks]

ii.

Will you recommend the project to your Management? Justify.

[3 marks]

iii.

Propose the breakeven of POS.

[4 marks]

b.

The eompany in question 4(a) decides to shoot a 3D seismic survey

before the first well with RM5 million budget. The geologst estimates the
POS to increase to 20% with NPV becomes RM120 million. Calculate the
new EMV using a decision tree.
[5 marks]

END OF PAPER