Supposing is good, but finding out is better. Mark Twain. Annual income twenty pounds, annual expenditures nineteen six, result happiness.

Transcription

1 Supposing is good, but finding out is better. Mark Twain Annual income twenty pounds, annual expenditures nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought six, result misery. Mr. Micawber in David Copperfield Tim Carr - West Virginia University

2 Risk Takers Provide the Future Income for the Company Economic Viability Play Prospect Well Project Are Our Geologic Interpretations Profitable? Consider Full-Range of Probable Outcomes 2

3 Geologic Success Encounter Mobile Hydrocarbons Completion Success A Project is Completed for Production Incremental Success Return a Profit Only When Fixed Costs (Sunk Costs) Are Ignored Economic Success Capable of Paying Exploration, Development and Operating Costs, and Returning a Reasonable Profit 3

4 Hydrocarbons are distributed in the earth s crust Hydrocarbons are concentrated in relatively few basins Exploration is not an equal chance game 4

5 Basin Framework Petroleum System A Play: An exploration concept that includes a specific source, reservoir, and trap type A Lead: An possible trap, data is not sufficient to fully map it. A Prospect: A specific trap that has been identified and mapped but has not been drilled yet. Reserves: Oil and gas that have been drilled and can be produced economically 5

6 Basin Framework Geologic geometry and timing of a sedimentary basin containing source rock, reservoir, trap and migration paths. Petroleum System Framework Volume of sedimentary rock containing hydrocarbons and potentially charged by source rock. 6

7 Exploration Strategy 1. Global Basin Analysis Complete Basin Studies Acquire New Exploration Licenses 2. Develop Play Concepts 3. Define Exploration Play Areas Compile Full Lead & Prospect Inventory 4. Evaluate Prospects 5. Identify Drillable Prospects Drillable Prospects/ Well proposals 6. Drill Exploration Wells Drill Exploration Wells = New Reserves 7

8 Basin Scale Assessment Estimation of undiscovered potential within each Play Volumetric Calculations (Reserve estimates) Assessment of Prospect-Specific Risk Economic Analysis Infrastructure Market Price Taxes and Royalties Political Risks The Play s The Thing! William Shakespeare 8

9 9

10 A. Everything is cool (100%) B. No structural traps (20%) C. Long migration required (50%) D. Long migration and bad reservoir (30%) E. Poor source (50%) 10

11 Plays (aggregates of related prospects) & large concessions can be systematically and objectively evaluated for potential, just like prospects chance of success reserves value 11

12 SELECTING PLAYS TO PURSUE IS THE KEY EXPLORATION DECISION Play Investment Plan Prospect Exploration Seismic Program Monetary Impact $ MM 12

13 CRITICAL DECISIONS? Which Play to Enter Which Prospects to Drill Play and Prospect Decisions Require Disciplined Analysis Technical Risk Evaluation Economic Evaluation 13

14 Dimensional thickness, area, volume, depth Reservoir net/gross, Φ (porosity), K (permeability), HC-rec %, GOR, Sw, etc. Well Performance IP, % decline, etc. Geochemical Values SR-type, TOC, maturity, composition Migration impedance, dispersal, routes Trap Integrity seal effectiveness, leakage, flushing, etc. Timing migration vs. trap creation Front-end Costs land, drilling, completion, geotechnical data acquisition, overhead Discovery Probability commercial and economic reserve thresholds Wellhead Price local vs. international influences, envelope of historical real oil prices 14

15 Rose,

16 Rose,

17 Project Success Project Potential Reality Check (10-90 Rules) Average Success Rate for Wells Drilled in Area (History) Average Size (net pay, recovery per foot, areal extent) Price Forecasts Costs (e.g., Drilling, Facilities, Seismic, Land) Production Rates If you depart from past history, you better have good justification e.g., Better Technology, Lower Costs, Smarter Show a Range of Possibilities 17

18 Rose,

19 Expenditures Exploration and Development Costs Operating Expenses (Before Income Taxes - BFIT) Proposing a Deal Taxes (After Income Taxes - AFIT) Evaluating a Deal Revenue Average Reserve Size Production Stream Producing Characteristics Price Forecast Risk 19

20 Maximum Negative Cash Flow Total Call on the Budget Payout Period Time to Pay Back the Investment Total Net Cash Flow Amount of Money to be Made from Project 20

