TECHNO-ECONOMICS OF OIL & GAS PROJECT. Dr. ARSEGIANTO

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1 TECHNO-ECONOMICS OF OIL & GAS PROJECT Dr. ARSEGIANTO 2004 CONTENTS INTRODUCTION DEFINITION AND CONCEPT MODEL AND FORMULATION INDICATORS FOR PROJECT FEASIBILITY DEPRECIATION INVESTMENT MANAGEMENT PROJECT FINANCING

2 1. INTRODUCTION INVESTMENT IS AN EXCHANGE OF MONEY AT HAND WITH AN AMOUNT OF MONEY THAT IS EXPECTED TO RETURN IN THE FUTURE. SINCE THE FUTURE IS UNCERTAIN, THE EXPECTED RETURNED MONEY SHOULD BE HIGHER THAN THE AMOUNT INVESTED. LIFE CYCLE COSTING (LCC) IS A METHOD OF INVESTMENT EVALUATION COVERING THE ALL COSTS AND REVENUES INCURRED ALONG THE WHOLE PROJECT LIFE CYCLE. RELATIONSHIP OF INVESTMENT AND INTEREST RATE INTEREST RATE INVESTMENT INVESTMENT DECLINES AS THE INTEREST RATE INCREASES 1. INTRODUCTION - 2

3 UTILITY AND INDIFFERENCE CURVES EXPECTED RETURN U 3 U 2 U 3 > U 2 > U 1 U 1 RISK 1. INTRODUCTION DEFINITION AND CONCEPT TIME INFLUENCES THE VALUE OF MONEY THROUGH ITS PURCHASING POWER AND EARNING POWER PURCHASING POWER OF MONEY DECREASES DUE TO INFLATION EARNING POWER YIELDS PROFIT (EARNING) FOR THE INVESTED MONEY INTEREST IS A RENT FOR UTILIZING MONEY

4 CONCEPT OF COMPOUNDING INTEREST THE CONSEP OF COMPOUNDING INTEREST STATES THAT THE INTEREST OF THE INVESTED MONEY YIELDS AN INTEREST AS WELL. ILLUSTRATION: ONE IS GOING TO PUT HIS Rp.10 MILLION IN THE BANK THAT GIVES 10% INTEREST RATE PER ANNUM. A YEAR LATER HIS MONEY SUMS UP TO Rp.11 MILLION; THAT CONSISTS OF HIS PRINCIPLE Rp.1O MILLION, PLUS ITS INTEREST Rp.1 MILLION. TWO YEARS LATER HIS MONEY JUMPS UP TO Rp.12,1 MILLION, CONSISTING OF PRINCIPLE Rp.10 MILLION, PLUS 2 YEAR INTEREST Rp.2 MILLION, PLUS INTEREST OF THE FIRST YEAR INTEREST Rp.0,1 MILLION. 2. DEFINITION & CONCEPT - 2 CONCEPT OF EQUIVALENCE CONCEPT OF EQUIVALENCE STATES THAT AN AMOUNT OF MONEY AT ONE TIME MAY HAVE AN EQUIVALENT VALUE WITH A DIFFERENT AMOUNT OF MONEY AT DIFFERENT TIME IF A CERTAIN DISCOUNT RATE IS APPLIED. ILLUSTRATION ONE FEELS INDIFFERENT TOWARD OPTIONS WHETHER HE RECEIVES Rp.10 MILLION TO DAY, OR Rp.13 MILLION NEXT YEAR. HE HAS A PDR (PERSONAL DISCOUNT RATE) 30% PER PER ANNUM. OTHER PEOPLE MAY HAVE DIFFERENT PDR, FOR EXAMPLE 25%. SOCIAL DISCOUNT RATE (OR JUST SAID DISCOUNT RATE) IS REPRESENTED BY BANK S INTEREST RATE. ONE WITH PDR HIGHER THAN THE DISCOUNT RATE WILL BORROW MONEY FROM THE BANK, WHILE OTHER WHO HAS PDR LESS THAN THE DISCOUNT RATE WILL SAVE HIS MONEY IN THE BANK. 2. DEFINITION & CONCEPT - 3

