Workshop
Simulated Licence Round
8th - 10th February 2012
Petroleum Economics
Workshop Outline … part 1
Workshop Outline … part 1
• You have been divided into groups of 8-9
• Each group is an exploration company (you’ll need a name)
interested in bidding for blocks in an upcoming licence round
• The exercise will be run in parallel with 9 teams in each set
Set A
Group A1
Group A2
Group A3
Group A4
Group A5
Group A6
Group A7
Group A8
Group A9
Apampa
Bakare
Chukwudi
Fadipe
Fagbowore
Ihe
Obeahon
Decroux
Hennion
Anderson
Busch
Charonnat
Dieudonne
El Hajbi
Faure
Gassabi
Julkipli
Agrawal
Barroso
Viseras
Alshawaf
Alyapina
Haji Jasni
Hou
Imam
Jehangir
Petto
Baldwin
Barkley
Bullimore
Durongwattan
a
Devlin
Dorai
Harpin
Hodgins
Keay
Lyne
Taylor
Russell
Riccio
Baillet
Cannelle
Varvara
Patrick
Burgess
Al Hooti
Caratge
Ceyhan
Eres Guardia
Haji Masri
RobletBambridge
Kim
Akatakpo
Farhat
Hussain
Rasheed
Studer
Tamunobereto
n-ari
Umoren
Watson
Zhang
Kaewprain
Kanafina
Karalis
Sheyh
Husein
Spyrou
Fargo
Segers
Wood
Tolessin
Rajesh
Kumar
Set B
Group B1
Group B2
Group B3
Group B4
Group B5
Group B6
Group B7
Group B8
Group B9
Izzidien
Kaczmarczyk
Karamessinis
Lislaud
McCaughan
McDonald
Mylonaki
Pantin
Rassuli
Jusoh
Liew
Nguyen
Xiao
Spronk
Varadi Mago
Khairullin
Tariq
Phoowarang
Sun
Su
Pointing
Roberts
Tranchina
Twallin
McGreevy
McKean
Minns
Eeva
Dowdeswell
Langan
Lawry
Reynolds
Zheng
De Grouchy
Dinwoodie
Sloan
Wang
Zahari
Kang
Mohd. Asman
Nnachetta
Oboh
Kamaludin
Nwachukwu
Raphael
Northall
Oakley
Okocha
Paiva Almeda
de Franca
Phillips
Polisano
Kokoshina
Li
Ngeri
Voake
Loh
Omofoma
Sandiford
Santacreu
Llovera
Wilson
Valdivaiano
Huertas
Sinclair Smith Thiakalingam
Prise
Geological Information
• You each have access to the same set of base data, which
includes a map of the blocks on offer, prospect outlines,
isopach data on the only prospective interval, and data on six
wells adjacent to the blocks on offer
• Seismic data are first class over the entire area, and you
have all mapped the top and base of the only prospective
reservoir (a Tertiary channel sand) in an identical way.
• You therefore all have identical gross sand isopach
interpretations (contour interval 100 ft) and prospect
outlines:
Investment Appraisal Exercise
9-block Licence Award Area
0
.
Brechin
100
1
Aberdeen
2
Crieff
100
Dundee

Forfar
Edinburgh
200
5
200
Glasgow
Inverurie
Helmsdale
Orange areas are prospect outlines
Black contours are 100 ft isopachs
0
.
.
3
4
6
Geological Cross Section A-A’
Geological Cross Section B-B’
Prospect Details
•
You have each planimetered the prospect maps in the same way, and have
assessed the gross rock volumes of the various prospects as follows:
Prospect
GRV (k acre feet)
Trap Type
Aberdeen
100
4-way dip
Brechin
250
Stratigraphic
Crieff
160
Stratigraphic
Dundee
250
4-way dip
Edinburgh
150
4-way dip
Forfar
175
Upthrown fault block
Glasgow
275
Stratigraphic
Helmsdale
200
Upthrown fault block
Inverurie
250
4-way dip
[Remember that units are tricky ... GRV is measured in acre feet, and reserves are quoted in
barrels, so use the conversion factor of 7758 barrels per acre foot.]
More Geological Information
You all have the following information, and only this information, from the 6 wells drilled
nearby:
Well
N/G
Porosity SHC
Re
FVF
1
0.80
0.32
0.80
0.45
1.15
2
0.60
0.26
0.00
N/A
N/A
3
0.50
0.28
0.85
0.35
1.15
4
0.30
0.25
0.00
N/A
N/A
5
0.65
0.28
0.00
N/A
N/A
6
0.40
0.22
0.60
0.30
1.15
(RB/STB)
Wells 1, 3 and 6 all recovered oil, GOR about 100 scf/Bbl, gas volumes sufficient only for
platform fuel
Upstream Oil Industry ...
