1 Petroleum Economic Overview

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Petroleum Economic


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Course Outcome

Describe the underlying concept of key economicindicators such as maximum cash sink, payout time, NetPresent Value (NPV), Internal Rate of Return (IRR)

Identify the various types of Fiscal Arrangements and itscomputational logic

Develop basic economic models for E&P projecteconomic evaluations.

Identify risk factor and impact on the project economics.


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Purpose of Economic Evaluation Your Deliverables

WHY DO ECONOMIC EVALUATION?

Bidding to National Oil Companies to

secure new petroleum acreages

Farming-in into existing acreages

Unitization agreements

Sale and exchange of petroleum

assets

Project financing in the form of loans

Propose new fiscal terms to National

Oil Companies

Evaluation of changes in

governmental regulations which affect

petroleum sector

Advise management/decision

makers on the economic merit of

the project:

monetary value and return to the

company

understanding of the impact of

each major economic parameter

on the decision

selection of optimal development

options

recommendation of of fiscal

terms and/or negotiation

parameters


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FLOW OF MONEY IN A PROJECT

PROJECTGenerating Money

Debt Repayment

Interest Payment

Dividends Payment

Re-investment

Absor

bing Money

Bank loans

Share issue Farm-out

SHAREHOLDERS

DEBTHOLDERS

(Sources of Funds)


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Technical Inputs

Economic Model

EconomicAssumptions

Economic Results

ReservesProduction

CapexOpex

ECONOMIC ANALYSIS WORK-FLOW

Risk &

SensitivityAnalysis

PriceCost Escalation

InflationExchange Rate

Net Cash FlowTax & Capital Allowance

Fiscal Arrangement

Time Value of MoneyEconomic Indicators

eg. NPV, IRR


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Technical Inputs

Economic Model

EconomicAssumptions

Economic Results

Risk &

SensitivityAnalysis

ReservesProduction

CapexOpex

ECONOMIC ANALYSIS WORK-FLOW

PriceCost Escalation

InflationExchange Rate

Net Cash FlowTax & Capital Allowance

Fiscal Arrangement

Time Value of MoneyEconomic Indicators

eg. NPV, IRR


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OVERVIEW OF UPSTREAM PROJECT EVALUATION

Field Life Cycle

Revisit/New OpportunitiesWell/Field Abandonment

Data Review

Project ScreeningProject Planning

Seismic/Drilling/Studies

Feasibility Study/Conceptual DesignDetailed Design

ProcurementFabrication/Installation

DrillingHook-up & Commissioning

Activities

Contract Years

1st Production

Production AbandonmentDevelopmentAcquisition Exploration


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Acquisition Exploration Development Production Abandonment

Acquisition Cost including Sunk Cost Acquisition Cost


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Exploration Costs depend on Rig costs Time to drill wells

Well Depth Number of exploration wells Seismic


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Development costs depend on Development concept Field Size

Water Depth ( offshore ) Facilities Number of Wells Wells costs Pipeline costs


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Production costs depend on Type of operations Maintenance

Workover


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Abandonment costs depend on Timing Salvage value


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Project Costs

Exploration seismic, G&G, exploration well, etc.

Development Study, production facilities, pipeline, development wells,

base camp, roads, etc.

Production maintenance, workover, manpower, etc.

Abandonment decommissioning.

Technical Data Input for Economic Evaluation


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Technical Data Input for Economic Evaluation

0

10

20

30

40

50

60

Production Year

Production

Plateau

Period

Decline

Period

Build-up

Period

Reserves or Expected Ultimate Recovery ( EUR )

Production Forecast ( Oil or Gas )


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Unit Finding Cost (UFC) = Exploration Capex / Total Production = $ 10/50MMSTB = $0.20/BBL

Unit Development Cost (UDC) = Development Capex / Total Production = $260/50MMSTB = $5.20/BBL

Unit Operating Cost (UOC) = Total Opex / Total Production = $ 50/50MMSTB = $1.00/BBL

