Basics of Petroleum Economics

Transcription

1 Koya University College of Engineering School of Chemical and Petroleum Engineering Department of Petroleum Engineering Third Stage Petroleum Economics Basics of Petroleum Economics Farhad Abdulrahman Assistant Lecturer Petroleum Economics Course Outline 1. An introduction to Petroleum Economics. 2. Cash Flow Calculation 3. Net Cash Flow Calculation 4. Investment Terminology 5. Risk Analysis 6. Expected Value Concept 7. Decision Tree Analysis 2/18/2017 Petroleum Economic 2 Farhad Khoshnaw 1

2 INTRODUCTION TO PETROLEUM ECONOMICS 2/18/2017 Petroleum Economic 3 DEFINITION AND OUTCOMES The Petroleum economy or Petroleum economic analysis are all used interchangeably to denote the study of the economics of engineering systems. Petroleum economy is an applied economics course. However, the application is not engineering systems, this course is taught by engineering faculty. As future engineers, no matter what type, you will sooner or later have to deal with problem situations similar to the ones covered in this course. At the end of the course you will be equipped with analytical skills that you can use to solve problems of an economic nature. 2/18/2017 Petroleum Economic 4 Farhad Khoshnaw 2

3 Aims, Objectives & Prerequisite Aims To introduce the basic concepts and background for the financial and economic assessment of projects within the petroleum industry. Objectives: At the end of the course student should: 1. Be able to calculate the NPV of a project, including the collection of all necessary data, carry out decision Pivot Point Analysis and be able to select the best option from several possibilities. 2. Be able to carry out simple portfolio management decision under conditions of uncertainty, including economic, technical and political risks. Prerequisite Familiarity of field development and reservoir life cycle 2/18/2017 Petroleum Economic 5 Decision Tree Analysis 2/18/2017 Petroleum Economic 6 Farhad Khoshnaw 3

4 The Tetrad Trade-Off Principle 2/18/2017 Petroleum Economic 7 ECONOMIC DECISION Why do I need to study economics? "Is it not enough for me to be a good engineer? I am not an accountant. I will ask the accountant in my company to do that work for me. 2/18/2017 Petroleum Economic 8 Farhad Khoshnaw 4

5 ROLE OF THE PETROLEUM ECONOMIST To advise on the economic attractiveness of these opportunities, taking into account the many uncertainties regarding reservoir behavior, development costs, future energy prices and relationships with governments. He/She will also be involved in some or all of the following activities: - Lease Bidding - Selection of "best" option - Reporting - Unitization discussions - Fiscal changes - Contracts 2/18/2017 Petroleum Economic 9 INSTRUCTIONAL OBJECTIVES Construct a project cashflow from given production, cost and fiscal assumptions. Name the major yardsticks (Categories) used to measure economic benefit and to make economic decisions. Apply the Discounted Cash Flow technique to determine the Net Present Value. Calculate ROR, NPV, and payout etc. 2/18/2017 Petroleum Economic 10 Farhad Khoshnaw 5

6 ECONOMIC ANALYSIS AND DECISIONN MAKING The primary objective of any business organization (oil and gas) is not merely to produce goods and services (oil and gas) BUT rather to make a profit the maximum profit. OTHERS: - Expansion in production capacity - Increase in market share - Diversification of activities - Continuous survival of the organization 2/18/2017 Petroleum Economic 11 WHY DO WE MAKE ECONOMIC EVALUATION? 1. Prioritize projects. 2. Re-evaluation of priorities in allocation of investment funds by the company. 3. Planned change in development or production methods that consequently may affect the production rate and ultimate recovery. 4. Assessment of value of assets for taxation purposes. Whatever the reason for conducting an economic evaluation, with limited financial resources and a specific set of corporate objectives, any company must select the best investment opportunities from among those available. 2/18/2017 Petroleum Economic 12 Farhad Khoshnaw 6

7 The economic analysis should lead toward an balanced answer to two questions: 1. Does the particular investment project seem to satisfy the stated objectives of the firm? 2. Is this project better or worse than other possible projects? Even if there were only one investment opportunity under review, it must favorably compare with other profit-generating activities. This is the concept of opportunity cost the advantage forgone due to alternative use of investment funds. 2/18/2017 Petroleum Economic 13 CHARACTERISTICS OF OIL AND GAS RESOURCES In addition to factors normally considered in capital investments, some of the characteristics of oil and gas that may affect the results of economic analysis are: 1. The long lead time from geologic discovery to full use of the resource (5 20 years) 2. The political and social environment in the region (takeovers and shutdown of operations) 3. Tax burden and special allowances customary in oil and gas accounting 4. The heterogeneous nature of deposits. 5. The nonrenewable nature of oil and gas resources 2/18/2017 Petroleum Economic 14 Farhad Khoshnaw 7

