Petroleum Economics

By Dr. IMS
Acknowledgement: Elias Abllah

Reference: PETRONAS Materials

 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