21 Cash Flow Year Actual Cumulative 0 ($50,000) ($50,000) 1 ($100,000) ($150,000) 2 ($50,000) ($200,000) 3 $100,000 ($100,000) 4 $150,000 $50,000 5 $120,000 $170,000 6 $100,000 $270,000 7 $80,000 $350,000 8 $60,000 $410,000 9 $40,000 $450, $20,000 $470,000 21

22 Dollars Cash Flow Analysis 35 Cash Flow Analysis 30 $500,000 Total Net Cash Flow ($100,000) 0 $400,000 $300,000 $200,000 $100,000 $0 ($200,000) Payout Maximum Negative Cash Flow Food Gas Motel Investment Year Jan Feb Mar Apr May Jun 22

23 Future Value = (I + i) n I = Initial Investment i = interest rate n = number of years Discount Factor = 1/(1+i)s n "I'll gladly pay you Tuesday for a hamburger today". J. Wellington Wimpy (Popeye) 23

24 Year Net Cash Flow Discount Factor (10%) Present Value Discounted at (10%) 0 ($50,000) ($50,000) 1 ($100,000) ($90,900) 2 ($50,000) ($41,300) 3 $100, $75,100 4 $150, $102,450 5 $120, $74,520 6 $100, $56,400 7 $80, $41,040 8 $60, $28,020 9 $40, $16, $20, $7,720 Totals $470,000 $220,010 24

25 Cash Flow Analysis $500,000 $400,000 Net PV (10%) $300,000 $200,000 $100,000 $ ($100,000) ($200,000) Investment Year 25

26 Year Net Cash PV (10%) PV (20%) PV (30 %) PV (40%) Flow 0 ($50,000) ($50,000) ($50,000) ($50,000) ($50,000) 1 ($100,000) ($90,900) ($83,333) ($76,923) ($71,429) 2 ($50,000) ($41,300) ($34,722) ($29,586) ($25,510) 3 $100,000 $75,100 $57,870 $45,517 $36,443 4 $150,000 $102,450 $72,338 $52,519 $39,046 5 $120,000 $74,520 $48,225 $32,319 $22,312 6 $100,000 $56,400 $33,490 $20,718 $13,281 7 $80,000 $41,040 $22,327 $12,749 $7,589 8 $60,000 $28,020 $13,954 $7,355 $4,066 9 $40,000 $16,960 $7,752 $3,772 $1, $20,000 $7,720 $3,230 $1,451 $691 Totals $470,0000 $220,010 $91,130 $19,891 ($21,574) 26

27 Present Value Profit $ Present Value Profile $500,000 $400,000 $300,000 $200,000 $100,000 Discounted Cash Flow Rate =34.1% $0 ($100,000) Discount Rate - Percent 27

28 Year Successful Project Cash Flow (PV 10%) Probability of Success Failure Case Cash Flow Probability of Failure Risk Adjusted Cash Flow 0 ($50,000) 0.6 ($50,000) 0.4 ($50,000) 1 ($90,900) 0.6 ($60,000) 0.4 ($78,540) 2 ($41,300) 0.6 ($24,780) 3 $75, $45,060 4 $102, $61,470 5 $74, $44,712 6 $56, $33,840 7 $41, $24,624 8 $28, $16,812 9 $16, $10, $7, $4,632 Totals $2,200,010 ($110,000) $88,006 28

29 Total Net Cash Flow $4,700,000 Payout Period 3.67 years Maximum Negative Cash Flow $200,000 Project Life 10 years Discounted Cash Flow Rate 34.1% Present Value at (10%) $2,200,010 29

30 Profit / Investment Many Definitions of Profit and Investment One Example Present Value / Sum of Discounted Negatives $2,200,000 / $182,200 =

31 Exploration Development Dryhole -$450,000 Dryhole -$200,000 1 Producer $1,200,000 1 Producer $1,860,000 2 Producers $3,260,000 If you come to a fork in the road, take it. Yogi Berra 31

32 Technical Risk Geologic Parameters are distributed Log-normal (Mean is not a good estimator) Normal (Mean is a good estimator), NOT P10 P50 P90 Economics Cash Flow Problem Discounted Cash Flow (Net Present Value) Risk-Weighted Cash Flow 32

33 Assignments Exercise Picking Faults with 3D Seismic Due on Friday 4/17 Discuss Current Energy Events Read Today in Energy for Friday (4/17) at Be Prepared to Discuss in Class Monday (4/20) Discussion Leader John Bernosky Quiz Wednesday 4/29 Open at 1:00pm Close at 11:00 on 5/1 33