5 CONCEPT OF PRESENT WORTH PRESENT WORTH (VALUE) INDICATES THE EQUIVALENT VALUE OF AN AMOUNT OF MONEY IN THE FUTURE WITH AN AMOUNT OF MONEY AT PRESENT ILLUSTRATION ONE WILL RECEIVE RP.10 MILLION NEXT YEAR, BUT HE WANTS TO HAVE THE MONEY RIGHT NOW. HE CAN GO TO THE BANK AND GET THE MONEY BY TRANSFERING HIS RIGHT OF GETTING HIS RP.10 MILLION NEXT YEAR TO THE BANK. IF THE BANK SETS THE INTEREST RATE 25% PER YEAR, THE AMOUNT OF MONEY THAT HE GETS FROM BANK IS Rp.8 MILLION. PUTTING A DISCOUNT RATE ON FUTURE (OR PAST TIME) MONEY, WE CAN CALCULATE ITS PRESENT WORTH. 2. DEFINITION & CONCEPT MODEL AND FORMULATION CASHFLOW IS A FLOW OF CASH. IT CONSISTS OF CASH-IN ANDCASH-OUT CASHFLOW IS ARRANGED IN A TABLE WITH MINIMUM 4 COLUMNS : COLUMN OF TIME, OF CASH-IN, OF CASH-OUT, AND OF BALANCE YEAR CASH-IN CASH-OUT BALANCE

6 CASHFLOW DIAGRAM CASHFLOW CAN ALSO BE PRESENTED AS A DIAGRAM, SHOWING THE FLOW OF MONEY AGAINST TIME. CASH-IN IS REPRESENTED BY AN UPWARD ARROW, AND CASH-OUT BY AN DOWNWARD ARROW MODEL AND FORMULATION - 2 INTEREST RATE OF DIFFERENT PERIOD INTEREST IS GENERALLY APPLIED YEARLY. HOW ABOUT DIFFERENT PERIOD? FOR INTEREST RATE i = 8% PER ANNUM, m = 1 (YEARLY) (1 + 0,08/1) = 1,08 m = 2 (HALF YEARLY) (1 + 0,08/2) 2 = 1,0816 m = 4 (QUARTERLY) (1 + 0,08/4) 4 = 1,08243 m = 12 (MONTHLY) (1 + 0,08/12) 12 = 1,08083 m = 365 (DAILY) (1 + 0,08/365) 365 = 1,08328 m = ϖ (CONTINUE) e 0,08 = 1, MODEL AND FORMULATION - 3

7 FUTURE WORTH / VALUE IF Rp.10 MILLION IS DEPOSITED IN A BANK TO DAY, WHAT WOULD BE THE AMOUNT AT THE END OF YEAR 5TH IN THE FUTURE? THE EQUATION: F = P (1 + I) n F F = FUTURE WORTH P = PRESENT WORTH i = INTEREST RATE n = TIME i, n THE AMOUNT AT THE END OF YEAR 5TH P = Rp.10 MILLION (1 + 0,1) 5 = Rp.14 MILLION 3. MODEL AND FORMULATION - 4 UNIFORM CASHFLOW MODEL UNIFORM CASHFLOW IS A CASHFLOW WITH FIXED AMOUNT OF CASH-IN OR CASH-OUT ALONG THE PROJECT LIFE CYCLE A A A N THE EQUATION : (1+ i) N - 1 i (1 + i) N P = A OR A = P i (1 + i) N (1+ i) N MODEL AND FORMULATION - 5

8 UNIFORM GRADIENT CASHFLOW UNIFORM GRADIENT CASHFLOW IS A CASHFLOW WITH INCREASING CASH-IN OR CASH-OUT AT FIXED AMOUNT ALONG THE PROJECT LIFE CYCLE THE DIAGRAM : B B+G THAT CAN BE SPLIT INTO B+2G B+(N-2)G N-1 N + B+(N-1)G B B B B B G 2G (N-2)G (N-1)G N-1 N N-1 N (1+ I) N (1 + N i) /(1 + i) N B G i (1 + i) N i 2 3. MODEL AND FORMULATION - 6 GEOMETRIC SERIES CASHFLOW THE GEOMETRIC SERIES CASHFLOW IS A CASHFLOW WITH INCREASING CASH-IN OR CASH-OUT AT FIXED RATE ALONG PROJECT LIFE CYCLE THE DIAGRAM : B(1+e) N-2 B(1+e) N-1 B B(1+e) N-1 N FOR i e : 1 - [(1 + e) / (1 + i)] N P = B i - e N FOR i = e : P = B (1 + e) 3. MODEL AND FORMULATION - 7

