Petroleum Economics ECO-310 Practice Final Exam April 23rd, 2004

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1 Petroleum Economics ECO-310 Practice Final Exam April 23rd, 2004 General Instructions Please read each question carefully. Please print legibly. You may do the questions in any order you choose (suggest starting with the material you know best). Space has been provided on the exam in the following. However, exam booklets are available for those that want them. There may be more questions on the exam than students are expected to complete. Formulas are provided on the last page. You must show work calculations for full (or partial) marks. Marking Total Marks Available Percent 1

2 1. Show the formula for calculating remaining reserves using exponential decline analysis (Qt, d, D, 365, qabd, qi, t) 2. Calculate remaining reserves for a gas well using the following information: d=0.35 qi = 35 E3M3/day qabd = 1 E3M3/day 3. Order the 6 factors in an evaluation starting with the most important: Reserves, production forecast, price, operating costs, royalties and taxes. i. ii. iii. iv. v. vi. 4. You are evaluating starting up a shirt laundry business. Your laundry machine can handle 350 shirts a day. It costs $0.25/shirt in detergent and water, to wash a shirt. Rent is $2,500/month and you need to pay $5,000 per month is salaries. The cost of the washing machine and a shirt presser is $17,500. At the end of the project you will be able to get $500 dollars for your used equipment. 2

3 You have also decided to go to the bank to finance the capital requirements. In order to get a loan you require a business plan. In this business plan you need to pick a price which you will charge for cleaning and pressing shirts. You will also need to show sufficient cash flow to make the payments to the bank. a. Using an AEW (annual equivalent worth calculation) and an interest rate of 8 percent, calculate the payments for the loan of $17,500 dollars over a period of 5 years. There will also be a one time charge of $550 for legal and bank fees which must be paid at the start of the project. 3

4 b. As a starting point, assume you will be able to process at capacity for the first 5 years. Estimate the price necessary to breakeven (i.e. just cover costs). Use this, with appropriate adjustments, to estimate a price per shirt. c. Using the table on the attached page and the price estimated above, forecast sales, revenue, operating costs, rent plus salaries, capital and loan payments. Calculate the net cash flow without discounting. d. Calculate the NPV at a 12 percent discount rate. 5. In a similar analysis, the following data has been determined in a sensitivity analysis: ===== Input ======= ========== NPV ============= Multiple Price Salvage Detergent Salary a. Plot this data as a Spider plot: b. Which input is the most sensitive and how did you come to this conclusion? 4

5 6. You have analyzed a prospect and determined the following parameters for a prospective well: NPV of successful well: Dry Hole Cost: $ 3,500 K $ 1,250 K a. Plot the breakeven chance of success for the above well. b. Calculate the breakeven chance of success for the above well. c. Calculate the Expected Monetary Value (EMV) for the following chances of success: 0.25, 0.50, 0.75 and

6 7. A small reservoir development has the potential for 4 wells. Using the binomial expansion, calculate the Expected Monetary Value (EMV) for a possible development. The chance of success for all of the wells is 0.65 (and therefore the chance of a dry hole is 0.35). The NPV for a successful well is $3,500 K and the dry hole cost is $1,500 K. 8. The following form has been supplied to you by your local friendly geologist: Structural chance (fraction) 0.90 Chance of correct lithology (pay) 0.75 Porosity development chance 0.70 Permeability development 0.80 a. Calculate the chance of success for the above information. b. What assumptions are inherent in this calculation? c. Does this approach result in a systematic bias and why? 6

7 9. Question on oil prices. Using the following graph and information, calculate the input field price at Tony Creek for economics in $/m3: WTI $ 19.25/bbl USD Transport to Chicago (market) $ 0.49/bbl USD Transport to Gretna $ 1.03/bbl USD Exchange Rate $ 0.75 USD / $CDN Transport to Edmonton Refinery Gate $ 1.90/bbl CDN Quality Differential $ 0.86/bbl CDN Federated Pipeline to Tony Creek $ 0.75/bbl CDN Trucking to Well $ 1.25/bbl CDN Barrels to M You are evaluating a gas field development. Your gas marketer has told you he can get $5.50/GJ at the Alberta border. The NOVA charges are $1.75/E3M3 for the cost of service in the Province of Alberta. The project is located near an existing gas plant. However the plant is located on a private lateral off the NOVA system. This requires an additional transport cost of $0.25/E3M3 of gas. 1 GJ = mcf (based on average heating value) 1 M3 of gas = cubic feet of gas Calculate the field price of gas for input into a PEEP run. 7

