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PETROLEUM ECONOMIC

Sharing Session

1
Internal
Sharing Schedule

10.00 am About Economic Evaluation


 Technical Input
 Economic Assumptions
 Economic Model
 Economic Result

Q&A
01.00 pm Lunch Break
02.00 pm FDP Model Sharing Session
04.00 pm Q&A

2
Internal
Economic evaluation generates value indicators..

• To assist Management in making informed business decisions


based on the economic merit of the project (monetary value and
return to the Company)

• To enable selection of best value option going forward, whether


development option & configuration, lease or buy, pre-
investment or deferred development

• To measure performance of approved projects

• To understand and determine the impact of change in economic


assumptions and basis on project value and viability

• To determine value of Company based on a given or different


portfolio of projects

• To determine economic worth and “bank-ability” of project for


financing by external Lenders/Bankers/investors.
Note : Although Economics plays an important part in decision making, it is not
• only
the To determine fiscal
criteria used terms and
in decision conditions required for economics
making
viability
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Internal
Economic Analysis Work Flow

Technical
Inputs
Production
CAPEX Economic Economic
OPEX Model Results
ABEX Net Cash Flow Economic
Capital Indicators
Allowance e.g. NPV, IRR
Tax
Fiscal
Economic Arrangement
Assumptions
Price
Forex
Sensitivity
Analysis

4
Internal
Economic Analysis Work Flow

Technical
Inputs
Production
CAPEX Economic Economic
OPEX Model Results
ABEX Net Cash Flow Economic
Capital Indicators
Allowance e.g. NPV, IRR
Tax
Fiscal
Economic Arrangement
Assumptions
Price
Forex
Sensitivity
Analysis

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Internal
Technical Input Data
Technical Data required for full life cycle of field

Acquisitio Exploratio Developmen Production Abandonment


n n t
 CR  Reserves  Remaining resource/
Reserves reserve
 Production  Production
/Resource forecast forecast  Supply forecast

 G&G Studies  Facilities Costs  Operating


 Sunk  Seismic (e.g. jacket,  Abandonment
cost
 Acquisition  Exploration & topsides, pipeline)  Lease rate Cost
Costs  Commitment appraisal well  Development
Cost costs drilling cost

 POS  No. of wells  Gas  Abandonment


 Schedule  Development demand schedule
Other Data  No. of wells forecast  Salvage value
scenarios
 Schedule

All data must be in yearly basis profile

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Internal
Technical Input Data

Typical Production Profile

50
Oil Production Profile Gas Production Profile
Plate Decline 120
Build up Build up Plate Decline
au au
40

mmscf/d
80
Kbbl/d

30

20
40
10

0 0
Year Year

s Field usually have a longer plateau period compared to an oil fie

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Internal
Technical Input Data

Capex and Opex


0

-100

-200 First Production

-300

-400

-500

Exploration Capex Development Capex Opex

• CAPEX is characterized by once off spending before start of production.


CAPEX spending is phased out (in example above development capex is spread
over two years).

• OPEX are recurring cost incurred once production start and are usually
smaller in magnitude compared to CAPEX necessary to maintain the
production from the field

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Internal
Economic Analysis Work Flow

Technical
Inputs
Production
CAPEX Economic Economic
OPEX Model Results
ABEX Net Cash Flow Economic
Capital Indicators
Allowance e.g. NPV, IRR
Tax
Fiscal
Economic Arrangement
Assumptions
Price
Forex
Sensitivity
Analysis

9
Internal
Oil and Gas Price

• Long term price forecast have a • Demand driven


major bearing on the economics of a –Government Regulation for Power
project therefore have a major Sector
impact on the decision making of a
–Project Requirement – profits
project.
at certain economic threshold,
• Most companies have own in house e.g. IRR = 18%
“CORPORATE” long term oil • Fuel oil parity – pegged to other
forecast, approved by Senior fuels, e.g. HSFO or a basket of
Management. crude prices (OPEC basket, Japanese
• Therefore, due to this different Crude Cocktail)
outlook, companies may make
different decision on the same
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Internal
project
Economic Analysis Work Flow