9 4. INDICATORS FOR PROJECT FEASIBILITY BASIC INDICATORS NET PRESENT WORTH / VALUE RATE OF RETURN OR RETURN ON INVESTMENT PAY BACK PERIOD OR PAY-OUT TIME NET PRESENT VALUE / WORTH NPV (NET PRESENT VALUE) IS THE PRESENT VALUE OF TOTAL REVENUE MINUS PRESENT VALUE OF TOTALEXPENDITURE ALONG THE PROJECT LIFE CYCLE FOR A GIVEN DISCOUNT RATE R 1 R 2 R 3 R 4 PV CASH-IN NPV C0 C 1 C 2 C 3 C 4 PV CASH-OUT A PROJECT IS FEASIBLE WHEN NPV > 0 4. INDICATORS

10 RATE OF RETURN RATE OF RETURN (ROR) OR RETURN ON INVESTMENT (ROI) IS A DISCOUNT RATE THAT SETS THE NPV EQUAL TO 0. ROR IS THE ANNUAL RETURN OF INVESTMENT IN A PROJECT NPV 0 ROR PROJECT IS FEASIBLE IF ROR > LOAN INTEREST RATE i (DISCOUNT RATE) EXTERNAL RATE OF RETURN (ERR) IS THE RETURN WHEN INVESTMENT IS MADE OUTSIDE THE COMPANY. INTERNAL RATE OF RETURN (IRR) IS THE RETURN WHEN INVESTMENT IS MADE INSIDE THE COMPANY. 4. INDICATORS PAY OUT TIME PAYBACK PERIOD (PBP) OR PAYOUT TIME (POT) IS TIME REQUIRED TO REPAY ALL THE MONEY INVESTED FOR A GIVEN DISCOUNT RATE. + PBP NPV 0 - WAKTU SIMPLE PAYBACK IS A PAYBACK PERIOD WITH DISCOUNT RATE = 0. SIMPLE PBP < (DISCOUNTED) PBP 4. INDICATORS

11 5. DEPRECIATION THE DEFINITION OF DEPRECIATION FOR TAXATION IN LINE WITH ACCOUNTING PRINCIPLES IS AN ALLOCATION OF COST IN SYSTEMATICAL AND RATIONAL WAY ON AN ASSET MINUS ITS SALVAGE VALUE ALONG ITS SERVICE LIFE. DEPRECIATION IS APPLIED ON TANGIBLE ASSETS. BOOK VALUE OF AN ASSET IS THE VALUE OF THE ASSET AFTER DEDUCTED WITH ITS DEPRECIATION. SALVAGE VALUE OF AN ASSET IS THE MINIMUM VALUE OF THAT ASSET AFTER IT REACHES ITS SERVICE LIFE. ILLUSTRATION : A HEAVY EQUIPMENT COSTS Rp. MILLION, HAS 5 YEARS SERVICE LIFE AND Rp.50 MILLION SALVAGE VALUE. HOW TO CALCULATE ITS DEPRECIATION ALLOWANCE? METHOD OF CALCULATION : STRAIGHT LINE (LINEAR), DOUBLE DECLINING BALANCE, SUM-OF YEAR-DIGITS LINEAR METHOD DEPRETIATION RATE = 100% / 5 YEAR = 20% PER YEAR YEAR DEPRECIATION ALLOWANCE NILAI BUKU 1 20% X Rp.500 MILL = Rp. 100 MILLION Rp. 400 MILLION 2 20% X Rp.500 MILL = Rp. 100 MILLION Rp. 300 MILLION 3 20% X Rp.500 MILL = Rp. 100 MILLION Rp. 200 MILLION 4 20% X Rp.500 MILL = Rp. 100 MILLION Rp. 100 MILLION 5 Rp. 100 MILL - Rp.50 MILL = Rp. 50 MILLION Rp. 50 MILLION THE BOOK VALUE AFTER YEAR 5 TH IS LEFT Rp. 50 MILLION 5. DEPRESIASI - 02

