Petroleum Project

Economics and Risk

Analysis

Dr. Batool Alrfooh

 Introduction

Why do companies explore ?

 To generate national wealth

 To create employment

 To maximize profits

 To grow and create value for shareholders /

stakeholders
 What is ‘Petroleum Economics’ ?

Investment Appraisal

 Best use of limited, discretionary funds

 Looking forward, not back

 Principles apply however big or small the project

 The economic evaluation of a exploration project is

undertaken to analyze the profitability of a project or
venture
Role and application of Petroleum Economics

 Establishes a consistent set of methods to evaluate the

attractiveness of investment opportunities
 Advise management on the attractiveness of such
investment opportunities
 Assist in selecting the best option
 Determine how to maximize the value of existing asset
 Evaluations aim to analyze project profitability
under the financial provisions of the petroleum
agreement
Defining Features of the Business

 Major Strategic Importance

 Great Technical Challenges

 High Risk & Uncertainty

 Big Financial Commitments

 Project Economics
• Defining the net cash flow equations

• Building an economic (cash flow and fiscal)

model of the project

• Estimating the economic value and return on

investment

• Identifying and quantifying the economic

risks
Where does the Money come From ?

INCREASING THE VALUE OF CRUDE OIL & GAS

Where does the Money Go ?
VALUE OF PRODUCTION > TOTAL COST
Division of Revenue
Decision through the Life-cycle of a
petroleum Project
Elements of TE Analysis

 Cash Flow analysis

 Economic Indicators

 Risk and Uncertainty

 Fiscal Regimes
 Input for Petroleum Economics
 Hydrocarbon In-place estimates
 Production Profile (EUR)
 Investment & Production Profile (IPP): Development
Concept / Scenario, Facility design, Development Plan
and costing
 General Economic data: Discounting, Inflation,
exchange rate etc.
 PSC Terms: Taxation and other Fiscal parameters
 Economic Life
Economic Life
(determines economically
recoverable reserves)
Cash Flow $

Gross Revenue
Opex

Fiscal Field is
costs uneconomic
here
Ignoring fiscal
costs

*Economic Life
Net Cash Flow

Time
Field is uneconomic here
taking into account fiscal costs
 Economic Production Limit

PRODUCE UNTIL: OPERATING COST > GROSS REVENUE

Determined by :

• Geological & engineering parameters

• Oil & gas prices
• Fiscal terms
• General economic factors

Impacts :
• Project value
• Ultimate recovery
Resources of necessary information for
cash flow of petroleum projects
Cash Flow Analysis
 Cash Flow Analysis

 The foundation of almost all economic analysis

carried out for investment decision making in the oil
and gas industry is forecast of cash flow

 Cash Flow is simply the cash received and the cash

expended over a defined period of time
 Basic Definitions and Derivation of Cash Flow

 Cash Flow is simply the cash received and the cash expended
over a defined period of time
 Net Cash Flow is defined as the summation of total annual cash
inflows and outflows over the life of the particular project or
venture under evaluation
 The derivation of the future net cash flow of an investment is
essential if we are to determine whether that investment is
economically viable or not
 In most investment appraisals, a projection of estimated future
cash flows is made for the life of the project

 NET CASH FLOW = CASH RECEIVED – CASH EXPENDED

 Elements in Cash Flows

 Revenues (positive)
such as money received from asset sales or interest on the
provisions (abandonment, depreciation and others).
Some choose a flat real price forecast, others choose flat rate
money of the day price forecast etc.

 COSTS (negative)
- capital investment (exploration & appraisal, development)
- operating costs (fixed & variable, overheads)
- government share (royalties, taxes, profit share)
- decommissioning expenditures
 Types of Costs

 Fiscal Costs
which include bonuses, royalties and taxes

Field Costs
Classified into four elements:
1. exploration costs,
2. development costs,
3. operating costs
4. abandonment costs.
Structure of the field cost
Project Cash Flow Profile
Project Cash Flow Profile
 Sunk Costs
LEAVE PAST COSTS OUT OF INVESTMENT APPRAISAL

• No DIRECT impact on FUTURE cash flows

• May have an impact on :

- Valuation of a block / acreage
- Future cost recovery

• Can have a psychological effect

 NET CASH FLOW AND PROFIT
 Net cash flow is the estimate or measure of money actually
received and spent during a period. Expenditure may include
both CAPEX and OPEX.

