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Petroleum Economic
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Course Outcome
Describe the underlying concept of key economicindicators such as maximum cash sink, payout time, NetPresent Value (NPV), Internal Rate of Return (IRR)
Identify the various types of Fiscal Arrangements and itscomputational logic
Develop basic economic models for E&P projecteconomic evaluations.
Identify risk factor and impact on the project economics.
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Purpose of Economic Evaluation Your Deliverables
WHY DO 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
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
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FLOW OF MONEY IN A PROJECT
PROJECTGenerating Money
Debt Repayment
Interest Payment
Dividends Payment
Re-investment
Absor
bing Money
Bank loans
Share issue Farm-out
SHAREHOLDERS
DEBTHOLDERS
(Sources of Funds)
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Technical Inputs
Economic Model
EconomicAssumptions
Economic Results
ReservesProduction
CapexOpex
ECONOMIC ANALYSIS WORK-FLOW
Risk &
SensitivityAnalysis
PriceCost Escalation
InflationExchange Rate
Net Cash FlowTax & Capital Allowance
Fiscal Arrangement
Time Value of MoneyEconomic Indicators
eg. NPV, IRR
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Technical Inputs
Economic Model
EconomicAssumptions
Economic Results
Risk &
SensitivityAnalysis
ReservesProduction
CapexOpex
ECONOMIC ANALYSIS WORK-FLOW
PriceCost Escalation
InflationExchange Rate
Net Cash FlowTax & Capital Allowance
Fiscal Arrangement
Time Value of MoneyEconomic Indicators
eg. NPV, IRR
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OVERVIEW OF UPSTREAM PROJECT EVALUATION
Field Life Cycle
Revisit/New OpportunitiesWell/Field Abandonment
Data Review
Project ScreeningProject Planning
Seismic/Drilling/Studies
Feasibility Study/Conceptual DesignDetailed Design
ProcurementFabrication/Installation
DrillingHook-up & Commissioning
Activities
Contract Years
1st Production
Production AbandonmentDevelopmentAcquisition Exploration
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OVERVIEW OF UPSTREAM PROJECT EVALUATION
Acquisition Exploration Development Production Abandonment
Acquisition Cost including Sunk Cost Acquisition Cost
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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
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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
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OVERVIEW OF UPSTREAM PROJECT EVALUATION
Acquisition Exploration Development Production Abandonment
Production costs depend on Type of operations Maintenance
Workover
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OVERVIEW OF UPSTREAM PROJECT EVALUATION
Acquisition Exploration Development Production Abandonment
Abandonment costs depend on Timing Salvage value
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OVERVIEW OF UPSTREAM PROJECT 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
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OVERVIEW OF UPSTREAM PROJECT EVALUATION
Technical Data Input for Economic Evaluation
0
10
20
30
40
50
60
Production Year
Production
Plateau
Period
Decline
Period
Build-up
Period
Reserves or Expected Ultimate Recovery ( EUR )
Production Forecast ( Oil or Gas )
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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 = $6.40/BBL
Sample of A Field Life Cycle Project
OVERVIEW OF UPSTREAM PROJECT EVALUATION
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
Productuion(Mstb)
/Costs(US$MM)
Surplus
Opex
Development Capex
Exploration Capex
eg. Total Opex= US$ 50 MM
ProductionPeriod
eg. Total Production= 50 MMSTB
ExplorationPeriod
eg. Expl. Capex= US$ 10 MM
DevelopmentPeriod
eg. Dev. Capex= US$ 260 MM
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History
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Oil history timeline
3000 BC The Mesopotamians of that era used rock oil in architectural adhesives, ship
caulks, medicines, and roads.
2000 BC
The Chinese refined crude oil for use in lighting and heating.
600700 AD
Arab and Persian chemists discovered that petroleums lighter elementscould be mixed with quicklime to make Greek fire, the napalm of its day.
1750
A French military officer noted that Indians living near Fort Duquesne (nowthe site of Pittsburgh) set fire to an oil-slicked creek as part of a religiousceremony. As settlement by Europeans proceeded, oil was discovered in
many places in northwestern Pennsylvania and western New Yorkto thefrequent dismay of the well-owners, who were drilling for salt brine.
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Mid1800s
Expanding uses for oil extracted from coal and shale began to
hint at the value of rock oil, encouraging the search for readilyaccessible supplies.
1859
Oil was first discovered when a homemade rig drilled down 70feet and came up coated with oil. This rig was near Titusville
(in northwestern Pennsylvania) and was owned by "Colonel"Edwin L. Drake.
1890s
Mass production of automobiles began creating demand forgasoline. Before this, kerosene used for heating had been the
main oil product. 1920
With 9 million automobiles in the United States, gas stationswere opening everywhere.
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1950present
With the growing use of automobiles, oil became our mostused energy source .
1960 The Organization of Petroleum Exporting Countries (OPEC)
was formed by Iran, Iraq, Kuwait, Saudi Arabia, andVenezuela. The group has since grown to include 11 membercountries.
1970 Production of petroleum (crude oil and natural gas plant
liquids) in the U.S. lower 48 States reached its highest level at9.4 million barrels per day. Production in these States has beendeclining ever since.
