This document provides an introduction to petroleum economics and economic analysis. It discusses key concepts such as:
1) Economics is vital to the oil and gas industry for evaluating projects, integrating technical analysis, and making recommendations based on profit potential.
2) Economic analysis considers cash flows including revenues, investments/capital expenditures, expenses, and taxes to determine metrics like net cash flow, profit to investment ratio, and payout period.
3) Calculating these economic yardsticks incorporates production volumes, prices, capital and operating costs to evaluate the overall economic viability and profitability of projects.
This document provides an introduction to petroleum economics and economic analysis. It discusses key concepts such as:
1) Economics is vital to the oil and gas industry for evaluating projects, integrating technical analysis, and making recommendations based on profit potential.
2) Economic analysis considers cash flows including revenues, investments/capital expenditures, expenses, and taxes to determine metrics like net cash flow, profit to investment ratio, and payout period.
3) Calculating these economic yardsticks incorporates production volumes, prices, capital and operating costs to evaluate the overall economic viability and profitability of projects.
This document provides an introduction to petroleum economics and economic analysis. It discusses key concepts such as:
1) Economics is vital to the oil and gas industry for evaluating projects, integrating technical analysis, and making recommendations based on profit potential.
2) Economic analysis considers cash flows including revenues, investments/capital expenditures, expenses, and taxes to determine metrics like net cash flow, profit to investment ratio, and payout period.
3) Calculating these economic yardsticks incorporates production volumes, prices, capital and operating costs to evaluate the overall economic viability and profitability of projects.
This document provides an introduction to petroleum economics and economic analysis. It discusses key concepts such as:
1) Economics is vital to the oil and gas industry for evaluating projects, integrating technical analysis, and making recommendations based on profit potential.
2) Economic analysis considers cash flows including revenues, investments/capital expenditures, expenses, and taxes to determine metrics like net cash flow, profit to investment ratio, and payout period.
3) Calculating these economic yardsticks incorporates production volumes, prices, capital and operating costs to evaluate the overall economic viability and profitability of projects.
Economics and Economic Analysis are Vital to the success
of the oil & gas industry Expense projects - Maintain reserves or production Capital projects - Attain reserves or production
- evaluating economic viability
2 Why Economics ?
Integrate all the technical analysis into a
recommendation(s) Evaluate the recommendation(s) for profit potential with an economic analysis Make a final recommendation(s) to management based on technical and economic evaluations
Economics is typically the focal point of all the technical
work - The Bottom Line.
3 Overall Flow of Funds
Loan capital Loan repayments
Re-investment Calculating Project Cash Flow
Capex Capital expenditure on assets with Gross revenues from lifetime >1 yr (platforms, facilities, sales of hydrocarbons wells) Payments for farming out Opex project or part of project Operating expenditure for assets with lifetime < 1 yr (maintenance, insurance) Government take (royalties, taxes) Cash Flow
Cash Flow (CF) = Cash Inflows - Cash Outflows
Cash Flows are classified as:
Revenues = (+) R Investments = (-) I Expenses = (-) E Federal Income Tax = (-) FIT
6 Revenue Production (R) Price
OPEC $ Sale of Oil, Gas, NGLs, CO2, sulphur, etcera Sale of Surplus Equipment Processing fees and royalties Sale of Producing Properties Expense reduction 7 Investments
8 Expenses Direct operating costs Differ from investments, may be discontinued at any time to shut in production Should include expenses caused by the proposed investment Are expressed as a fixed amount per well, fixed amount per field, or variable amount per unit of production
Other Direct costs - Non routine or anticipated periodic
costs Periodic expense workovers Plug and abandonment costs
9 Expenses
Other Expenses (E)
Production taxes Tariffs Transportation fees
10 Expenses Indirect Expenses (E), Overhead Money required to run the business above the field level Costs for salaries, offices, supplies, and equipment Investment and expense overhead are included in economic analysis For example in the U.S., overhead rates are: 10% on Investments 24% on Direct Operating costs
11 Net Cash Flow Net Cash Flow = R - I - E - FIT = NCF [ The term Net refers to some reductions may have been made to reflect only the owners perspective.]
Economic yardsticks are then developed from the NCF
- NCF by year = Actual Value Profit (AVP)
- Discounting is used to determine PVP, PVP/I, DCFR
Sale of Other Products Eqpt. purchase Maintenance costs Sale of Surplus Eqpt. Pipelines Overhead [Taxes / Royalties / Govt Take] Sale of Prod. Properties Platforms Eqpt. Replacement Repair workovers Fuel costs P & A costs
NCF = R - I - E - FIT
13 Economic Yardsticks Profit or Actual Value Profit (AVP)
Profit (AVP) = All Cash In - All Cash out
Actual Value Profit (AVP) = NCF by year
Profit to Investment Ratio (P/I)
P/I = Profit / Investment
P/I = AVP / I
16 Economic Yardsticks Payout / Payback How long does it take to break even? How long is the investment at risk?
Payout = Length of time required for the total cash outlay
to be recovered through the profit generated by the project.
Measured from the time of first investment
Indicates the riskiness of the opportunity Not a good yardstick to compare large and small opportunities 17 NCF Example Cumulative Year Revenue Investment Expense FIT NCF NCF 0 10 -10 -10 1 20 14 1 5 -5 2 20 14 1 5 0 3 20 14 1 5 5 4 20 14 1 5 10 5 20 14 1 5 15