NCF = Cash received – Capital Expenditure – Operating

Expenditure – Royalties, Taxes, Profit Sharing etc.

 Profit is usually an artificial measure used in annual accounts

or in tax calculations. It is not the same as net cash flow.

 Profit calculations are required to determine the financial

health of a business or project once it is underway.

Profit = Cash received – Depreciated Capex – Operating

Expenditure – Royalties, Taxes, Profit Sharing etc.
 NET CASH FLOW AND PROFIT

 Calculating profit involves depreciating capital costs instead of

incorporating them directly.

 Depreciation means spreading of capital costs over a period of

time to reflect the fact that they are used up not in one period,
but over the life of an asset

 The way in which capital costs are depreciated or spread over

time is determined usually by rules laid down in tax regulations

 It is artificial in the sense that it does not correspond to actual

money flows but depends on depreciation schedules and rules
laid down in regulations or by convention. On the other hand,
net cash flow represents actual money flows.
NET CASH FLOW AND PROFIT
 Comparison of Cash Flow & Profit
Net Cash Flow

Profit & Loss

Net Cash Flow: Profit and Tax Calculation
Tax Calculation – Loss carry Forward
 Depreciation

COMMON METHODS

 Straight Line (equal amounts over a given number of years)

 Declining balance (given percentage of undepreciated capex)
 Unit of production (shared on a ‘per barrel’ basis)

 Usually defined in legislation

 Often varies for different capex categories
 Calculations can change for different taxes
Straight Line depreciation
Declining Balance Depreciation
 Units of Production Depreciation
 It assumes that capital assets of these projects are used up in
proportion to the degree to which the resource base is used up
in any year
 In petroleum projects, units of production depreciation would
in any one year would be proportionate to the ratio of
production of petroleum in a year to total estimated oil or gas
reserves extracted over the life of a project
 In algebraic form, the formula for Units of Production
depreciation is as follows:
Di = K * Pi / Reserves
where :
Di = Depreciation in year I and Pi = Production in year I
K = Initial Capital Investment
 Units of Production Depreciation

Limitations:

One problem with units of production depreciation is that it relies on an inherently

uncertain estimate of reserves at the beginning of the depreciation period. If
subsequently reserves estimate change, then adjustments to the annual depreciation
figure must be made
Comparison of Depreciation Methods
Economic Indicators
 Introduction
 Net cash flow can not on its own help us to decide whether the
project should be undertaken

 We need to have some means of deciding whether a particular

cash flow gives us an economic / financial return or not and, if
so, how much

 We need realistic measure of profitability

 Economic Indicators are devices which reduce a net cash flow

projection to single numbers so that we do not need to deal
with a stream of money amounts stretching out from now into
the future
 Time Value of Money

Why should you rather have $ 100 today rather than in 1 year ?

 Inflation will erode its value

 You could save by repaying some borrowings

 You have a great investment opportunity

 You are certain to get it

Present Value Concept
How Discounting Works
Changing Value of Money with Time
INFLATION & DEFLATION
- Changes in general price levels over time

• INFLATION - rising prices

• DEFLATION - Constant purchasing power

REAL MONEY = Unescalated, uniflated, to-day’s money

NOMINAL MONEY = Money-of-the-day, escalated, inflated,
current, out-turn

COMPOUNDING & DISCOUNTING

- Changes in value of our money over time

• COMPOUNDING - future money value

• DISCOUNTING - present money value
Inflation and Types of Money
 Different Perceptions of Discounting

INVESTORS’ REQUIREMENT
- Why should they leave their money in the company

OPPORTUNITY COST
- What return is available in alternative projects

HURDLE RATE
- Corporate standard decision making rules
What Discount Rate / Cost of Capital to Use ?
What Discount Rate / Cost of Capital to Use ?