Technical
Inputs
Production
CAPEX Economic Economic
OPEX Model Results
ABEX Net Cash Flow Economic
Capital Indicators
Allowance e.g. NPV, IRR
Tax
Fiscal
Economic Arrangement
Assumptions
Price
Forex
Sensitivity
Analysis

11
Internal
We do economic evaluation to determine the economic
merit of making an investment, derived from Net Cash
Flow
 In simplest terms, a net cash flow forecast is a
forecast of the CASH balance after deducting all
monies spent from monies earned.
 The merit or the economic health of the project is
measured using economic yardsticks, derived from
the project Net Cash
Net Cash Flow Flow (NCF).
= Cash Inflow minus Cash
Outflow

Cash Amount Paid


Cash Amount  Capital Expenditures
Received (Capex), e.g.
 Fiscal o Facilities
Income,e.g. o Well cost
o Sale of oil &  Operating Expenses (Opex),
gas e.g.
 Operating o Maintenance
Income,e.g. o General & administration
o Tariff  Fiscal Cost, e.g.
received o Royalty
 Other Income: o Taxes
o Premium o Bonuses & PSC Payments
received
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Internal
Simplified Project Net Cash Flow Calculation

Net Cash Flow = Cash Inflow minus Cash Outflow

Cash In = Revenue

(less) Royalty
(less) Opex
Income Before Tax
(less) Tax
Income After Tax
(less) Capex
Cash Out = Royalty + Opex
+ Capex +Tax
Net
Cash Flow After Tax

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Internal
Calculating Net Cash Flow

Exercise 1 : Calculate the Net Cash Flow After Tax(1) for the following d

Capex 50.0 US$ MM


Opex 50.0 US$ MM

Production 7.0 MMstb


US$/bb
Price 20.0
l

Royalty 10%
Tax 30%
(assuming no
depreciation)

Note:
(1) Example from a Royalty-Tax fiscal
regime

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Internal
Calculating Net Cash Flow

Exercise 1 : Calculate the Net Cash Flow After Tax(1) for the following d

SUGGESTED ANSWER
Capex 50.0 US$ MM
Opex 50.0 US$ MM Revenue 140.0
less Royalty (14.0)
less Opex (50.0)
Production 7.0 MMstb Income Before Tax 76.0
US$/bb less Tax (22.8)
Price 20.0
l Income After Tax 53.2
less Capex (50.0)
Royalty 10% Net Cash Flow After Tax 3.2MMUS$
Tax 30%
(assuming no
depreciation)

Note:
(1) Example from a Royalty-Tax fiscal regime

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Internal
Types of Fiscal Arrangements
Petroleum Fiscal
Arrangements

Concessionary
Contractual
Systems
Systems
 Oil companies owns the  Government has the sole
production ownership of petroleum
 Contractors pay royalty and resources.
tax to the government  Oil companies are assigned as
contractors
 Contractors furnish all risk
capital in return,
contractors will be allowed
to recover the cost upon
Service Production Sharing
production
Contract Contract
 For Service Contract:  For Production Sharing
remaining profit Contract: remaining
belongs to government; profit (after cost
contractors will be recovery) is shared
compensated through between government &
unused cost oil as contractors
their ‘remuneration’
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Internal
Evolution of Malaysia PSC
2017

Deepwater
2012 R/C PSC

Progressive To attract
Volume new foreign
2011 based exploration
investment in
Risk Service To attract
deepwater
1997 Contract development
are and
of riskier
promote use
To promote potential in
R/C PSC of cost-
1994 niche platers brown fields
effective new
and promote technology in
Deepwater/ innovation for Provide base
To attract the
ultra cost volume for
1985 new foreign deepwater
deepwater PSC optimization Contractor to
exploration area
and increase accelerate
Target big investment
1985 PSC local cost recovery
1976 player with and to
experience in promote use participation
deepwater of cost- and develop
To attract
1976 PSC exploration, effective new local
Pre 1976 foreign
development technology in capability
investor to
explore oil and the
Primarily to
Concession and gas production exploration
convert the
resources for higher risk
then existing
subtle plays.
Concession concession
agreement agreements Progressively Profitability
between oil into PSCs. Profitability Some better profit based sliding
Production Production
companies based sliding diversion in sharing to fiscal regimes
tranche tranche
and state Fixed profit fiscal risk/reward contactor with tied to index
based fiscal based fiscal
government split regimes tied sharing development
term term
to index structure of new
resources

