MODULE 4

UPSTREAM PETROLEUM
ECONOMICS

1
Tutorial 1 : Technical Data input for Economic Evaluation

Estimate the production and cost parameters for the following conceptual development
of Field ‘Sparco’
• Field ‘Sparco’, located south east of the country,
at 40 m water depth, with Gas Speculative
Resource (SR) of 100 Bscf
• Well test indicate well deliverability of 10 MMscf/d
per well for the reservoir around the area, with
expected production decline after 75% reserves
already produced
• Gas sales agreement signed for 5 years for 40
MMscf/d. Processed gas to be evacuated to sales
point at Port Putra (25 km)
• Estimated well cost of $5 Million per well
• Require 1 Central Processing and 1 Wellhead
Platforms to fully develop the resources at a cost
of $ 90 million.
• Pipeline cost estimate = $1 MM/km
• Opex is expected to be 4% of cumulative Capex
2
 TUTORIAL 1 : Generate Technical Data input for Economic Evaluation

Estimate the production and cost parameters for the following conceptual development
of Field ‘Sparco’

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Total

No Wells

Gas Sales (MMscf/d)

Cum. Gas Sales/
(%)
Reserves
Facilities Cost (US$ MM)

Pipeline Cost (US$ MM)

Drilling Cost (US$ MM)

Total Capex (US$ MM)

Total Opex (US$ MM)

• Unit Development Cost (UDC) = US$ /Kscf

• Unit Operating Cost (UOC) = US$ /Kscf
• Unit Technical Cost (UTC) = US$ /Kscf

3
TUTORIAL 2 : Convert Technical Input Data

Suppose you have been assigned to conduct an economic analysis for a Country
A with relatively high inflation rate. The following costs data have been collected if
we were to develop it today. What would be our technical input data be ?
Platform : US$ 80 Million spread over Year 1 and 2

Drilling : DM 120 Million spread over Year 2 and 3

Drilling costs will increase 10% p.a. in Real Term (RT)

Facilities : Pesos 1 Billion in Year 1

Pesos 4 Billion in Year 2
Pesos 1 Billion in Year 3

Pipeline : US$ 5 Million in Year 1

US$ 30 Million in Year 2

Fixed Opex : 6% of Cumulative Capex to be paid in Pesos being indexed to

local inflation rate

Variable Opex : US$ 1.50/bbl Real Term (RT) being indexed to local inflation rate
Oil Price : US$ 18/bbl, will increase by 2% p.a. in Real term (RT)

Inflation rate : US$ 9% p.a.; DM 6% p.a. and Pesos 25% p.a.

Exchange rate : 105 Pesos per 1 US$; 70 Pesos per 1 DM

4
TUTORIAL 2 : Convert Technical Input Data

Suppose you have been assigned to conduct an economic analysis for a Country
A with relatively high inflation rate. The following costs data have been collected if
we were to develop it today. What would be our technical input data be ?

Costs Data in RT Pesos Billion (1/1/Year 1) Year 1 Year 2 Year 3 Year 4

Oil Production Forecast Bbl/d 40,000 80,000
Platform US$ Mill
Facilities Pesos Bill.
Pipeline US$ Mill.
Drilling DM Mill.
Platform RT Pesos Bill.
Facilities RT Pesos Bill.
Pipeline RT Pesos Bill.
Drilling RT Pesos Bill.
Total Capex RT Pesos Bill.
Fixed Opex @ 6% Cum. Capex RT Pesos Bill.
Variable Opex @ US$ 1.50/bbl RT Pesos Bill.
Pesos Escalation factor 25%
Capex MOD Pesos Bill.
Opex MOD Pesos Bill.

5
TUTORIAL 3 : Calculate Cash Flow

The following offshore oil development project is being proposed. What would be
your approach to address the opportunity ?

Production Data : First Oil beginning of Year 3

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9

Annual Oil Production 5 15 15 10 2.5 1.0 0.5

Technical Costs :

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9

Platform 30 30
Facilities 15 30
Tangible Drilling 10 15 10 4
Intangible Drilling 20 32 15 5
Fixed Opex 8 14 15 15 15 15 15
Variable Opex US$ 0.40/bbl produced

Oil Price forecast : US$ 20/bbl, expected to remain constant thereafter

Terms and Conditions : Royalty 25%

Tax rate 20%, Tax losses not allowed
Capital Allowance – Straight line at 25% p.a.,
Only start after First Oil production
6
TUTORIAL 3 : Calculate Cash Flow

The following offshore oil development project is being proposed. What would be
your approach to address the opportunity ?

1 Capital Allowance Calc. Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9
Platform
Facilities
Tangible Drilling
Total Capex
CA Year 1 Capex @25%
CA Year 2 Capex @25%
CA Year 3 Capex @25%
CA Year 4 Capex @25%
Total CA

2 Tax Calc. Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9
Cash In
Royalty
Opex
Income Before Tax
Total CA
Drilling costs Expensed
Taxable Income
7
Tax Paid @20%
TUTORIAL 3 : Calculate Cash Flow

The following offshore oil development project is being proposed. What would be
your approach to address the opportunity ?

