Economic Evaluation

Petroleum Economics
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 Your Deliverables
• Bidding to National Oil Companies to • Advise management/decision makers

secure new petroleum acreages on the economic merit of the project:
• Farming-in into existing acreages – monetary value and return to the

company
• Unitization agreements
– understanding of the impact of each
• Sale and exchange of petroleum assets
major economic parameter on the
• Project financing in the form of loans decision
• Propose new fiscal terms to National Oil – selection of optimal development
Companies options
• Evaluation of changes in governmental – recommendation of of fiscal terms
regulations which affect petroleum sector 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
Acquisition Cost including

• Sunk Cost
• Acquisition Cost
Exploration Costs depend on

• Rig costs
• Time to drill wells
• Well Depth
• Number of exploration wells
• Seismic
Development costs depend on

• Development concept
• Field Size
• Water Depth ( offshore )
• Facilities
• Number of Wells
• Wells costs
• Pipeline costs
Production costs depend on

• Type of operations
• Maintenance
• Workover
Abandonment costs depend on

• Timing
• Salvage value
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.
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
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) = Exploration Capex / Total Production = $ 10/50MMSTB = $0.20/BBL
• Unit Development Cost (UDC) = Development Capex / Total Production = $260/50MMSTB = $5.20/BBL
• Unit Operating Cost (UOC) = Total Opex / Total Production = $ 50/50MMSTB = $1.00/BBL
• Unit Technical Cost (UTC) = [Total Capex + Total Opex ] / Total Production
= UFC + UDC + UOC = $0.20 +$5.20 + $1.00 = $6.40/BBL
Thank You

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Petroleum Economics

• To know the criteria for economic evaluation

Purpose of Economic Evaluation Your Deliverables

• Bidding to National Oil Companies to • Advise management/decision makers

• Farming-in into existing acreages – monetary value and return to the

Absorbing Money Generating Money

Technical Inputs Economic Results

Technical Inputs Economic Results

Field Life Cycle

Acquisition Exploration Development Production Abandonment

Feasibility Study/Conceptual Design

Hook-up & Commissioning

1st Production Well/Field Abandonment

Acquisition Exploration Development Production Abandonment

Acquisition Cost including

Acquisition Exploration Development Production Abandonment

Exploration Costs depend on

Acquisition Exploration Development Production Abandonment

Development costs depend on

Acquisition Exploration Development Production Abandonment

Production costs depend on

Acquisition Exploration Development Production Abandonment

Abandonment costs depend on

Technical Data Input for Economic Evaluation

Technical Data Input for Economic Evaluation

• Reserves or Expected Ultimate Recovery ( EUR )

Sample of A Field Life Cycle Project

eg. Total Production

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

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