17
Internal
Calculating PSC Net Cash

Revenue = $100 Royalty


Cost = $ 40 @10%
$10
Cost
Recovery
Ceiling @50% $40
= $40 Government
Govt.
Profi Take = $51
Contractor
t
Take
$9 Share
= $9 $35
@70%
$6 Tax
@40%

Cost = $40 *Net Govt. Take


Government Take = $51 = 85%
Contractor Take = $ 9

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Internal
Cost Bank and Cost Recovery Concepts
• Cost Bank = Balance of cost to be recovered Deposit Withdrawal
= Unrecovered Cost
BANK
 Cost incurred
= Current Cost Bank Balance  Cost Recovery
(+) Total Cost for the period Unrecovered Cost
(- ) Cost Recovered

• Actual Cost Recovered = MIN [Cost Recovery Ceiling vs. Amount Cost
Bank]

• Example Actual Cost Recovered =


Ceiling $50 $50
Cost Bank $60 Unrecovered Cost =
$10
Actual Cost Recovered =
Ceiling $50 $40
Unrecovered Cost =
Cost Bank $40
$0
Profit
Gross Revenue (

Maximum Cost Recovery

Actual Cost
Recovery
% )

Royalty
TIME ( YRS )

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Internal
Calculating Cost & Profit Oil

Exercise 2 : Calculate the cost oil recovery and contractors’ profit


oil for the following data
Year 1 Year 2 Year 3
Annual Production MMstb 5 10
Capex US$ MM 50 40
Opex US$ MM 20 20
Price US$/BBL 50 50 50
Gross Revenue US$ MM 100 200
Royalty (10%) US$ MM 10 20
Cost Oil Ceiling (60%) US$ MM 60 120
Annual Costs US$ MM 60 20
Total Cost Bank US$ MM 110 70
Actual Cost Oil Recovered US$ MM 60 70
Un-recovered Costs US$ MM 50
Total Profit Oil US$ MM 30 110
NOC’s share of Profit Oil
US$ MM 21 77
(70%)
Contractor’s share of Profit
US$ MM 9 33
Oil (30%)

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Internal
Calculating Cost & Profit Oil

Exercise 2: Calculate the cost oil recovery and contractors’ profit


oil for the following data
Year 1 Year 2 Year 3
Annual Production MMstb 5 10
Capex US$ MM 100 80
Opex US$ MM 30 30
Price US$/BBL 50 50 50
Gross Revenue US$ MM 100 200
Royalty (10%) US$ MM 10 20
Cost Oil Ceiling (60%) US$ MM 60 120
Annual Costs US$ MM 100 60 20
Total Cost Bank US$ MM 100 110 70
Actual Cost Oil Recovered US$ MM 60 70
Un-recovered Costs US$ MM 100 50
Total Profit Oil US$ MM 30 110
NOC’s share of Profit Oil (70%) US$ MM 21 77
Contractor’s share of Profit
US$ MM 9 33
Oil (30%)

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Internal
Calculating Cost & Profit Oil

Exercise 2: Calculate the cost oil recovery and contractors’ profit


oil for the following data
Year 1 Year 2 Year 3
Annual Production MMstb 5 10
Capex US$ MM 100 80
Opex US$ MM 30 30
Price US$/BBL 50 50 50
Gross Revenue US$ MM 250 200
Royalty (10%) US$ MM 25 20
Cost Oil Ceiling (60%) US$ MM 150 120
Annual Costs US$ MM 100 110 20
=
Total Cost Bank US$ MM 100 210 70
Actual Cost Oil Recovered US$ MM + 150 70
Un-recovered Costs US$ MM 100 60
Total Profit Oil US$ MM 75 110
NOC’s share of Profit Oil
US$ MM 52.5 77
(70%)
Contractor’s share of Profit
US$ MM 22.5 33
Oil (30%)

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Internal
Calculating Cost & Profit Oil