8 11. Calculate the economic limit in m3/day using the following information: Monthly operating cost: $3,487/well/month Oil Price: $198/M3 Avg. Number of days in month The following information has been provided on a reservoir: Graph of reservoir pressure Graph of production a. What mechanism is occurring in the reservoir? b. Can you estimate the bubble point? If so, what is it? 8

9 13. Shown below is a graph of Alberta Gas Royalties. Identify 5 features of the royalty regime. a. b. c. d. 14. The following graphs have reservoir pressures and production performance. Label the following: a. Primary production b. Gas cap drive c. Water Drive 9

10 15. Shown below is the oil rate v. cumulative performance for a reservoir. This reservoir was initially produced on primary production. After the field was fully developed a waterflood was installed. In the later stages of production an infill drilling program was done in preparation for a HCMF (Hydro Carbon Miscible Flood) project. The 00IP for the field is estimated at 19,600 E6M3. a. Estimate the primary reserve and recovery factor. b. Estimate the waterflood reserve and recovery factor. c. Estimate the reserves for the combined infill drilling and miscible flood. d. How much of the increment for the miscible flood project (and associated infill drilling) came from infill drilling? 10

11 16. In the table below are a series of production figures. This data comes from the Medicine Hat gas field. The field is of low overall permeability and the wells have all been hydraulically fractured. Your supervisor comes in during the early part of the morning and asks you how to predict the performance of the Wells in the first 2 years of production. After lunch you come back with a table and a chart. Well Month 1 Well 2 Well 3 Avg E3M3/day E3M3/day E3M3/day

12 17. Calculate the reserves for the development of a tight gas field using the above data. In total there will be 9 sections developed, with the average development amounting to 3 wells per section. 12

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14 18. Definitions: a. Net Present Value: b. Chance of Success: c. Expected Monetary Value d. Working Interest e. Royalty f. Simple Interest g. Compound Interest h. Annual Equivalent Worth or an Annuity 19. On the following pages is a PEEP output. Further background information is provided on pages through.from the output and the associated information: a. Demonstrate in a short calculation that the gross working interest revenue is correct. b. Demonstrate in a short calculation below that the working interest operating cost is correct: c. What royalty regime is this high rate well being produced from and how do you know this? d. Check the discounting caldulation assuming that discounting occurs at the end of the year (per our assignments). Is the discounting used in PEEP exactly the same? How is it different? 14

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19 20. A project has a cash flow as shown in the following table (next page) under the base case column. For an expenditure of more capital, it is possible to make the cash flow higher. a. Does this expenditure make sense with no discounting or i=0? b. Using the table on the following page and the graph below, calculate the (1) Internal Rate of Return (IRR). c. Describe how the graph above is typical of incremental economics. d. In incremental economics, is a higher NPV automatically a good thing? e. List 2 reasons why cash acceleration may not be a good idea. 19

20 Year Base With Increment NPV NPV NPV NPV NPV NPV NPV Capital I (interest rate)

21 21. You have recently obtained a job at an oil company. You have been there for about 3 months. One of the senior engineers in the company, who has significant influence in the company for personnel assignments, is present during one of your presentations. You know that you want to work on an East Coast project, which is a very high profile position, for your next job. The senior engineer asks you a reservoir engineering question (and yes his question is a test!) Why aren t gas reservoirs waterflooded? Grateful that you have studied and reviewed this in ECO-310 you provide the following explanation: 22. In the diagram below the royalty regime for Alberta Natural Gas. a. Identify the difference between the different regimes b. What happens as a well approaches its economic limit? c. Why does the government do this? 21

22 23. The company you are working for has decided to try developing a potential small pool. The pool has at most 3 wells. The perceived chance of success is However, if even one dry hole results, the perceived chance of success drops to Drilling more than two dry holes in a row will result in your immediate dismissal (hint don t do this). Using a decision tree, calculate the EMV of this little development. The NPV of a successful well is $2850 K and the DHC (dry hole cost) is -750 K. 22

23 24. Calculate the growth of an account earning simple interest in the following table. The amount deposited at the beginning of year 1 is $5, and the interest rate is 14.3 percent: Calculate the total amount of interest paid. Calculate to 2 decimal places. End of Principal Interest Total Year Earned Cash Total 25. Calculate the growth of an account earning compound interest in the following table. The amount deposited at the beginning is $5, and the interest rate is 4.5 percent. Calculate the total amount of interest. Next demonstrate the values obtained by using the formula F = P*(1 + i)^n as a rapid method of calculating compound interest growth. Calculate to 2 decimal places. Year Start of Close of Formula Year Year F=P(1+i)^n Total 26. A savings account (compound interest) has grown over 10 years from $10,000 to $17, What was the interest rate? Report results to 2 decimal places i.e. x.xx percent. 23

