Basic Petroleum Economy

Transcription

1 Basic Petroleum Economy Dr. Alfred Kjemperud The Bridge Group AS

2 Petroleum Investments Petroleum Investments are: capital intensive irreversible risky Economic analysis and modeling is a method to reduce the risk when taking decisions Discounted cash flow modeling is based on basic economic principles 2

3 Investments An 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 is expected to be higher than the amount of money invested. 3

4 Investment decisions Develop Preparations for application Yes Apply Yes Shoot seismic and map acreage Yes No Drill wildcat well No Yes Appraisal No Yes No Drop 4

5 Cash flow one year Income -costs = Net cash flow 5

6 Cash flow every year Income -costs = Net cashflow Income -costs = Net cashflow Income -costs = Net cashflow Year time 6

7 Cash Flow vs. Profit Cash Books Cash Flow Year Capex Revenue DD&A Opex Net Cash Flow Cum. Cash Flow Financial Books Accounting Year Capex Revenue DD&A Opex Profit Cum. Profit

8 Cash Flow vs. Profit Net Cash Flow Profit Cum. Profit Cum. Cash Flow Net Cash Flow Profit USD 3000 USD Years PPM - 4th Workshop Years Cambodia 8

9 Outflow Outflow Outflow 400 Million USD Exploration Development Production

10 Inflow Inflow Outflow 400 Million USD ExplorationDevelopment Production

11 Cash Flow Inflow Outflow cash flow 400 Million USD ExplorationDevelopment Production

12 Cumulative Cash flow Cash flow Cummulative cashflow Million USD

13 Cash Flow over time We can t just add up inflow and outflow. This is due to: Inflation Time Value of Money Uncertainty 13

14 Inflation As long as there is inflation the value of 1$ today is more than 1$ in the future. One could buy more for 10$ in 1980 than in and probably more in 2003 than in 2010 Inflation is adjusted for, by using real values instead of current values 14

15 Inflation corrected Cash flow Cummulative cashflow Current Values Million USD Inflation corrected Real Values

16 Future Value Example $1000 invested at 10% for five years. What is the future value: F = $1000(1+0.10) = $1,100 F = $1000(1+0.10)* (1+0.10) = $1,210 F = $1000(1+0.10)* (1+0.10) * (1+0.10) = $1,331 F = $1000(1+0.10)* (1+0.10) * (1+0.10) * (1+0.10) $1,464 F = $1000(1+0.10)* (1+0.10) * (1+0.10) * (1+0.10) * (1+0.10) $1,610 General Formula F = P(1+i) n F = future value P = Present value (principal) i = Interest rate n = Number of time periods 16

17 Present Value Example $1610 is paid back after 5years at 10% interest rate. What was the principle (present value)? P = $1610/(1+0.10) = $ 1,464 P = $1610(1+0.10)* (1+0.10) = $1,331 P = $1610(1+0.10)* (1+0.10) * (1+0.10) = $1,210 P = $1610(1+0.10)* (1+0.10) * (1+0.10) * (1+0.10) $1,100 P = $1610(1+0.10)* (1+0.10) * (1+0.10) * (1+0.10) * (1+0.10) $1,000 General Formula P = F/(1+i) n F = future value P = Present value (principal) i = Interest rate n = Number of time periods 17

18 Example 500$ investment You invest 500 $ in a business and are promised to be paid back 100$ every year for 6 years Year Nominal values This Year Gain or loss $ Inflation is 3% and the interest rate in the bank is 5%. Is this a good business deal? 18

19 Example 500$ investment Year Nominal values Real values This Year Gain or loss Still a good business deal? 19

20 Present Value Future in- and out-flow must be discounted to be comparable. Net present value of a project is the sum of discounted cash-flow elements. Discount rate should be the rate of return of the best alternative use of money 20

21 Time value of money Alternative investments Bank - small risk Fonds - higher risk Other projects - high risk 21

22 NPV formula (end year)...where: NPV = F 1 ( F n ) (1 + i) n = F (1 + i) 1 (1 + i) 2 (1 + i) n F 2 F n F n - the net income in year n i - discount rate n - total numbers of years (project duration) n n = 0 22