12 DOUBLE DECLINING BALANCE METHOD DDB-RATE = 2 X 20% = 40% PER YEAR YEAR DEPRECIATION ALLOWANCE BOOK VALUE 1 40% X Rp.500 MILL = Rp. 200 MILLION Rp. 300 MILLION 2 40% X Rp.300 MILL = Rp. 120 MILLION Rp. 180 MILLION 3 40% X Rp.180 MILL = Rp. 72 MILLION Rp. 108 MILLION 4 40% X Rp.108 MILL = Rp. 43,2 MILLION Rp. 64,8 MILLION 5 Rp. 64,8 MILL - Rp.50 MILL = Rp. 14,8 MILLION Rp. 50 MILLION THE BOOK VALUE AFTER YEAR 5 TH IS LEFT Rp. 50 MILLION 5. DEPRESIASI - 03 SUM-OF-YEAR DIGIT METHOD DENOMINATOR = = 15 N x (N + 1) USE FORMULA OF DENOM = YEAR DEPRECIATION ALLOWANCE 1 (5 / 15) X Rp.500 MILLION = Rp. 166,67 MILLION 2 (4 / 15) X Rp.500 MILLION = Rp. 133,33 MILLION 3 (3 / 15) X Rp.500 MILLION = Rp MILLION 4 (2 / 15) X Rp.500 MILLION = Rp MILLION 5 Rp.100 MILL - Rp.50 MILL = Rp. 50,00 MILLION THE BOOK VALUE AFTER YEAR 5 TH IS LEFT Rp. 50 MILLION 5. DEPRECIATION - 04

13 COMPARATION OF DEPRECIATION TYPES 500 BOOK VALUE, Rp.MILLION DOUBLE DECLINING BALANCE SUM-OF YEAR-DIGIT STRAIGHT-LINE YEAR 5. DEPRECIATION - 05 CAPITAL GAIN AND CAPITAL LOSS CAPITAL GAIN IS OBTAINED IF AN ASSET IS SOLD ABOVE ITS BOOK VALUE, AND CAPITAL LOSS OCCURS WHEN IT IS SOLD BELOW ITS BOOK VALUE. CAPITAL GAIN MAKES TAX INCREASE, CAPITAL LOSS GIVES TAX INCENTIVE A MACHINE WITH Rp. 100 MILLION BOOK VALUE WILL BE SOLD. IN THAT FISCAL YEAR THE COMPANY IS BOOKING A PRETAX PROFIT OF Rp. 200 MILLION. CORPORATE TAX RATE IS 30%. CAP.GAIN SCENARIO CAP.LOSS SCENARIO SALE PRICE Rp. 150 MILLION Rp. 50 MILLION BOOK VALUE Rp. 100 MILLION Rp. 100 MILLION CAPITAL GAIN/LOSS Rp. 50 MILLION - Rp. 50 MILLION PRE-TAX REVENUE Rp. 200 MILLION Rp. 200 MILLION TAXABLE REVENUE Rp. 250 MILLION Rp. 150 MILLION TAX Rp. 75 MILLION Rp. 45 MILLION AFTER TAX REVENUE Rp. 175 MILLION Rp. 105 MILLION REAL REVENUE Rp. 325 MILLION Rp. 155 MILLION

14 6. INVESTMENT MANAGEMENT ALTERNATIVES OF INVESTMENT INVESTMENT ALTERNATIVES OF NO-RETURN, FOR EXAMPLE TO BUILD A STORAGE OR A BRIDGE NEEDED IN THE DRILLING ACTIVITY. THE SOLUTION IS A LEAST COST METHOD, THAT IS TO SELECT AN ALTERNATIVE WITH MINIMUM PRESENT VALUE COST. INVESTMENT ALTERNATIVES WITH REVENUES OR SAVINGS. THE SOLUTION IS TO SELECT THE MOST VIABLE OPTION. ILLUSTRATION A COMPANY IS ALLOCATING US$ 100 MILLION FOR FIELD DEVELOPMENT. SEVERAL DEVELOPMENT ALTERNATIVES ARE PROPOSED : PROJECT A B C D E INV. US$ MILLION ANNUAL RETURN US$ MILLION 6,39 4,10 7,61 1,17 7,00 ALL PROJECTS HAVE 20 YEARS LIFE CYCLE. ANOTHER ALTERNATIF IS TO DEPOSIT THE MONEY IN BANK THAT YIELDS 6% INTEREST RATE. WHICH ALTERNATIVE IS THE MOST VIABLE? 6. INVESTMENT MANAGEMENT - 02

15 INCREMENTAL ANALYSIS IF THE RETURN ON THE ADDITIONAL INVESTMENT IS HIGHER THAN MARR, THEN IT IS FEASIBLE TO MAKE THAT ADDITIONAL INVESTMENT THE ABOVE STATEMENT IS VALID UNDER THE CONDITION OF: EACH ALTERNATIVE IS MUTUALLY EXCLUSIVE THE FUND TO BE INVESTED HAS EARNING POWER OF MARR THE OBJECTIVE IS TO MAXIMIZE THE RETURN OF INVESTMENT. 6. INVESTMENT MANAGEMENT - 03 INCREMENTAL ANALYSIS : STEP 1 CALCULATE THE ROR OF EACH ALTERNATIVE, AND DISPOSE ALTERNATIVE WITH ROR < MARR PROJECT A B C D E ROR, % DISPOSE ALTERNATIVE (E), BECAUSE ITS ROR < 6% 6. INVESTMENT MANAGEMENT - 04