3 Net Cash Flow Calc. Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9
Cash In
Royalty @25%
Opex
Capex
Tax
Cash Out
Net Cash Flow

8
TUTORIAL 4 : Fiscal Terms Computational Logic

Concession Agreement

Provide the logic for Contractors’ Net Cash Flow calculations using the provided input
variables

Input Variable Computational Logic

Gas Sales Revenue – Cash In
Gas Price Royalty
Capex Opex
Opex Income Before Tax
Royalty Rate Capital Allowance
Depreciation Rate Taxable Income
Tax Rate Tax Paid
Income After Tax
Capex
Cash Out
Net Cash Flow After Tax

9
TUTORIAL 5 : Fiscal Terms Computational Logic

Production Sharing Agreement

Provide the logic for Contractors’ Net Cash Flow calculations using the provided input
variables

Input Variable Computational Logic

Gas Sales Revenue
Gas Price Royalty
Capex Cost Ceiling
Opex Cost Incurred
Royalty Rate Cost Bank
Depreciation Rate Cost Recovered
Tax Rate Unrecovered Cost
Profit
Contr. Profit
Contr. Entitlment (Cash In)
Opex
Income Before Tax
Capital Allowance
Taxable Income
Tax Paid
Income After Tax
Capex
Cash Out
Net Cash Flow After Tax
TUTORIAL 6 : Fiscal Terms Computational Logic

Production Sharing Agreement

Provide the logic for NOC’s Net Cash Flow calculations using the provided input variables

Input Variable Computational Logic

Oil Production Revenue
Oil Price Royalty
Capex Cost Ceiling
Opex Cost Incurred
Royalty Rate Cost Bank
Cost Ceiling Rate Cost Recovered
NOC Profit Rate Unrecovered Cost
Depreciation Rate Profit
Tax Rate NOC Profit
NOC Entittlment (Cash In)
Income Before Tax
Taxable Income
Tax Paid
Income After Tax
Cash Out
Net Cash Flow After Tax
TUTORIAL 7 : Calculate Net Cash Flow under Production Sharing

Production Sharing Agreement

Calculate Contractors’ Net Cash Flow using the provided input

Year 1 Year 2 Year 3
Input Variable Annual Oil Production 2.0 6.0 5.0
Oil Price (US$/bbl) 20.0 Capex 30.0 20.0 -
Royalty Rate 10% Opex 10.0 10.0 10.0
Cost Ceiling Rate 50% Revenue
Contr. Profit Rate 30% Royalty
Depreciation Rate 20% Cost Ceiling
Tax Rate 38% Cost Incurred
Cost Bank
Cost Recovered
Unrecovered Cost
Profit
Contr. Profit
Contr. Entitlment (Cash In)
Opex
Income Before Tax
Capital Allowance
Taxable Income
Tax Paid
Income After Tax
Capex
Cash Out
Net Cash Flow After Tax
TUTORIAL 8 : Calculate Net Cash Flow under Production Sharing

Production Sharing Agreement

Calculate National Oil Company (NOC)’s Net Cash Flow using the provided input
Year 1 Year 2 Year 3
Input Variable Annual Oil Production 2.0 6.0 5.0
Oil Price (US$/bbl) 20.0 Capex 30.0 20.0 -
Royalty Rate 10% Opex 10.0 10.0 10.0
Cost Ceiling Rate 50% Revenue
NOC Profit Rate 70% Royalty
Depreciation Rate 20% Cost Ceiling
Tax Rate 38% Cost Incurred
Cost Bank
Cost Recovered
Unrecovered Cost
Profit
NOC Profit
NOC Entitlment (Cash In)
Income Before Tax
Taxable Income
Tax Paid
Income After Tax
Cash Out
Net Cash Flow After Tax
TUTORIAL 9 : Calculate Time Value Of Money

• A company makes a retirement offer to its employees as follows :-

a) receives RM 60K at the end of the 10th year or
b) receives additional annual salary of RM 5000 for the next 10 years
• Mr A is thinking of participating in an investment project which offers average annual
return of 6%. Would he be better off if he accepts option (b) and put all the additional
salary into the investment scheme?

Average Return 6% RM ‘000

Year Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Total
Deposit
Year Begin
Balance
Year End Gain

RM ‘000
Total amount deposited in the Investment scheme
Total Profit Gain
Total Amount collected at the end of 10th Year

14
TUTORIAL 10 : Calculate Time Value Of Money

The forecasted Consumer Price Index is around 3% per year. Your company’s Cost
of Capital is at 10%. What is the Present Value of the following Net Cash Flow ?

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Total

Net Cash Flow -60 -92 10 163 177 117 20 336

Discount Rate @ 3%

Discounted NCF @3%

Discount Rate @ 10%

Discounted NCF @10%

15
TUTORIAL 11 : Calculate Economic Indicators

A project requires US$ 260 Million of total Investment, which excludes exploration Sunk
Cost of US$ 32 MM. First oil is expected to be in year 4. Below is the forecasted annual
Net cash Flow for your assessment. Calculate the economic indicators for the project life
at January Year 3.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Total

Net Cash Flow (32) - (260) 90 80 80 70 58 86

Cum. Net Cash Flow

Discount Factor @ 10% 1.00 1.00 1.00 0.91

Discounted Net Cash Flow

Discount Factor @ 15% 1.00 1.00 1.00 0.87

Discounted Net Cash Flow

NPV NPV NPV Maximum Paybac Undisc.

IRR @0% @10% @15% Cash Sink k PIR

16
TUTORIAL 12 : Calculate Economic Indicators

Calculate the economic indicators for the previous project for look
forward Year 3. Sunk cost of US$ 32 Million in year 1 is now excluded.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Total

Net Cash Flow - - (260) 90 80 80 70 58 118

Cum. Net Cash Flow - -

Discount Factor @ 10% 1.00 1.00 1.00 0.91

Discounted Net Cash Flow - -

Discount Factor @ 15% 1.00 1.00 1.00 0.87

Discounted Net Cash Flow - -

NPV NPV NPV Maximum Paybac Undisc.

IRR @0% @10% @15% Cash Sink k PIR

17