Unit Technical Cost (UTC) = [Total Capex + Total Opex ] / Total Production

= UFC + UDC + UOC = $0.20 +$5.20 + $1.00 = $6.40/BBL

Sample of A Field Life Cycle Project


Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

Productuion(Mstb)

/Costs(US$MM)

Surplus

Opex

Development Capex

Exploration Capex

eg. Total Opex= US$ 50 MM

ProductionPeriod

eg. Total Production= 50 MMSTB

ExplorationPeriod

eg. Expl. Capex= US$ 10 MM

DevelopmentPeriod

eg. Dev. Capex= US$ 260 MM


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History


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Oil history timeline

3000 BC The Mesopotamians of that era used rock oil in architectural adhesives, ship

caulks, medicines, and roads.

2000 BC

The Chinese refined crude oil for use in lighting and heating.

600700 AD

Arab and Persian chemists discovered that petroleums lighter elementscould be mixed with quicklime to make Greek fire, the napalm of its day.

1750

A French military officer noted that Indians living near Fort Duquesne (nowthe site of Pittsburgh) set fire to an oil-slicked creek as part of a religiousceremony. As settlement by Europeans proceeded, oil was discovered in

many places in northwestern Pennsylvania and western New Yorkto thefrequent dismay of the well-owners, who were drilling for salt brine.


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Mid1800s

Expanding uses for oil extracted from coal and shale began to

hint at the value of rock oil, encouraging the search for readilyaccessible supplies.

1859

Oil was first discovered when a homemade rig drilled down 70feet and came up coated with oil. This rig was near Titusville

(in northwestern Pennsylvania) and was owned by "Colonel"Edwin L. Drake.

1890s

Mass production of automobiles began creating demand forgasoline. Before this, kerosene used for heating had been the

main oil product. 1920

With 9 million automobiles in the United States, gas stationswere opening everywhere.


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1950present

With the growing use of automobiles, oil became our mostused energy source .

1960 The Organization of Petroleum Exporting Countries (OPEC)

was formed by Iran, Iraq, Kuwait, Saudi Arabia, andVenezuela. The group has since grown to include 11 membercountries.

1970 Production of petroleum (crude oil and natural gas plant

liquids) in the U.S. lower 48 States reached its highest level at9.4 million barrels per day. Production in these States has beendeclining ever since.

1972 Oil well productivity for the Nation reached a high of 18.6

barrels per day per well.
http://tonto.eia.doe.gov/kids/energy.cfm?page=kids_glossaryhttp://tonto.eia.doe.gov/kids/energy.cfm?page=kids_glossary


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1973

Referred to as theArab Oil Embargo, several Arab OPECnations embargoed, or stopped selling, oil to the United States

and Holland to protest their support of Israel in the Arab-Israeli Yom Kippur War. Later, the Arab OPEC nationsadded South Africa, Rhodesia, and Portugal to the list ofcountries that were embargoed. Arab OPEC production wascut by 25 percent, causing some temporary shortages and the

tripling of oil prices. Some filling stations ran out of gasoline,and cars had to wait in long lines for gasoline.

1973

In reaction to the Arab Oil Embargo of 1973, Congress passed

laws that tried to protect consumers from gasoline shortagesand high prices. The price controls of the EmergencyPetroleum Allocation Act of 1973 were generally considered afailure, and they were later repealed.


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1975

Congress passed the Energy Policy and Conservation Act of1975 aimed at increasing oil production by giving priceincentives. This act also created the Strategic PetroleumReserve (SPR) and required an increase in the fuel efficiency(miles per gallon) of automobiles.

197880 The Iranian Revolution, which began in late 1978, resulted in a

drop of 3.9 million barrels per day of crude oil productionfrom Iran from 1978 to 1981. At first, other OPEC countriesmade up for the drop in Iranian production. In 1980, the Iran-Iraq War began, and many Persian Gulf countries reducedoutput as well. By 1981, OPEC production was about one-fourth lower than it had been in 1978, and prices had doubled.