16 INCREMENTAL ANALYSIS : STEP 2 SORT ALL PROJECTS BASED ON THE AMOUNT OF INVESTMENT PROJECT C A B D INV. US$ MILLION ROR, % DISPOSE ALTERNATIVE WITH INVESTMENT AND ROR LESS THAN THE OTHER ALTERNATIVE. ALTERNATIVE (D) HAS AN INVESTMENT AND ROR LESS THAN ALTERNATIVE (B), SO IT CAN BE DISPOSED 6. INVESTMENT MANAGEMENT - 05 INCREMENTAL ANALYSIS : STEP 3 CALCULATE ROR FOR ADDITIONAL (INCREMENTAL) INVESTMENT OF PROJECT (C) TO PROJECT (A), THAT IS US$ 20 MILLION. INVESTMENT = US$ 60 MILLION - US$ 40 MILLION = US$ 20 MILLION ANNUAL RETURN = US$ 7,61 MILLION - US$ 6,39 MILLION = US$ 1,22 MILLION ROR = 1,5 % SINCE ROR < MARR, SELECT ALTERNATIVE (A), AND DISPOSE ALTERNATIVE (C) PROYEK C A B INV. US$ MILLION ANNUAL RETURN, US$ MILLION 7,61 6,39 4,10 6. INVESTMENT MANAGEMENT - 06

17 INCREMENTAL ANALYSIS : STEP 4 CALCULATE ROR FOR ADDITIONAL (INCREMENTAL) INVESTMENT OF PROJECT (A) TO PROJECT (B), THAT IS US$ 20 MILLION. INVESTMENT = US$ 40 MILLION - US$ 20 MILLION = US$ 20 MILLION ANNUAL RETURN = US$ 6,39 MILLION - US$ 4,10 MILLION = US$ 2,28 MILLION ROR = 9,5 % SINCE ROR > MARR, SELECT ALTERNATIF (A). FINALLY ALTERNATIVE ( A) IS SELECTED AS THE MOST VIABLE AMONG THE 5 PROPOSED PROJECTS. PROJECT A B INV. US$ MILLION ANNUAL RETURN, US$ MILLION 6,39 4,10 6. INVESTMENT MANAGEMENT PROJECT FINANCING SPONSOR 1 SPONSOR 2 EXPORT CREDIT INSURERS (ECA s) FINANCING BANK 1 FINANCING BANK 2 FEEDSTOCK SUPPLIER PROJECT COMPANY (BUYER) INTEREST AND LOAN PAYMENT TAKE OR PAY AGREEMENT PLANT CONTRACTING COMPANY (SELLER) GOVERNMENT PRODUCT TRADER ESCROW ACCOUNT DEBT RESERVE ACCOUNT

18 INVESTMENT PROBLEM & FINANCING PROBLEM THE SELECTION OF BEST PROJECT ALTERNATIVE INVOLVES TWO DECISIONS THAT ARE MADE SEPARATELY: FISRT, IS IT FEASIBLE TO PUT INVESTMENT ON THE PROPOSED PROJECT; SECOND, IF IT IS FEASIBLE, HOW TO FINANCE THE PROJECT. SO FAR WE HAVE DISCUSSED THE FIRST (INVESTMENT) PROBLEM. NEXT, WE DISCUSS THE SECOND (FINANCING) PROBLEM. 7. PROJECT FINANCING - 02 ILLUSTRATION A PROJECT REQUIRES US$ 100 MILLION INVESTMENT. A LOAN OF US$ 80 MILLION IS OBTAINED FROM THE BANK WITH 20% INTEREST RATE, AND THE REST, US$ 20 MILLION, IS COLLECTED FROM OWN FUND WITH EXPECTED RETURN OF 50%. NOTICE THAT THE BANK S INTEREST OF 20% IS BEFORE- TAX, SINCE BANK IS OBLIGED TO PAY TAX. WHILE THE EXPECTED RETURN FROM OWN FUND IS AFTER-TAX 7. PROJECT FINANCING - 03