23 Time value of money Cash flow Cummulative cashflow Inflation corrected Current Values Million USD Value of time corrected Real Values Discounted Values

24 Example 500$ investment You invest 500 $ in a business and are promised to be paid back 100$ every year for 6 years Year Nominal values Real values Discounted values This Year Gain or loss Inflation is 3% and the interest rate in the bank is 5%. Was it a good business deal? 24

25 Risk premium Petroleum projects always possess a certain risk of failure The risk vary due to a multitude of factors (geological, technical, political economical) A risk premium is often added to the discount factor 25

26 Discounting incl. risk premium 3500 Cash flow Cummulative cashflow Inflation corrected + Value of time corrected Current Values (0%) Million USD Risk corrected Real Values (3%) Discounted Values (7%) Risk corrected Discounted Values (5%)

27 NPV formula (mid year)...where: NPV = F 1 ( F n ) (1 + i) (n-0.5) = F F 2 F n (1 + i) (1-0.5) (1 + i) (2-0.5) (1 + i) (n-0.5) F n - the net income in year t i - discount rate n - total numbers of years (project duration) n n = 0 27

28 Discounting 3500 Cash flow 3000 Cummulative cashflow Inflation corrected Value of time corrected ++ Risk corrected end year Risk corrected mid year Million USD

29 Present Value Year Cash Flow NPV 5% NPV 10% NPV 15% NPV 20% SUM

30 Present Value - IRR IRR % 10 % 15 % 20 % NPV Discount Factor

31 Economic Decision Criteria The discount rate that yields NPV=0 defines the Internal Rate of Return (IRR) A simple decision criteria would be: Accept all project with IRR > discount factor Drop all project with IRR < discount factor 31

32 Exercise Net Present value - IRR Use the cash flow given in the table to the right as basis for calculating NPV at 0,5,10,15 and 20 % discount rate. Use the result to find the approximate Internal Rate of Return (IRR). If you have time use both end year and mid year discounting Year Cash Flow

33 Present Value Year Cash Flow NPV 5% NPV 10% NPV 15% NPV 20% SUM

34 Discounted Cash Flow Year Cash Flow NPV 5% NPV 10% NPV 15% NPV 20% SUM

35 IRR % 10 % 15 % 20 % -50 NPV Discount Factor IRR = ~11.5% 35

36 Depreciation, book value and salvage Depreciation is an allocation of cost in a systematic way of an asset s value over its service life. Depreciation is applied on tangible assets. Book value of an asset is the value of the asset at any time after deduction of depreciation. Salvage value of an asset is the minimum value of that asset after it reaches its service life. 36

37 Depreciation Models Straight line Declining balance Double declining balance Unit of production Sum of the years digits 37

38 Linear method DEPRETIATION RATE = 100% / 5 YEAR = 20% PER YEAR Year Depreciation Allowance Book value 1 20% * 500 million = 100 million 400 million 2 20% * 500 million = 100 million 300 million 3 20% * 500 million = 100 million 200 million 4 20% * 500 million = 100 million 100 million 5 20% * 500 million = 100 million 0 5. DEPRESIASI

39 Double declining balance method Ddb-rate = 2 x 20% = 40% per year of book value Year Depreciation Allowance Book Value 1 40% * 500 = 200 million 300 million 2 40% *300 = 120 million 180 million 3 40% *180 = 72 million 108 million 4 40% *108 = 43,2 million 64,8 million 5 40% * 64,8 = 25.9 million 38.9 million 5. DEPRESIASI

40 Sum-of-year digit method Denominator = = 15 Year Depreciation allowance Book value 1 (5 / 15) * 500 = million 2 (4 / 15) * 500 = million 3 4 (3 / 15) * 500 (2 / 15) * 500 = = million million 5 (1 / 15) * 500 = million 5. DEPRECIATION

41 Comparation of depreciation methods YEAR 41 STRAIGHT-LINE SUM-OF YEAR-DIGIT DOUBLE DECLINING BALANCE BOOK VALUE.MILLION

42 Types of depreciations 500 million, 5 years Year Capex 1 9 mill 2 28 mill mill mill Straight Line Sum-Of-The-Year's Digits Declining Balance Double Declining Balance Units of Production