24 27. An engineering project generates the cash flow shown in the table below. Year Cash Interest Interest Interest Interest Interest Total Received 0 % p. a. 10% p.a. 15% pa 20% p.a % p.a a. Assuming discount rates of 0, 10, 15, 20 percent per annum, calculate the present values for the cash received in each year and then calculate the NPV. Calculate figures to 2 decimal places. b. Sketch the NPV v. interest rate (i) on the graph below. Then graphically estimate the IRR (show on graph!). Check your estimate the nearest 1 percent on the previous table. 24

25 28. You have been asked to prepare a presentation to management. Since you have taken an economics course you have been selected by your work group to make a recommendation to management. It has not been decided how much budget your group will get. It has been agreed that several levels would be presented as options: The group will request a capital budget of $2,500 K; or, The group will request a capital budget of $5,000 K. Possible project economics prepared by you and your group are shown below. Note that all are considered to have the same level of risk. a. Given a capital budget of $2,500 what project(s) combinations are possible? b. Which of these would you recommend and why? (One good point will do) c. Given a capital budget of $5,000 K what project combinations are possible? d. Which combination would you chose and why? (3 good points) 25

26 29. You have just walked out of the bank, where you found out that the current interest rates on T Bills is 5.0 percent. It is a good day. You have just deposited your first pay cheque. Amazingly, you have listened to your SAIT instructors and have decided to put a little money away from earnings for your retirement. In fact, you have $500 dollars in your pocket to invest. As you walk down the 8Th Avenue Mall you receive a number of offers. a. The first offer is an investment in health services. They will pay you $ at the end of 7 years if you invest $ today. Using your skills learned in ECO-310, you tell the salesman: Forget it "I'll put my $500 in T Bills" Give the man your $500 dollars and say "see you in 7 years." b. The second offer is an investment in the sports industry. They will pay you $ at the end of 5 years. You make a few calculations and reply: Forget it, "I'll put my $500 in T Bills" Give the man your $500 dollars end say "see you in 5 years" 30. You've finally done it. You won the Lotto with 3 other people, with whom you will split $9,000 K equally. You are evaluating a number of lifestyle alternatives. One of which is purchasing an annuity from the bank and living on the beach. The Bank of the Newly Wealthy is offering a 6 percent interest rate on annuities (a series of equal payments) with 45 year terms. How much money per year will you have to live on? 26

27 31. An engineering enterprise has the following projected cash flow generated from an initial investment of $ 850 K. The table below has been prepared for your calculations. The interest rate for T Bills in this problem is 7.5 percent. a. Calculate the future value of each year's cash flow at for years 1 through 5 (i.e. the positive values) at the end of the project, which is year 5. b. Then calculate the growth of the same capital ($850 K) in a T Bill. cg. Compare the amount of cash the enterprise will generate compared to the T Bill account and calculate the difference. c. What is the present value of the difference? d. Calculate the NPV (Net Present Value) for the project. e. Are (d) and (e) the same? If they are, is this a cosmic coincidence? Or does it tell us something about the meaning of NPV? If so, what is it? 27

28 32. What's the difference between tangible and intangible costs? 33. You are going to be doing after tax economics. Explain the following: a. Is the tax rate different or the same for gas plants v. production? b. What is a tax pool? c. Do they have any value? d. Are they restricted in any way? e. What are Plant and Gathering Costs f. What are Canadian Oil and Gas Property Expense g. What are Drilling Costs h. Why do the values of properties go up when properties are bought and sold? i. Is doing after tax values really important? r j. Do companies always use after tax calculations k. Why don't' they use them l. What is a resource allowance? 28

29 m. Is paying taxes really a good thing? 34. From the following information, what are the variable costs and what are the fixed costs? 35. Describe the SEC-10K test from the following perspectives: a. Price assumption b. Cost assumption c. Discount rate d. What is the purpose of a Ceiling Test? e. What is the purpose of using these results in view of the assumptions you have outlined in a and b above? 29

30 f. What is the purpose of the SEC anyway? 36. Draw rate v. time plots for the following reservoirs: a. Primary production with under-saturated oil production b. Strong water drive oil reservoir c. Strong water drive gas reservoir d. Solution gas drive oil reservoir e. Expansion drive gas reservoir 37. Does a royalty owner have to pay for: a. Trucking to a battery? b. A well site separator c. Gas plant processing d. Line heaters on the lease ====== END ====== 30

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