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198085

OPEC kept prices high by producing less oil. Saudi Arabia acted as aswing producer, cutting more production than any other OPEC country.But high prices caused less oil to be used. For example, cars became

smaller, using less gasoline. The drop in oil consumption meant that less oilneeded to be produced. Thus, oil production from Saudi Arabia fell from9.9 million barrels per day in 1980 to 3.4 million barrels per day in 1985.

1981

The U.S. Government responded to the oil crisis of 1978-1980 by removingprice and allocation controls on the oil industry. For the first time since the

early 1970s, market forces (supply and demand) set domestic crude oilprices.

1986

In 1986, Saudi Arabia stopped holding back production, and other OPECmembers increased production. This caused an oil glut, and prices werealmost cut in half. Oil consumption grew quickly in the late 1980s because

prices remained low.


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1988

Alaskas production at Prudhoe Bay peaked at 2.0 millionbarrels per day and fell to 1.0 million barrels per day in 1999.

By then, U.S. total output had dropped to 7.8 million barrelsper day, 31% below its peak.

199091

Iraq invaded Kuwait on August 2, 1990, causing crude oil and

product prices to rise suddenly and sharply. Prices rose evenhigher when the United Nations (UN) limited the amount ofoil that could be purchased from these countries. Between theend of July and August 24, 1990, the world price of crude oilclimbed from about $16 per barrel to more than $28 per barrel.

The price rose even higher in September, reaching about $36per barrel. As UN troops began seeing military successes inIraq, concerns about long-term supply problems were easedand oil prices dropped again.


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1990

The Clean Air Act Amendments of 1990 required

many changes to gasoline and diesel fuels to makethem pollute less. The use of these cleaner fuels was

phased-in during the 1990s. Since 1995,

reformulated gasoline has been used in places with

the worst pollution problems. Since 1993

For the first time, the United States imported more oil

and refined products from other countries than itproducedowing to growing petroleum demand

and declining U.S. production.


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199798

The Asian financial crisis that occurred in

1997 had worldwide economic effects. As theAsian economies shrank, their demand for

petroleum products declined. The slow

demand for petroleum, along with thereluctance of OPEC to cut its production

quotas, led to the plummet of oil prices in

1998.


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2001

The Nations petroleum production measured an average of11.0 barrels of oil per day per well, 41% below the 1972 peak.

U.S. petroleum consumption reached 19.7 million barrels perday, an all-time high.

Of every 10 barrels of petroleum consumed in the UnitedStates, more than 4 barrels were consumed in the form ofmotor gasoline. The transportation sector alone accounted for

two-thirds of all petroleum used in the United States. To meet demand, crude oil and petroleum products were

imported at the rate of 11.9 million barrels per day, whileexports measured 1.0 million barrels per day.

Net imports (imports minus exports) of crude oil and

petroleum products more than doubled between 1985 and2001. The five leading suppliers of petroleum to the UnitedStates that year were Canada, Saudi Arabia, Venezuela,Mexico, and Nigeria.


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2005

The record-setting hurricane season of 2005 caused

massive damage to the U.S. petroleum and naturalgas infrastructure. The Gulf of Mexico, one of thenation's largest sources of oil and gas production, wasdealt a one-two punch by Hurricanes Katrina and Ritaduring August and September.

The Energy Policy Act of 2005 was passed. Itrequired increased use of renewable fuels fortransportation and new measures to reduce pollutionfrom gasoline and diesel.

Gasoline prices broke $3.00 per gallon for the firsttime.


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2006

Refineries began using more ethanol, a

renewable fuel, in response to the Energy

Policy Act.

2008

For the first time, crude oil price broke $100

per barrel and gasoline prices broke $4.00 per

gallon.


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Oil at Present

Productio 90MMBBL/D

Reserve

1 Petroleum Economic Overview

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