1972 Oil well productivity for the Nation reached a high of 18.6
barrels per day per well.
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1973
Referred to as theArab Oil Embargo, several Arab OPECnations embargoed, or stopped selling, oil to the United States
and Holland to protest their support of Israel in the Arab-Israeli Yom Kippur War. Later, the Arab OPEC nationsadded South Africa, Rhodesia, and Portugal to the list ofcountries that were embargoed. Arab OPEC production wascut by 25 percent, causing some temporary shortages and the
tripling of oil prices. Some filling stations ran out of gasoline,and cars had to wait in long lines for gasoline.
1973
In reaction to the Arab Oil Embargo of 1973, Congress passed
laws that tried to protect consumers from gasoline shortagesand high prices. The price controls of the EmergencyPetroleum Allocation Act of 1973 were generally considered afailure, and they were later repealed.
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1975
Congress passed the Energy Policy and Conservation Act of1975 aimed at increasing oil production by giving priceincentives. This act also created the Strategic PetroleumReserve (SPR) and required an increase in the fuel efficiency(miles per gallon) of automobiles.
197880 The Iranian Revolution, which began in late 1978, resulted in a
drop of 3.9 million barrels per day of crude oil productionfrom Iran from 1978 to 1981. At first, other OPEC countriesmade up for the drop in Iranian production. In 1980, the Iran-Iraq War began, and many Persian Gulf countries reducedoutput as well. By 1981, OPEC production was about one-fourth lower than it had been in 1978, and prices had doubled.
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198085
OPEC kept prices high by producing less oil. Saudi Arabia acted as aswing producer, cutting more production than any other OPEC country.But high prices caused less oil to be used. For example, cars became
smaller, using less gasoline. The drop in oil consumption meant that less oilneeded to be produced. Thus, oil production from Saudi Arabia fell from9.9 million barrels per day in 1980 to 3.4 million barrels per day in 1985.
1981
The U.S. Government responded to the oil crisis of 1978-1980 by removingprice and allocation controls on the oil industry. For the first time since the
early 1970s, market forces (supply and demand) set domestic crude oilprices.
1986
In 1986, Saudi Arabia stopped holding back production, and other OPECmembers increased production. This caused an oil glut, and prices werealmost cut in half. Oil consumption grew quickly in the late 1980s because
prices remained low.
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1988
Alaskas production at Prudhoe Bay peaked at 2.0 millionbarrels per day and fell to 1.0 million barrels per day in 1999.
By then, U.S. total output had dropped to 7.8 million barrelsper day, 31% below its peak.
199091
Iraq invaded Kuwait on August 2, 1990, causing crude oil and
product prices to rise suddenly and sharply. Prices rose evenhigher when the United Nations (UN) limited the amount ofoil that could be purchased from these countries. Between theend of July and August 24, 1990, the world price of crude oilclimbed from about $16 per barrel to more than $28 per barrel.
The price rose even higher in September, reaching about $36per barrel. As UN troops began seeing military successes inIraq, concerns about long-term supply problems were easedand oil prices dropped again.
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1990
The Clean Air Act Amendments of 1990 required
many changes to gasoline and diesel fuels to makethem pollute less. The use of these cleaner fuels was
phased-in during the 1990s. Since 1995,
reformulated gasoline has been used in places with
the worst pollution problems. Since 1993
For the first time, the United States imported more oil
and refined products from other countries than itproducedowing to growing petroleum demand
and declining U.S. production.
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199798
The Asian financial crisis that occurred in
1997 had worldwide economic effects. As theAsian economies shrank, their demand for
petroleum products declined. The slow
demand for petroleum, along with thereluctance of OPEC to cut its production
quotas, led to the plummet of oil prices in
1998.
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2001
The Nations petroleum production measured an average of11.0 barrels of oil per day per well, 41% below the 1972 peak.
U.S. petroleum consumption reached 19.7 million barrels perday, an all-time high.
Of every 10 barrels of petroleum consumed in the UnitedStates, more than 4 barrels were consumed in the form ofmotor gasoline. The transportation sector alone accounted for
two-thirds of all petroleum used in the United States. To meet demand, crude oil and petroleum products were
imported at the rate of 11.9 million barrels per day, whileexports measured 1.0 million barrels per day.
Net imports (imports minus exports) of crude oil and
petroleum products more than doubled between 1985 and2001. The five leading suppliers of petroleum to the UnitedStates that year were Canada, Saudi Arabia, Venezuela,Mexico, and Nigeria.
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2005
The record-setting hurricane season of 2005 caused
massive damage to the U.S. petroleum and naturalgas infrastructure. The Gulf of Mexico, one of thenation's largest sources of oil and gas production, wasdealt a one-two punch by Hurricanes Katrina and Ritaduring August and September.
The Energy Policy Act of 2005 was passed. Itrequired increased use of renewable fuels fortransportation and new measures to reduce pollutionfrom gasoline and diesel.
Gasoline prices broke $3.00 per gallon for the firsttime.
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2006
Refineries began using more ethanol, a
renewable fuel, in response to the Energy
Policy Act.
2008
For the first time, crude oil price broke $100
per barrel and gasoline prices broke $4.00 per
gallon.
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Oil at Present
Productio 90MMBBL/D
Reserve