8 ASPECTS OF LEASING Oil and gas are minerals and part of land for Home government (HG) or landowner s (LO) legal right. If HG/LO says NO then no bidding. In some countries Govt owns the mineral rights and only Govt can explore the minerals unless it transfers right to another. If this happens we say that Govt gives another a CONCESSION. Three Common Interests for HG/LO: Lease interest Mineral interest Royalty interest 2/18/2017 Petroleum Economic 15 LEASE INTEREST There will be written agreement b/w HG (lessor) and the Petroleum company (lessee) granting legal interest in HG property. The right will revert to LO at the end of the lease term. The lease is granted for explicit period (primary term) and for as long as petroleum is found. The LO reserves certain rights and privileges Bonus payment Royalty payment Reversion of right Surface rights Delayed rental 2/18/2017 Petroleum Economic 16 Farhad Khoshnaw 8

9 MINERAL RIGHTS: - LO is the owner of mineral right. - LO may choose to develop or sell right to mineral to second party through a lease. ROYALTY INTEREST: - LO is granted with fraction of production free of costs. 2/18/2017 Petroleum Economic 17 LICENSES AND LEASES OIL-EXPLORATION LICENSE (OEL) A non-exclusive right to explore for and produce petroleum within area of grant. Whoever finds oil first should report to the HG/LO. Others will leave. OIL-PROSPECTING LICENSE (OPL) Exclusive right to explore and prospect for petroleum within area of grant. OIL-MINING LEASE (OML) Permits lessee use of land to explore and dispose of petroleum discovered within leased area. Ultimate in petroleum exploration and production 2/18/2017 Petroleum Economic 18 Farhad Khoshnaw 9

10 TYPE OF OIL AND GAS CONTRACTS 1. CONCESSIONARY - Allows private (coy) ownership of oil and gas discovered through transfer of rights and payments of bonuses, royalties, taxes to Govt. - No more prevalent 2. JOINT VENTURE - Risk shared by Govt and Coy - Objective is to increase HG take - Better control of your money and assets 2/18/2017 Petroleum Economic PRODUCTION SHARING CONTRACT (PSC): - Coy assumes risk of exploration - At commercial discovery, Govt steps in and becomes partner. - Production first used to repay expenses (cost oil). - Coy then receives share of remainder ( to be determined by contract) - Remaining oil is divided into: > Tax oil (Obligations) > Interest (profit) oil True value of contract to coy. 4. SERVICE CONTRACTS (SC): - Principle is same as PSC - Service Coy takes care of exploration - At discovery, Govt pays actual exploration cost, but remains sole owner of discovered reserves - Govt may buy part of the production 2/18/2017 Petroleum Economic 20 Farhad Khoshnaw 10

11 CONTRACTING STRATEGIES 1. Aligned operator and contractor's goal through performance based contracts, such as the move from direct to integrated/incentive contracts and balanced rewards fro operator and contractor. 2. Better use of contractor expertise, such as minimising the level of operator/contractor duplication and clearly defining roles and responsibilities. 3. Teamwork (operator/contractor. subcontractor), including developing open and trusting contractual relationships. 4. Continuous performance improvement with a commitment to quality management principles and long term contractual security. 2/18/2017 Petroleum Economic 21 Technical Tender Evaluation Category Element Timeline Costs Scope of work Capability Delivery Management System Project Assurance and Risk Management Procurement and logistics capability Managing/personal and rig crew organization Staff CVs Central office support Contractor and sub-contractor profile and performance record Experience International Experience Local presence 2/18/2017 Petroleum Economic 22 Farhad Khoshnaw 11

12 Commercial Tender Evaluation Category 1. Fixed Price Element Drilling Services Mud Services Casing supply and Running TBG supply and Running Contingency 2. Unit Costs Wire line & perforation Service Surface Well testing & sampling Mud logging Cementing service Coring & evaluation test 3. Other Cost Elements (Not foreseen pre-tender) Mob.& DeMob InterMove Bet. Location 2/18/2017 Petroleum Economic 23 End Cash Flow Calculation Farhad Khoshnaw 12