 Two main technique

• Weighted average cost of capital (WACC)
• Capital Asset pricing Model (CAPM)

(equity*dividend return rate) + (debt* loan interest rate) * (1-tax rate)

WACC =
market value of (debt +equity)
 WACC: Weighted average cost of capital
 Cost of Capital is the weighted average cost of various
sources of finance used by the company, viz., equity, debt
etc.
 Suppose that a firm uses equity costing 16 % and debt
costing 9 % and proportions in which equity and debt used
are 40% and 60% respectively, its weighted average cost of
capital (WACC) will be

 WACC = Proportion of equity x cost of equity + proportion

of debt x cost of debt
= 0.40 x 16% + 0.60 x 9%
= 6.4% + 5.4%
WACC = 11.80%
 Capital Asset Pricing Model (CAPM)
 Capital Asset pricing Model (CAPM)
• Includes performance of the company
• Based on historical performance

The Capital Asset Pricing Model (CAPM) describes the

relationship between systematic risk and expected
return for assets, particularly stocks. CAPM is widely
used throughout finance for pricing risky securities and
generating expected returns for assets given the risk of
those assets and cost of capital
Ra = Rrf + Ba ( Rm - Rrf ) where,
Ra = Expected return on a security
Rrf = Risk-free rate
Ba = Beta of the security
Rm = Expected return from the market
Risk Premium = (Rm – Rrf)
 Capital Asset Pricing Model (CAPM)
An investor is investing in a stock worth Rs.100 per
share today that pays a 3% annual dividend. It has a
beta compared to the market of 1.3. So, assume that
the risk-free return is 3% and the investor expects the
market to rise in value by 8% per year. The expected
return of the stock based on the CAPM formula is

Ra = Rrf + Ba ( Rm - Rrf ),
where Rrf = 3, Ba = 1.3, Rm = 8
Then, Ra = 3 + 1.3 (8-3)
= 9.5 %
What Discount Rate / Cost of Capital to Use ?

 Opportunity Cost of Capital

• If fully self financed

• RoR of alternate investment opportunities

• Then more appropriate than WACC

• Assumes return at least equal to cost of capital

 What Economic Indicators are used ?

NPV - equalizing money in different periods

IRR - equivalent return to come out even

CPI - value added per unit of investment

Pay Back - how soon do I get my money back ?

 NET PRESENT VALUE

 The equivalent value today of a sum of money received or

spent sometime in the future is its present value (‘PV’)

 The present value of net cash flow occurring at some point in

the future is referred to as the net present value (‘NPV’) of that
future cash flow
 NET PRESENT VALUE

 Economic Analysis Involves expressing future values in terms

present values

 The estimated value of future receipts or future expenditures

would be expressed in terms of an equivalent present value

 Process is called Discounting a future value in order to obtain

an equivalent present value

 Sum of the present values of the annual net cash flows is the
NET PRESENT VALUE (NPV) of the project
 Present Value of an Amount

 The Present value of an amount can be obtained by the

formula:
PV = FVn [1/(1+r) n ]
where
PV is Present Value
FVn is the Future Value n years hence
r is the Interest rate or Discount rate
n is number of periods over which the cash flows occur
1/(1+r) n is called the Discounting factor or the present
value Interest factor
Discounting factors using discount rate of 10%

 1/(1+r) 1 = 1/(1+10%) 1 = 0.9091

 1/(1+r) 2 = 1/(1+10%) 2 = 0.8264

 1/(1+r) 10 = 1/(1+10%) 10 = 0.3855

 Net Present Value of Cash Flow Stream

Total NPV = NCF1 / (1 + r)1 + NCF2/ (1 + r)2 + ……………+

NCFn / (1 + r)n

Where, NPV = Net Present value

NCF1 = Net cash flow in year 1
NCF2 = Net cash flow in year 2
………………………………….

