IDENTIFYING AND QUANTIFYING RISKS AND UNCERTAINTIES IN DEVELOPING AN OFFSHORE OILFIELD UNDER VARYING OIL PRICE REGIMES By Adeogun Oyebimpe, Wumi Iledare, Green Ovunda Emerald Energy Institute University of Port Harcourt UNITED STATES ASSOCIATION for ENERGY ECONOMICS CONFERENCE, HOUSTON, NOVEMBER 2017
Outline Background Geographical Distribution of Global Oil and Gas Resources Oil Price History and Impact Deepwater Fiscal System in Nigeria Model Specifications and Assumptions Performance Metrics and System Measures Results Conclusion
Background In recent years, the oil and gas industry has witnessed a sharp decline in oil price as a result of The emergence US shale oil and gas production, Supply disruptions due to militancy especially in Nigeria Geopolitics Projects undertaken in the oil and gas industry is characterized by a measure of risk and uncertainties in the entire life cycle. The decision to either accept or reject a project is dependent on how best these risks are managed. World bank projected oil price of $55/bbl; how sustainable for oil and gas companies
Geographical Distribution of Global Oil and Gas Resources
5, 10, 15, 20 and 25 Years Moving Average Oil Price (World Bank, 2016) 5 year Moving average Oil Price - $92.02 10 year Moving average Oil Price - $83.33 15 year Moving average Oil Price - $66.84 20 year Moving average Oil Price - $55.08 25 year Moving average Oil Price - $47.59
Impact of Decline in Oil Price Source: Wood Mackenzie, 2016 Decline in global offshore drilling rig services in the last few years.
Oilfields Reserves Size in Deepwater in Nigeria
Deep water Petroleum Fiscal System in Nigeria Existing PFS in Nigeria Concessionary or Royalty & Tax (R/T) system 2000 R/T Contractual system 1993 PSC 2000 PSC 2005 PSC Reforms are currently ongoing in Nigeria to include fiscal instruments that are flexible enough to address fluctuations in oil prices and other externalities 8
Deep water Petroleum Fiscal System in Nigeria 9
Model Formulation and Assumption Deterministic Model Discounted Cash Flow Assumed Fiscal System Production Sharing Contract Hypothetical 250 MM bbl field located offshore is evaluated under contractual fiscal regime Expected Model Output Variable for decision making NPV, IRR, Discounted Payout Period, Profitability Index, Host Government Take Stochastic Simulation Monte Carlo Simulation using @Risk, an add-in on Excel Spreadsheet
Model Assumptions Most Likely Oil Price $55/bbl, Minimum Price - $35/bbl and Maximum - $75/bbl Tangible cost is assumed to be 70 % of total CAPEX Fixed OPEX 5% of gross revenue Escalation rate of 2% for a nominal economic model Discount rate assumed 15% for government and contractor cash flow model Production commenced in the fifth year to allow time for exploration, G & G services and facility installation Abandonment cost is 1% of depreciated CAPEX. Straightline Depreciation of tangible CAPEX is applied for 5 years as legislated in Nigeria.
Model Input Parameters Input Parameters Production period 19 years Estimated Reserve 250 MMBBL Initial Oil Production 15000 BOPD Build up period (Oil) 5 years Oil Peak rate 68493 BOPD Plateau Period (Oil) 3 years Total Period 24 years Build up production 62.50 MMBBL Plateau production 75.00 MMBBL Effective Decline rate (Oil) 0.1729 Total Wells to drill 15 Average Well cost 84 $mm
Model Specification After Tax Net Cash Flow for contractual systems are given in the equation below: NCF = GR t ROY t CAPEX t OPEX t BONUS t PO G t - TAX t OTH t Where: NCF = After Cash Net Cash Flow in year t GR t = Gross Revenue in year t ROY t = Total Royalties paid in year t CAPEX t = Total capital Expenditure in year t (Both tangible and intangible) OPEX t = Total Operating Expenditure in year t BONUS t = Total Bonus paid in year t PO G t = Profit oil share to the government in year t TAX t = Total taxes paid in year t OTH t = Other costs paid in year t PO G t = Profit oil share to the government in year t 13
Performance Metrics and System Measures The IRR is simply the discount rate at which the NPV becomes 0. Mathematically expressed as: NPV r, t = N NCF t 1+IRR t t=0 = 0 NPV r, t = N t=0 NCF t 1+r t PI = 1 +NPV/PV of CAPEX Host Government Take, t HG = NPV (HGT) NPV CT + NPV (HGT) Where: NPV (HGT) = Net present value of host government take, NPV (CT) = Net present value of contractor take r is the discount rate or the cost of capital. Discounted Payout Period 14
Stochastic Model Assumptions @RISK Input Results Performed By: Oyebimpe Adeogun Name Graph Min Mean Max 5% 95% Discount Rate (%) 15.09% 16.54% 30.87% 15.29% 19.07% Exploration Cost ($MM) $ 9.10 $ 10.00 $ 10.98 $ 9.30 $ 10.70 Facilities Cost ($MM) $ 67.71 $ 75.08 $ 82.13 $ 69.85 $ 80.03 Oil Price ($/STB) $ 70.25 $ 74.91 $ 79.63 $ 71.61 $ 78.23 Operating Cost ($MM) $ 18.08 $ 20.03 $ 21.95 $ 18.62 $ 21.35
Deterministic Model Results Oil Price Metric Measures $35/bbl $55/bbl $75/bbl Contractor's IRR (%) 11.90% 18.35% 23.06% NPV ($MM) -178.77 214.96 562.61 Profitability Index 0.824 1.211 1.552 Discounted HGT (%) 126.81% 87.28% 78.66% Payout Period (years) 12.71 10.20 9.16
