UNIVERSITI TEKNOLOGI PETRONAS FINAL EXAMINATION JANUARY 2015 SEMESTER COURSE : PCB3023 PETROLEUM ECONOMICS DATE : 27% APRIL 2015 (MONDAY) TIME : 2:30 PM - 5:30 PM (3 HOURS) INSTRUCTIONS TO CANDIDATES 1. Answer ALL questions in the Answer Booklet. 2. Begin EACH answer on a new page. 3. Indicate clearly answers that are cancelled, if any. 4. Where applicable, show clearly steps taken in arriving at the solutions and indicate ALL assumptions, if any. 5. Do not open this Question Booklet unti! instructed. Note : i, There are SEVEN (7) pages in this Question Booklet including the cover page. ii, ONE (1) graph paper is provided. Universiti Teknologi EEPCB3023 Explain the following profitability measures: i. Payback period [2 marks] ji. Net present value (NPV) [2 marks] iii, Internal rate of return (IRR) [2 marks] Describe TWO (2) most important indications provided by discounted payback method in an investment analysis. [4 marks]PCB3023 A small independent oil company has $1,500,000 to invest in 2015. The company has three drilling prospects, all of which are considered of equal risk but their initial drilling and completion costs and the patterns of their forecast benefits are different as shown in TABLE Q2. The minimum attractive rate of return (MARR) of the company is 10% per annum. TABLE Q2 Prospect Year 0 | Year 1 | Year2 | Year3 | Year 4 | Year 5 | Year6 ($'000) | ($'000) | ($000) | ($000) | ($000) | ($000) | ($’000) A ~450 150 150 | 150 150 150 B 850. 300. 200. 450. 400. 4. Cc 900 | 400 | 350 | 350 300 | 300 | 100 a. Assess the net present value (NPV) of each prospect. [12 marks] b. Propose which one or more of the available prospects should be drilled to maximize the investment worth, given the company has $1,500,000 to invest. Justify your answer. [3 marks]PCB3023 ‘An oil company is planning to install an offshore production facility. The estimated investment, annual expenses and revenues are shown in TABLE Q3. The company uses a minimum rate of return (MARR) of 10% per year in evaluating investment proposal. TABLE Q3 Year 0 1 2 3 4 5. Investment ($ million) | -80 | -20 Revenue (§ million) 40 | 40 | 40 | 40 | 40 Expenses ($million) 5 5 5 5 5 a. Perform the following economic evaluations for the above project: i. Discounted payback period [7 marks] ii. Internal rate of return (IRR) [8 marks] b. For the investment shown in TABLE Q3, determine the minimum annual net revenue (i.e. revenue ~ expenses) for the project to breakeven. [5 marks]PCB3023 State the difference between uncertainty and risk. [4 marks] A company is evaluating three drilling prospects, A, B and C with details presented in TABLE Q4. The expected present value for the capital investment, E(PV Capital Investment) in prospects A, B and C are $104,000, $198,750 and $41,250 respectively. TABLE Q4 Prospect A Outcome State Probability NPV Dry hole 0.40 ~$80,000 700 MMScf 0.25 $80,000 200MMSof | 0.20 “| $480,000 300 MMScf 0.10 $270,000 400 MIMScfF 0.05 $360,000 Prospect B Outcome State Probability NPV Dry hole 0.35 | -$150,000 | 100 MMScf 0.25 ~$85,000 250 MMScf 0.20 $325,000 400 MMScf 0.48 $520,000 | 550 MMScf 0.05 $715,000 Prospect C Outcome State Probability NPV Dry hole 0.25 -$30,000 | 100 MMScf 0.30 "$25,000 250 MMScf 0.25 $45,000 ‘400 MMScf 01 ~ $62,000 550 MMScf 0.05 $80,000PCB3023 i. Based on the expected value analysis, select the most economically viable option. [16 marks] li, If the company has limited funds of $150,000, which of these prospects would be the preferred choices? Justify, [8 marks] A company is planning to drill 10 wells and the dry hole cost (dhe) for each well is RM1,000,000. The chance of success for drilling (CFs) in the area is 60% and the chance of success for completion is (CF) is 80%. Itis estimated that the completion cost is RM400,000, Calculate: The minimum cost that must be recovered by-each producing well [4 marks} ii The completion risk. [3 marks]PCB3023 Concessionary and Contractual Systems are two types of Fiscal Arrangements, commonly practiced world-wide. What makes them different? [4 marks] Draw a split of barrel diagram and calculate the Government's Net Take, in percentage, under Production Sharing Contract for data shown in TABLE Q5b. [8 marks] TABLE Q5b Gross Revenue (GR) $100 Royalty 10% Total Costs $40 Cost Recovery Ceiling 50% of GR Profit Split (Government: Contractor) 70:30 Tax 40% Under a Production Sharing Contract, the profit splits are shared according the production tranche shown in TABLE Q6c. Calculate the Contractor's effective profit share if the total oil production (Qo) is 35 Kbbi/d. [8 marks] TABLE Q5c Government Contractor 0 < Qos 10 Kbbi/d 50% 50% 10 < Qo 520 Kbbild 60% 40% [o> 20 Kbbi/d L 70% 30% - END OF PAPER -