NCFn = Net cash flow in year n

r = The discount rate
 Finding Net Present Value
End 0 1 2 3 4 5 6 7 8
Year
Future -200 100 90 80 70 60 50 40 30
Value
Discount 10% 10% 10% 10% 10% 10% 10% 10% 10%
rate
Discount 1.0 0.91 0.83 0.75 0.68 0.62 0.56 0.51 0.47
factor
(no.)
Present
Values -200
($ MM) 90.9
74.4
60.1
47.8
37.3
28.2
Total = 173.2 20.5
14.0
 Meaning of Net Present Value

 Net present value measures how

much more we would have to
put in the bank today (or an alternative
investment) to give the same net cash
flow as the project

 Or, how much more we can gain as

compared to bank or an alternative
investment
Variation of NPV with Discount Rate
 Internal Rate of Return

 The discount rate at which the NPV becomes zero is defined as

the internal rate of return of a net cash flow stream

 This is the discount rate for which all discounted negative cash
flows are equal to all discounted positive cash flows

 It is a trial and error type of calculation in which the NPV of a

series of cash flows is determined for several selected discount
rates until the rate is found that yields a NPV of zero
 Internal Rate of Return

Discount Rate at which NPV = 0

NPV = 0 = NCF1 / (1 + r)1 + NCF2 / (1 + r)2 + NCF3 / (1 + r)3

……………+ NCFn / (1 + r)n

Where,
r = Internal Rate of Return (IRR)
 Internal Rate of Return
 Difficult to solve such an equation

 Normally trial and error method

 Can be resolved graphically

 By iteration using a computer

 Can be Multiple rates of return

for a single cash flow
 Internal Rate of Return

 Consider the cash flows of a Project ABC :

Year 1 2 3 4 5

Cash flow (-100000) 30000 30000 40000 45000

 The IRR is the value of r that satisfies the equation:

30000 30000 40000 45000

100000 = + + +
(1+r)1 (1+r)2 (1+r)3 (1+r)4
 Following Trial & Error process, with r = 15%, right-hand
side (RHS) is equal to 100802 whereas with r = 16% it
becomes 98641. Therefore, the value of IRR is between
15 and 16 which makes RHS equal to 100000.
 Comparing Mutually Exclusive Investments
 Both NPV and IRR have their advantages and limitations

 NPV is direct measure of the discounted cash surplus accrued

by a project, and NPVs are additive

 NPV also requires an estimate of an appropriate discount rate;

the cost of capital

 IRR does not indicate the cash surplus of the project, neither it
is additive. However, it does not take into account the capital
investment required since it expresses return on the investment

 IRR only indicates whether project achieves the desired hurdle

rate
 Comparing Mutually Exclusive Investments
 It is recommended that both NPV and IRR are used to help the
decision making

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Project 1 NCF ($MM) -100 50 40 30 20 10
Project 2 NCF ($MM) -100 1 2 10 20 175
Project 1 NPV @ 10% $ 19 MM
Project 1 IRR = 20.3 %
Project 2 NPV @ 10% $ 29.5
Project 2 IRR = 16.8 %
 Comparing Mutually Exclusive Investments
 Another example

Project A Project B
Capital investment 100 100
Year 1 Income ($) 150 0
Year 2 Income ($) 0 225
NPV @ 10 % ($) 33.0 78.14
IRR (%) 50 50
 Capital Productivity Index (CPI)

 A quick first look investment criteria

 Indicates how much project cash flow covers initial investment

 Also called the benefit-cost ratio, is the ratio of present value

to cost

 Working rule is to take an investment if the CPI’ exceeds 1.0.

