Petroleum Economics, Risk and Fiscal Analysis

Introduction

Given the volatility in oil prices today, the economic evaluation of an upstream oil and gas investment is essential. Business decisions involving asset acquisitions, lease-buy assessments, exploration drilling options, oil and gas field development, equipment purchases, and fiscal negotiations all require detailed economic analysis.

The course will cover cash flow analysis, deriving and understanding economic indicators and detailed probability and fiscal analysis. These are vital components of the evaluation of investments in today’s international upstream oil and gas industry.

This 5-day course is a practical petroleum economics course that will provide participants with a complete understanding of the use of the techniques of economic analysis and risk analysis as currently practiced in the oil and gas industry. Participants will receive a thorough understanding of the context of economic analysis as well as practical instruction and an appreciation of the analytical techniques used. Along the course, participants will be engaged in exercises and examples to reinforce their understanding of the concepts learned

Objectives

• GAIN a thorough understanding of oil & gas economic evaluations
• IDENTIFY the main components and CONSTRUCT cash flow projections for your upstream projects
• DETERMINE key elements and determinants involved in making oil and gas investment decisions
• UNDERSTAND and APPLY economic indicators to assess oil & gas industry projects
• QUANTIFY and MANAGE uncertainty and risk faced in upstream business decisions
• APPLY Monte Carlo Simulation and other statistical methods in risk analysis to exploration and production investments effectively
• UNDERSTAND, EVALUATE and MODEL both fiscal and production sharing contract terms worldwide

Training Methodology

This is an interactive course. There will be open question and answer sessions, regular group exercises and activities, videos, case studies, and presentations on best practice. Participants will have the opportunity to share with the facilitator and other participants on what works well and not so well for them, as well as work on issues from their own organizations.

Who Should Attend?

• Geoscientists
• Reservoir Engineers
• Production Engineers
• Petroleum Engineers
• Planning and Development Analysts/Executives
• Commercial Analysts/Executive/Managers
• Business Planners/Analysts/Executives/Managers
• Production Sharing Executives/Managers
• Project Executives/Manager
• Petroleum Economists
• General Managers
• Finance and Account Executive/Managers

Course Outline

Module 1

1. INTRODUCTION

Aims and scope

Contents
• Cash flow analysis
• Economic indicators
• Economic Evaluation Examples
• Risk analysis
• Fiscal system and PSC analysis
• Worldwide fiscal terms

2. CASH FLOW ANALYSIS

Net Cash Flow
Discussion of the main components and relative importance of components of cash flow for oil and gas investments (production, price, revenue, operating costs, capital costs, abandonment costs and fiscal costs). Oil and gas price forecasts and the treatment of price forecasts in net cash flow analysis.

Economic Life and Reserves
How net cash flow projections are critical in determining economic life and reserves. The effects of oil price, costs, and fiscal terms on reserves estimates.

The distinction between Cash Flow and Profit
How cash flow is distinguished from profit. The role of depreciation. When we use cash flow and when we use to profit.

Cash Flow and Tax
How tax is incorporated into cash flow projections. The basic rules for calculating tax worldwide. The effect of tax on-field development decisions. Loss carries forward and the effect of different petroleum tax regimes.

Cash Flow and Production Sharing Contracts (PSC)

The basic economic distinction between tax regimes and production sharing contract regimes. How to make cash flow projections for production sharing systems worldwide. Cost recovery and profit-sharing arrangements.

Sunk Costs
The treatment and mistreatment of sunk costs in cash flow analyses and petroleum property acquisitions. Discussions of the effects of sunk costs.

Incorporating Inflflation into Cash Flow Projections.
How to inflate the components of cash flows. The conventions and the jargon.

Real and Nominal Cash Flows
The distinction between real and nominal cash flows. Fiscal drag and the problems associated with taking short cuts to derive real cash flows. Common misunderstandings in the use of real cash flows.

Depreciation
Coverage of the main depreciation methods used in fiscal terms worldwide.

Module 2

3. ECONOMIC INDICATORS
Introduction
The need to measure net cash flow projections with single indicators. The indicators used in the oil and gas industry.

The importance of time.

Net Present Value (NPV)
The time value of money. Compounding and discounting. Using a discount factor table and measuring the effect of time and discount rate. Discounting a cash flow projection and calculating NPV. Understanding the meaning, uses, and features of NPV. Valuing petroleum properties using NPV. Preliminary discussion of choosing discount rates

Real and Nominal NPVs
The distinction between deflating and discounting and between real and nominal discount rates and NPVs. Dealing with the pitfalls of using real NPVs.

Internal Rate of Return (IRR)
The definition and application of IRR. Calculating the IRR.

Problems with IRR
Multiple IRRs – when, how often and how they arise. How the NPV and IRR measures can give conflicting results and how to resolve this. The effect of project delays and the use of IRR.

Payback
Calculation and use of payback and discounted payback indicators. The use of discounted payback in petroleum fiscal regimes. Problems with payback.How compound payback is used in some fiscal regimes

Capital Productivity Index (CPI).
Calculation and use of CPI. The use of CPI in oil companies and petroleum fiscal regimes. Capital rationing. Problems with CPI.

4. EXAMPLE ECONOMIC EVALUATIONS

Accelerated production example.

Optimizing field development and determining reserves.

Lease-buy decision example.

Module 3

5. RISK ANALYSIS

Sensitivity Analysis
Analyzing the sensitivity of investment decisions to variations in input parameters. Interpreting sensitivity diagrams. The pitfalls in using sensitivity analyses for oil industry investment decisions.

Probability Analysis
Defining and using probability distributions. Means, standard deviations, levels of confidence. Industry-standard reserves definitions and classifications.

Using Probability in the oil and gas industry
Making estimates under uncertainty in the petroleum industry. Combining uncertain variables and issues with adding reserves, adding costs and analyzing economics.

Monte Carlo Simulation
The mechanics of Monte Carlo simulation. Choosing probability distributions. The pitfalls of Monte Carlo simulation and how to avoid them. Reserves estimation using Monte Carlo simulation. Investment decisions using Monte Carlo simulation.

Exploration decisions
The definition, meaning, and examples economics for oil and gas exploration drilling decisions. Expected value (EV) versus probability of success lines. Using EV to compare drilling and famous decisions. The effects if fiscal terms and common problems with using EV. Choosing probabilities of success. Valuing properties using EV.

6. PRODUCTION SHARING CONTRACTS, FISCAL SYSTEMS, AND TERMS IN THE ASIA PACIFIC REGION

Analysis of example PSCs and fiscal terms in the Asia-Pacific region. Evaluating the severity of fiscal terms. How the fiscal components work. How certain fiscal terms can distort oil and gas project investment decisions. How to avoid potential investment distortion in the design or negotiation of fiscal terms. Examples for Indonesia, Malaysia, Thailand, Vietnam, and Australia.

7. WORLDWIDE FISCAL TERMS

The economic comparison of fiscal terms across the world - severity, and efficiency.

8. SUMMARY AND CONCLUSION

The above is a guide to the topics covered during the course and the approximate timing of the topic. The presenter reserves the right to make modifications to these depending on the delegates’ background and experience and the progress of the course.”