Project IRR Sensitivity Analysis E & P projects are highly impacted by reserves size, cost and oil price
-$ 300 -$ 200 -$ 100 $ 0 $ 100 $ 200 $ 300 16.5% 17.0% 17.5% 18.0% 18.5% 19.0% 19.5% Stochastic Model Results 0.007 Net Present Value / CONTRACTOR A(CITA) ($MM) -$34 $214 5.0% 90.0% 5.0% 120 Internal Rate of Return / CONTRACTOR A(CITA) ($MM) 17.371% 19.029% 5.0% 90.0% 5.0% 0.006 100 0.005 80 0.004 0.003 Net Prese nt Value / 60 Internal Rate of Return / CONTRA CTOR A(CITA 40 0.002 0.001 20 0.000 0
0.6 0.7 0.8 0.9 1.0 1.1 1.2 1.3 80% 100% 120% 140% 160% 180% 200% Stochastic Model Results 7 Profitability Index / CONTRACTOR A(CITA) ($MM) 0.963 1.213 5.0% 90.0% 5.0% 10 Discounted Take Statistics / HOST GOVT A(CITA) ($MM) 87.2% 103.6% 5.0% 90.0% 5.0% 9 6 8 5 7 4 3 Profitabilit y Index / CONTRA CTOR A(CITA) ($MM) 6 5 4 Discounted Take Statistics / HOST GOVT A(CITA) 2 3 2 1 1 0 0
9.5 10.0 10.5 11.0 11.5 12.0 12.5 13.0 13.5 14.0 14.5 15.0 Stochastic Model Results 1.6 Payout Period (years) / HOST GOVT B4(CITA) ($MM) 10.087 11.099 5.0% 90.0% 5.0% 1.4 1.2 1.0 0.8 Payout Period (years) / HOST GOVT B4(CITA) ($MM) 0.6 0.4 0.2 0.0
$ 150 $ 200 $ 250 $ 300 $ 350 $ 400 $ 450 $ 500 $ 550 Stochastic Model Results Net Present Value / CONTRACTOR A(CITA) ($MM) Inputs Ranked By Effect on Output Mean ASSUMED DISCOUNT RATE / NOMINAL($) $166.22 $529.06 Oil Price ($/STB) / NOMINAL($) $389.39 $438.61 Field/Facilities Cost / Cost/year ($MM/yr) $397.71 $432.25 Input High Input Low Yearly Operating Cost / Cost/year ($MM/yr) $405.77 $433.22 Exploration Cost / Cost/year ($MM/yr) $398.89 $425.70 Baseline = $416.56 Net Present Value / CONTRACTOR A(CITA) ($MM)
Summary of Stochastic Model Results Metric Measures Oil Price $35/bbl $55/bbl $75/bbl P10 P50 P90 P10 P50 P90 P10 P50 P90 Contractor's IRR (%) 11.15% 11.93% 12.63% 17.58% 18.33% 18.90% 22.87% 23.06% 23.25% NPV ($MM) -297.27-228.82-175.43-10.69 130.9 199.16 278.98 459.32 522.45 Profitability Index 0.68 0.77 0.82 1.01 1.13 1.20 1.30 1.46 1.52 HGT (%) 127.00% 144.00% 192.00% 87.79% 90.88% 98.86% 79.18% 80.19.% 84.12% Payout Period (years) 12.64 13.37 15.23 10.13 10.43 10.87 9.2 9.29 9.57
Results and Discussion Deterministic Model Input variables identified to be impacting the performance of the hypothetical field are discount rate, oil price, exploration cost, facilities cost and operating cost. Oil price is a major determinant of the viability of E & P ventures. Deterministic model results gave the following results: IRRs of 11.90%, 18.35% and 22,66% were obtained for the $35/bbl, $55/bbl and $75/bbl price scenarios, assuming a discount rate of 15%. This implies that at extreme low oil price, the interest earned on E & P ventures is unable to pay for the cost of capital. Other economic metric measures also indicate that projects are most viable when oil price is at least $55/bbl
Results and Discussion The stochastic model outputs are NPV, IRR, PI and Discounted Pay-out Period. It is observed that under varying oil price conditions, the average NPV can is ($228.82 MM), $130.9, $522.45 under the varying oil price respectively. Under the same assumptions, the average IRR are 11.93%, 18.33% and 23.25% for a hurdle rate of 15%. The average pay-out period is 13.37 years, 10.43 years and 9.57 years at oil price of $35/bbl, $55/bbl and $75/bbl respectively. This is as expected because at low oil price it takes longer period to recoup the maximum capital exposure of the business venture and vice versa
Results and Discussion The profitability index is a measure of how much the discounted revenue exceeds the cost incurred. PI of 1.13 at $55/bbl implies that the revenue generated is 113% higher than the incurred cost. A profitability index less than 1 signifies that the business is not adding value, as obtained with oil price oif $35/bbl which gave PI of 0.77 as presented in the stochastic simulation result. The tornado chart obtained from stochastic analysis show that discount rate and oil price have the highest impact on field performance. Investments that earn interest rate higher than the cost of capital are most favorable in decision making.
Conclusion The study was conducted to identify and quantify risks and uncertainties associated with developing an oil and gas property offshore under varying oil prices The deterministic model was developed assuming no risk was involved in the analysis, this is unrealistic as E & P ventures are carried out in the presence of inherent uncertainties. Hence, a stochastic simulation is carried out for risk and uncertainty analysis. The cost of capital and oil price were identified as high risk factors in evaluating the performance of an oil and gas property, hence the investor must ensure that a careful evaluation is carried out for sound decision making. Cost benchmarking is expected by investors to ensure that major disruptions in operations is avoided especially in a period of low oil price.
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