The PI measures the present value per dollar
 Capital Productivity Index (CPI)

 The ‘Capital Productivity

Index’ or CPI is also used
as an indicator of the
economic merits of an
investment
Example calculation of CPI and CPI’
 Capital Productivity Index (CPI)
 The Decision Rules associated with Capital Productivity Index
(CPI or CPI’) are :

CPI CPI’ Rule

>0 >1 Accept
=0 =1 Indifferent
<0 <1 Reject
( Discounted) Capital Productivity Index

NPV of Net Cash Flow

(A) CPI = ------------------------------
NPV of Capex
Or

NPV of (Net Cash Flow + Capex)

(B) CPI = ---------------------------------------------
NPV of Capex

Note: CPI’ = CPI + 1

 Limitations

 Do not take into account the time value of money and there do
not in any way distinguish between early and late net cash
flows or capital expenditure streams

 They are ratios and therefore do not in themselves measure the

money value of an investment to the company

 Basically a ranking tool when multiple investment

opportunities are available
 Payback
 Time taken to Break Even
 Pay Back Period

 This is the time taken for the project’s positive net cash flow to
recoup the initial capital outlay

 Useful initial indicator of the merit of a project

 Pay Back Calculation

Year 1 Year 2 Year 3 Year 4

Net Cash Flow (NCF) -50 -150 +100 +175
($MM)
Cumulative Net Cash -50 -200 -100 +75
Flow ($MM)
Pay back = 3.57 yrs.
 Limitations

 Tells nothing about the profitability of the project. Significant

cash flows might occur after payback.

 Do not indicate by how much a project increases the value of a

company. It is not a measure expressed in money terms.

 Payback indicators cannot be meaningfully added, subtracted

or otherwise arithmetically manipulated to assess incremental
economics or to assess risk-weighted returns.
Why use the different Economic Measures ?
COMPARISON OF ECONOMIC INDICATORS

Desirable Criteria NPV IRR Pay Back CPI

Takes Time into account Yes Yes Yes No
Gives Unique value Yes No Yes Yes
Can add or subtract Yes No No No
Absolute money value of Yes No No No
a Project
Depends on Project start Yes No No No
Indicate the size of No No No No
investment
 ONGC PAS Guidelines & Hurdle Rate
Category Assumptions

Crude price Nomination - US$ 65/bbl

NELP/JV/HELP- US$ 66/bbl
Natural Gas Price Domestic Gas Price:
US $ 3.69/MMbtu (Price to be adjusted for calorific value)-
w.e.f. 01.04.2019
DW/UDW/HP-HT:
US $ 9.32/MMbtu (Price to be adjusted for calorific value)-
w.e.f. 01.04.2019
Escalation of Opex 2% per annum
Escalation of Capex 2% per annum
Hurdle 12% (post tax)
Rate/Discount
rate/Target (IRR) for
investment proposals

83
Risk & Uncertainty
 Risk & Uncertainty

 Risk and uncertainty are inherent aspects of investing in

petroleum ventures.

 Every exploration decision involves consideration of both risk

and uncertainty.

 The problem in serial exploration decision making is twofold:

• To be consistent in the way we deal with risk and

uncertainty, and
• To perceive uncertainty accurately and reduce it
where possible
What are the Risks & Uncertainties ?

PROJECT RISKS
• Reserves and reservoir productivity
• Capital & operating costs

COUNTRY RISKS
• Change to fiscal terms
• Political changes

O & G ECONOMIC ENVIRONMENT

• Oil & gas prices
• Economic parameters (interest rate, inflation etc.)
 Techniques for Analyzing Risk

 Most Likely Estimates

• Assumes risk is ‘symmetrical’ or ignores it

 Sensitivity Analysis
• Impact of changes to a single variable

 Expected Monetary Value

• Consolidation of a range of representative outcomes

 Monte Carlo Risk Analysis

• Generate range of outcomes reflecting views of uncertainty

 Scenario Planning
• Investigates uncertainties in the business environment
 Expected Monetary Value (EMV)

 Decision alternative recognizes the possibility of several

outcomes.
 The expected value of an outcome is obtained by multiplying
the probability of occurrence of the outcome and the
conditional value (or worth) that is received if the outcome
occurred, where the values received are expressed as monetary
profits or losses.