19 BEFORE-TAX AND AFTER-TAX RETURN THE RELATIONSHIP BETWEEN BEFORE-TAX AND AFTER-TAX INTEREST RATE OR RETURN IS : I after-tax = i before-tax x (1 - TAX) WHEN THE TAX RATE = 30%, THEN : BEFORE-TAX BANK S INTEREST = 20% AFTER-TAX BANK S INTEREST = 20% X ( 1-30%) = 14% BEFORE-TAX RETURN ON OWN INVESTMENT = 20% AFTER-TAX RETURN ON OWN INVESTMENT = 50%/ (1-30%) = 71,43 % 7. PROJECT FINANCING - 04 CALCULATION OF AFTER-TAX MARR THE AFTER-TAX COMPOSITE INTEREST IS CALCULATED AS FOLLOWS: SOURCE SHARE INTEREST WEIGHTED AVERAGE OWN 20 % 50 % 10,0 % BANK 80 % 14 % 11,2 % COMPOSITE 100 % 21,2 % THIS 21,2% ANNUAL COMPOSITE INTEREST IS AFTER-TAX MARR. 7. PROJECT FINANCING - 05

20 CALCULATION OF AFTER-TAX MARR THE PRE-TAX COMPOSITE INTEREST IS CALCULATED AS FOLLOWS: SOURCE SHARE INTEREST WEIGHTED AVERAGE OWN 20 % 71,43 % 14,286 % BANK 80 % 20 % 16,0 % COMPOSITE 100 % 30,286 % THIS 30,286% ANNUAL COMPOSITE INTEREST IS AFTER-TAX MARR. 7. PROJECT FINANCING - 06 PROJECT CASHFLOW YEAR BEFORE-TAX TAXABLE TAX AFTER-TAX CASHFLOW INCOME CASHFLOW 0-100,0 mill ,0 mill ,29 mill 30,29 mill 9,09 mill 21,2 mill ,29 mill 30,29 mill 9,09 mill 21,2 mill ,29 mill 30,29 mill 9,09 mill 21,2 mill ,29 mill 30,29 mill 9,09 mill 21,2 mill ,29 mill 30,29 mill 9,09 mill 121,2 mill THE ANNUAL BEFORE-TAX RETURN IS US$ 30,29 MILLION, AND AFTER TAX RETURN IS US$ 21,2 7. PROJECT FINANCING - 07

21 BEFORE TAX REVENUE SPLIT LET S SEE WHETHER EVERYONE GETS HIS RETURN AS DESIRED. THE INTEREST PAID TO THE BANK FOR US$ 80 MILLION LOAN IS 20% X US$ 80 MILLION = US$ 16 MILLION EXPECTATION TO COLLECT RETURN OF 71,43% ON OWN FUND OF US$ 20 MILLION IS: 71,43% X US$ 20 MILLION = US4 14,286 MILLION THE SUM IS (US$ 16 MILLION + US$ 14,286 MILLION) = US$ 30,286 MILLION, WHICH IS EQUAL TO THE BEFORE TAX ANNUAL RETURN OF THE PROJECT 7. PROJECT FINANCING - 08 CASHFLOW OF OWN FUND YEAR BEFORE TAX TAXABLE TAX AFTER TAX CASHFLOW INCOME CASHFLOW 0-20,0 mill ,0 mill ,29 mill 14,29 mill 4,29 mill 10,0 mill ,29 mill 14,29 mill 4,29 mill 10,0 mill ,29 mill 14,29 mill 4,29 mill 10,0 mill ,29 mill 14,29 mill 4,29 mill 10,0 mill ,29 mill 14,29 mill 4,29 mill 30,0 mill ANNUAL RETURN FROM OWN FUND IS US$ 10 MILLION OR 50%; WHICH IS EQUAL TO AFTER TAX MARR 7. PROJECT FINANCING - 09

22 SPLIT, AFTER TAX THE INTEREST OF US$ 80 MILLION BANK LOAN IS 20% X US$ 80 MILLION = US$ 16 MILLION. AFTERS TAX DEDUCTION, BANK RECEIVES US$ 11,2 MILLION EXPECTATION TO GAIN RETURN OF 50% ON US$ 20 MILLION OWN CAPITAL IS: 50% X US$ 20 MILLION = US$ 10 MILLION IT SUMS UP TO US$ 21,2 MILLION, WHICH EQUALS THE AFTER TAX ANNUAL PROJECT S REVENUE. 7. PROJECT FINANCING - 10 THANK YOU

Basic Petroleum Economy

Basic Petroleum Economy Dr. Alfred Kjemperud The Bridge Group AS Petroleum Investments Petroleum Investments are: capital intensive irreversible risky Economic analysis and modeling is a method to reduce