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SPE Introduction To E&P Petroleum Economics & Commercial: November 28, 2019 Lamé Verre
SPE Introduction To E&P Petroleum Economics & Commercial: November 28, 2019 Lamé Verre
1 • Introduction
6. • Conclusion
Energy Transition
&
Climate Change
Technological
HSEQ
&
&
Digital
ESG
Transformation
E&P
Human
Capital Geopolitical
& &
Local Security
Content
Economic
&
Financial
VALUE
Loading Execution
FID
Good Project
Definition Operational
Excellence
Cycle Time
Identify and Asses Most important phase Optimise selected Detail Design and Execute Operate
opportunity Identify, Evaluate & Rank alternative & plan project
multiple alternatives Project close out
execution
Check fit with business Verify technical, commercial, Procure, construct,
Basis for Design Project review (lessons learned)
strategy economical viability commission.
Verify alignment with Project Specification Verify operating performance
Verify potential viability Track Project Performance
business strategy
Develop risk mitigation plan Verify value realization
Create Project Charter Select single “best” Verify readiness for
alternative Define KPIs Maintain & optimize the system to
Plan for Evaluate & Select Operations & pre-Start-up
Plan for Define phase maximise value
phase Develop project execution
Time
Investment decision
Fiscal terms set; Significant costs
Bonus paid Deep offshore wells
>£100 million each Operations lower risk than
development
Fiscal
Regime
Internal
Rate of
Cash Flow
Return
(IRR)
Petroleum
Expected Economics
Monetary Time Value
Value of Money
(EMV)
Net
Present
Discounting
Value
(NPV)
© 2017 Halliburton. All rights reserved. 12
Fiscal Regime/Systems: Government Take
Government take is the revenue that the sovereign state earns from an oil and gas asset.
There are three main types of oil & gas fiscal systems/regimes around the world.
Petroleum economic
evaluation is based on the use
Project
of Cashflow analysis or
Discounted Cash Flow
analysis (DCF).
A Dollar (or Rupiah or Pounds or any unit of currency) is worth more today than it is
tomorrow. This is known as the Time Value of Money.
While there are a number of methods and techniques employed in the economic
analysis of opportunities, the Discounted Cash Flow (DCF) is by far the most common.
Discount rate adjusts time value of money ("risk-free" investments) and systematic risk
Discount Factor depends upon timing, i.e. Start of year or Mid-year or End of year.
Values for subsequent years are calculated by dividing the previous factors by
1/(1.10) and 1/(1.15) respectively
Discount rates should only account for market (or Upstream Exploration 15% - 20%
systematic) risk, not idiosyncratic (unsystematic or
specific) risk. Upstream Production 10% - 15%
Cost
of Capital 3%
10%
Project Discount
Corporate Rate16.20%
Equity
WACC Hurdle Rate
5%
10.20% 13.20%
Debt
0%
1 2 3
To properly express NPV, one must also show a discount rate and a point in time, e.g.:
The Net Present Value at 10% discount rate (NPV10 or PV10) as of 1st January 2019 is $132.5M.
Note:
NPVs of different cash flow streams as of the same date are additive, even if they have different
discount rates.
NPVs as of different dates are NOT additive, even if they have the same discount rate.
EMV Drill
Well
(£0.36 MM)
Non-commercial (£5 MM)
10% 20%
Discovery
30% Low £10 MM
80% 40%
Commercial Best £50 MM
1,500
Development Capex
Incremental Case
(500) Revenues
Drilling (Tertiary Recovery)
Base Case
Revenues
(1,000)
Opex Abandonment/
Decommissioning
© 2017 Halliburton. All rights reserved. 30
Economic Modelling Considerations
Commercial
Agreements
&
Fiscal Regime
Production
Profiles
Cash Flows
Development
Concept
Petroleum Cost
Economics Profiles Economic Sensitivity Outputs
Inputs ESG & Model Analysis
Carbon
Emissions Hydrocarbon
Prices
Key
Performance
Indicators
10,000
Payback
8,000
6,000 Maximum
Financial
Abandonment/
Exposure
£ Millions
4,000 Decommissioning
2,000
-
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27
-2,000
-4,000 Investment
Phase
Net Revenues After-Tax Cashflow Cum Cashflow
Production (Low/High)
-1000 -500 0 500 1000 1500 2000 2500 3000 3500 4000
Base Case = NPV10
Enhanced
Exploration Appraisal Development Operation Decommission
Production
Source: PWC Report - Current developments and a look into the future
November 2018
© 2017 Halliburton. All rights reserved. 37
Petroleum Economics Output - Key Performance Indicators
Reserves Economic
Reserve Life Index (years) NPV / EMV
Reserves Replacement Ratio (%) IRR
Reserves Replacement Cost (£/boe) PV-Ratio (Profit Investment Ratio)
Pay Back
Technical Competence Maximum Financial Ratio
Discovery Cost (£/boe) Breakeven
Finding and Development Cost (£/boe)
Lifting Cost (£/boe) Financial
Technical Cost £/boe) Earning Before Interest and Taxes (EBIT)
Return on Average Equity
Successful Efforts Return On Capital Employed (%)
Commercial Success Ratio (%) Weighted Average Cost of Capital (%)
Technical Success Ratio (%) Revenue per boe (£/boe)
Profit per boe (£/boe)
Cash Flow per boe (£/boe)
© 2017 Halliburton. All rights reserved. 38
The E&P Team
Updated
Assumptions Decision Making
Approvals
Subsurface Economics
Asset Management
(G&G, Reservoir Engineering &
Engineers) Commercial
Planning/Budget
STOIIP/GIIP/ Development Options & Discounted Cash Flow
Production Profiles Cost Estimates Analysis Financing
Calculate MCFS (min Wells (Number & Location) NPV & EMV Sale & Purchase
com/eco field size) based on Facilities (topside & subsea) IRR, PIR, MFE, Payback
current economic & Pipelines Sensitivity Analysis
technological assessment. Product-2-market solutions Graphing
Production Profiles above CAPEX Schedule etc. Economic Cashflow
MCFS (P10, P50 & P90) Economic Limit Test
# Wells (E, A & P) Tariffs Expense (Transport,
Hydrocarbon mix extraction and production)
Product data (shrink, yield Tariff income Peer Reviews
etc.) Other income, etc. are Essential
Peak rates