EMV = (Pg * NPV of Project) – ((1-Pg) * NPV of Risk Money of

Project)
Where EMV = Expected Monetary value
Pg = Probability of Geological Success
 Geologic Chance Factors
Five Key Geologic Chance Factors
• Hydrocarbon Source rocks
• Reservoir rocks
• Seal rocks
• Entrapment
• Play Dynamics

Probability of geologic success (Pg): It is the Probability of the presence of

hydrocarbon accumulation of at least minimum resource size (or greater) of
any prospect to sustain the flow (Otis et al.,1997).

Pg = Ps * Pr * Psl * Pt * Ptim./mig (PD)

Where, Hydrocarbon source rock components (Ps), Reservoir rock components

(Pr), Trap geometry (closure) components (Pt), Timing of trap formation,
hydrocarbon migration and preservation (Ptim./mig.) and Seal effectiveness
(Psl).
Subjective Expressions of confidence
 EMV’s & Decision Trees
 A decision tree is merely a pictorial representation of a
sequence of events and possible outcomes. A typical decision
tree would include a series of decision node or chance nodes.

Dry Hole (– $ 50000)

0.7
0.2
2 BCF (+ $ 100000)
ill
Dr 0.1

5 BCF (+ $ 250000)
Do
n’t
dri
ll

$0

DECISION CHANCE OUTCOME

 EMV’s & Decision Trees

Heads Win $ 2.0

Uncertainty 50% Outcome -1
EMV = +$ 2. 0 * 0.50 = +$ 1.0
s
Ye 50 %
Cost to play Tails Loose $ 1.0
Do I play ? Outcome -2
EMV = - $ 1.0 * 0.50 = -$0.50
No EMV = $ 0
OUTCOME

DECISION CHANCE OUTCOME

** Expected value of decision to take part = EMV of Outcome 1 + EMV of Outcome 2

= +$ 1.00 - $ 0.50 = + $ 0.50
 The value of Information
DECISION TREE ANALYSIS
 The value of Information
SOLUTION OF DECISION TREE

 The outcome of A & B = +$90 MM * 36.8% - $6 MM * 63.2%

= +$29.4 MM
 The outcome of C = - $ 1 MM
 The outcome of D & E = +$90 MM * 9.7% - $6 MM * 90.3%
= +$3.3 MM
 The outcome of F = - $ 1 MM
 The outcome of G & H = +$91 MM * 20% - $5 MM * 80%
= +$14.2 MM
 The outcome of G & H = +$91 MM * 20% - $5 MM * 80%
= +$14.2 MM (No Seismic & Drill)
 The outcome of I = $ 0 MM
 The outcome of running the seismic & Drill
= +$29.4 MM * 38% + $3.3 MM * 62% = + $13.2 MM

** Since, it is less than not running the seismic, so we should decide to drill the
well without seismic.
 EMV in Farm out decision
POS = 10 %
Well cost = $ 5 MM
NPV = $100 MM
EMV = ($100 MM*10%) – ($5 MM*90%) = $ 5.5 MM
As a 100% PI holder, potential loss is $5 MM, to reduce risk If
we farm out, what PI % (X) should be agreed to share keeping
EMV same($5.5 MM) ?
EMV=($100 MM*(100-X)%*10%) – ($0 MM*90%)
Or, EMV= $10 MM*(100-X)%=$ 5.5 MM
Or, (100-X)% = 5.5/10 = 55%, X = 45%

95
 Sensitivity Analysis
• Investigation and analysis is done to answer the ‘what-if’
questions for each project
 What if the oil price drops to $50/bbl?
 What if the cost to drill and test is $10M, not $5M?
 What if the volume found is less than predicted?