Exercise 2: Calculate the cost oil recovery and contractors’ profit


oil for the following data
Year 1 Year 2 Year 3
Annual Production MMstb 5 10
Capex US$ MM 100 80
Opex US$ MM 30 30
Price US$/BBL 50 50 50
Gross Revenue US$ MM 250 500
Royalty (10%) US$ MM 25 50
Cost Oil Ceiling (60%) US$ MM 150 300
Annual Costs US$ MM 100 110 30
=
Total Cost Bank US$ MM 100 210 90
Actual Cost Oil Recovered US$ MM 150 + 90
Un-recovered Costs US$ MM 100 60
Total Profit Oil US$ MM 75 360
NOC’s share of Profit Oil
US$ MM 52.5 252
(70%)
Contractor’s share of Profit
US$ MM 22.5 108
Oil (30%)

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Internal
Economic Analysis Work Flow

Technical
Inputs
Production
CAPEX Economic Economic
OPEX Model Results
ABEX Net Cash Flow Economic
Capital Indicators
Allowance e.g. NPV, IRR
Tax
Fiscal
Economic Arrangement
Assumptions
Price
Forex
Sensitivity
Analysis

25
Internal
Profitability Indicator Concept
Ultimate Cash Surplus = $
1200
1,125 MM
Net Cashflow
1000
Cum Cashflow Ultimate Cash Surplus
800
 Cumulative Net Cash
600
Flow at the end of
Cashflow, $ MM

project life
400

200

-200

Max Cash Sink


-400

Max Cash Sink = $ 370 MM


 Maximum amount of cash
outlay for a project

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Internal
Profitability Indicator Concept
1200

Net Cashflow
1000
Cum Cashflow
800
Breakeven
Investment
600
Payout Period =  The year when the sum
Cashflow, $ MM

8 years of cash inflow equals


Breakeven the sum of cash
400 year outflow beyond which
the project will
200 fully fund itself

0
1st Investment
-200 Investment Payout Period

-400
 No of years from First
Investment to achieve
breakeven

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Internal
Profitability Indicator Concept
1200

Net Cashflow
1000
Cum Cashflow Economic Limit
800

 The year where


600 Maximum Cumulative
Cashflow, $ MM

Cash is realised
400

200

-200
Economic Life
-400

 No. of years from first


investment to achieve
Economic Limit

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Internal
Profitability Indicator Concept

Ultimate Cash Surplus = $


1,125 MM
1200

Net Cashflow
1000
Cum Cashflow Profit Investment Ratio
(PIR)
800
• Amount earned for
every dollar spent
600
Cashflow, $ MM

• Formula: Undiscounted
Net Present Value /
400 Total Investment

200 Total Investment PIR = $ 1,125 MM = 2.0


= $ 550 MM $ 550 MM
0

-200

-400

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Internal
Profitability Indicator Concept
Net Present Value
200
(NPV)

100  Sum of
discounted
0 Net Cash Flow
over project
-100 life

-200
Cashflow disc
-20 disc -50
disc disc
-150 -100 -50 100 150

series
n 1 -20
1 -50 -150 2 -100 -50 3 100 150 4 5 6
Disc.
series
Factor 2
1.00 0.91 0.83 0.75 0.68 0.62 0.56
(10%)
-20
-45
1200
-124

Present Values -75 800


Net
-34 Cashflow
400 Cum
62 Cashflow

0
85
Total -151 Net Present Value @ 10% -400
=

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Internal
Profitability Indicator Concept

Internal Rate of Return


1,200 (IRR)
 The discount rate for
which NPV=0
1,000  Formula: Discount rate
where NPV=0 from NPV
profile
Net Present Value, $ MM

800

600
IRR = 24%
400

200 NPV@24% = 0

0
0% 5% 10% 15% 20% 25% 30% 35%

(200)

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Internal
Sample of Economic Analysis

Project A Project B
100 100

50 50

0 0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 1 2 3 4 5 6 7 8 9 10 11 12
-50 -50

-100 -100

-150 -150

NPV10 RM 148.8 Million NPV10 RM 138.2 Million


IRR 19% IRR 25%

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Internal
FDP Economic Model
2.00 PM – 4.00PM

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Internal
Q&A
4.00 PM – 5.00PM

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Internal
Thank you

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Internal