* Sensitivity Analysis

96
 Sensitivity Analysis

• At Oil/Gas price
•At CAPEX
•At OPEX
•On production
•At Exchange rates
•Any other point envisaged, if any

97
 Sensitivity Analysis
Country : INDIA
Basin : Mumbai-Offshore
Block : NW-Mukta, HPB Sector-PML
Prospect : GB-157N-A
SENSITIVITY ON OIL PRICE
Variation -30% -20% -10% 0 10% 20% 30%
Variation in
$/Mcf 37.1 42.4 47.7 53 58.3 63.6 68.9
Price
NPV @ 12% MM$ 82.21 122.21 161.69 201.17 240.64 280.12 319.6
NPV @14% MM$ 57.95 92.64 126.8 160.95 195.1 229.25 263.4
IRR % 21.8 25.96 29.72 33.22 36.52 39.63 42.6
SENSITIVITY ON CAPEX
Variation in
-30% -20% -10% 0 10% 20% 30%
CAPEX
NPV @ 12% MM$ 247.72 232.2 216.69 201.17 185.65 170.13 154.61
NPV @14% MM$ 205.31 190.52 175.74 160.95 146.16 131.37 116.58
IRR % 45.22 40.51 36.57 33.22 30.33 27.8 25.56
SENSITIVITY ON OPEX
Variation in
-30% -20% -10% 0 10% 20% 30%
OPEX
NPV @ 12% MM$ 212.38 208.65 204.91 201.17 197.43 193.69 189.95
NPV @14% MM$ 170.48 167.3 164.12 160.95 157.77 154.59 151.41
IRR % 34.06 33.78 33.5 33.22 32.94 32.65 32.36
* Tornado Diagram

99
* Sensitivity-Spider diagram

100
Spider diagram – Robust Project

*Spider Diagram-
Robust Project
101
Spider diagram – Sensitive Project

*Spider Diagram-
Sensitive Project
102
 MEFS (Minimum Economic Field Size)

 Minimum Economic Field Size is defined as the minimum volume of

recoverable oil /gas necessary to make the project an economic success
 Variables:
• value of oil and gas,
• finding costs,
• productivity,
• recovery by well,
• proximity to and cost of infrastructure,
• development options, cost of applicable technology,
• royalty payments, transportation tariffs,
• regulatory costs and tax structures.

After-tax Costs (G&G, Expl. Drilling + Land + Transportation + Overhead)

MEFS = -------------------------------------------------------------------------------------------------
Minimum Number of discoveries * Present Value (PV) /BOE
 MEFS
 Estimation:
• Analogy based: Using statistical evaluation from the available global
database
• Graphical: From the identified prospect, choose a resource size which is
expected to be close to the MEFS for potential development, considering
nearby or similar development projects, estimate the production profile,
number of producer and injector wells for the selected resource case.
• Estimate the drilling and facilities CAPEX, OPEX including drilling and
development schedule for overall project life cycle.
• Calculate the NPV of the subject case following internal company norms.
• Repeat the above three steps increasing or decreasing the resource sizes.
Ensure that at least one resource size provides a negative NPV of the
project.
• Draw a regression line using positive and negative NPV cases. Make the
preliminary assessment of a resource size which gives an NPV close to
zero. As the NPV versus resources regression is not linear, iterate this
process several times until few positive and negative NPVs (minimum three
values) are obtained to estimate a case having a NPV equal to zero.
 MEFS

Scenario-1: Pipeline to shore Scenario-2: FLNG tolling

(Prospect-A) (Prospect-A)
Reserve Reserve
Case (bcf) NPV Case (bcf) NPV

1 631 -354.3 1 631 -143.96

2 900 -189.56 2 900 -32.99

3 1200 25.38 3 1200 66.42

MEFS
 Reading References
 Decision Analysis For Petroleum Exploration
• By Paul D. Newendorp

 Risk Analysis and Management of Petroleum Exploration

Ventures
• By Peter R. Rose
(AAPG Methods in Exploration Series, No. 12)

 International Exploration Economics, Risk and Contract

Analysis
• By Daniel Johnston
Thank You