volumetric assessment - recap
Recoverable Hydrocarbons
GRV
*
N/G
(Gross Rock Volume)
Ø
*
Shc
*
1/FVF
(Porosity)
RF
(Recovery Factor)
*
*
(Net reservoir to Gross rock ratio)
(hydrocarbon saturation of pore fluids)
(Formation Volume Factor)
Basis: correlation with nearby
wells/data
Assessing Risk - recap
•
Play Chance (%)
Reservoir presence (%) * Reservoir Effectiveness (%)
Seal presence (%) * Seal Effectiveness (%)
Source presence (%) * Source maturity (%) * Source migration (%)
•
Prospect Specific Risk (%)
Trap presence (%) * Trap effectiveness (%)
Reservoir presence (%) * Reservoir Effectiveness (%)
Seal presence (%) * Seal Effectiveness (%)
Source presence (%) * Source maturity (%) * Source migration (%)
Overall Chance of Success = Play Chance * Prospect Specific Risk
Assessing Risk
Assume the following:
• Play is proven
• Prospect Specific Risks are independent
• Remember we are using a dice to decide
when a well is successful, therefore your
chance of success can only be
1/6 (16.67%)
2/6 (33.33%)
3/6 (50%)
4/6 (66.67%)
5/6 (83.33%)
6/6 (100%)
Workshop Output … part 1
•
Assign an input distribution to Ø, N/G, Shc, FVF for each prospect.
•
You are supplied with the GRV and Re distributions to use in the
work file
•
Complete a volumetric assessment of the nine blocks available for
bid.
•
Estimate the chance of success for each prospect
•
Tabulate both unrisked and risked Resources for each prospect
•
Consolidate your risked and unrisked recoverable Resource
estimates to give the total Resource potential of the nine blocks
•
Calculate the chance of making at least 1 discovery if all 9
prospects are drilled
Workshop Outline … part 2
Workshop Outline … part 2
• Continue to work in your groups.
• Use your volumetric and risk assessment of the nine blocks
available for bid.
• You are required to prepare cash bids for those blocks you
wish to acquire, and each team has a budget of $1 billion for
that purpose, $250 million from retained profits from the
business and a $750 million borrowing facility.
• Produce a risked valuation of each prospect and rank them in
order of attractiveness to you.
• Prepare a bid for at least 4 of the blocks
Workshop Outline … part 2
• If your bids are unsuccessful, or you choose not to spend all
of your budget, then any remaining retained profits are
invested safely at 6% pa compound interest, after tax, for
the period during which exploration, appraisal and production
activity takes place … the borrowing facility not needed is
not used.
• The successful bidder for each block will be decided by the
Petroleum Minister based on the highest cash bid. The
outcome of an exploration well on each of the prospects is
determined by the throw of a dice. The values of each of
the companies are determined by the Present Values of the
discoveries, plus the compounded present value of unspent
retained profits, less abortive costs.
Economic Modelling
• Assemble the cash flows by year, considering the
magnitude and timing of all the costs associated with
purchasing, developing and producing the prospect.
• You will be provided with a simple cash flow model
• Calculate NPV’s and EMV for each prospect (3 point)
Project schedule
2012
2013
2014
2015
2016
2017
2018
2019
yr 0
yr 1
yr 2
yr 3
yr 4
yr 5
yr 6
yr 7
x
x
x
Acquire licence
x
2D seismic
x
Drill Expl. well
x
(if successful)
3D seismic
Drill Appr. Wells
Dev CAPEX
Dev Drilling
1st production
x
x
x
x
……
Economic Input
• Costs: all amounts expressed in real US$
• Licence Acquisition - whatever you bid, in year zero
• CAPEX, DRILLEX, OPEX, [ABEX] - Costs for all of
these depend on field production rates. The following
slides allow you to estimate costs for your prospects.
• Forecast production – you will need to turn your
recoverable oil volumes into annual production data (see
following slides)
• Bids must be made in US$
Seismic Costs
Assume the following:
• 2D seismic costs US$1.5 million to acquire
• 3D seismic costs US$6.0 million to acquire
• 3D seismic takes 1 year to acquire and interpret
Drilling Costs (Drillex)
Assume the following:
• all E&A wells cost US$35 million (REAL)
• Exploration well is drilled in 2012
• all successes require appraisal (2014)
• number of appraisal wells is related to level of resources
(1 well for every 30 MMbbls)
• Recovery of oil is around 10 MMbbls per development well
•all Dev wells cost US$30 million (REAL)
Assume the following:
• Subsea completion costs US$35 million
(REAL) per producing well
FPSO Costs (CAPEX)
Production rate (stb/d)
Total FPSO CAPEX (US$ million REAL)
25,000
400
50,000
570
100,000
1,000
150,000
1,425
200,000
1,875
250,000
2,325
Minimum CAPEX = US$400 milllion
Assume CAPEX is spent evenly over 3 years prior to first production
Tip: Plot CAPEX vs. Production rate and use plot to interpolate. Don’t forget the costs are linked
to daily production rate not annual volume of oil
FPSO Costs (CAPEX)
Tip: Use the plot of
CAPEX vs. Production
rate to derive a
relationship between
production rate and
cost. Use this
relationship to
interpolate for the
CAPEX in your cases.
Don’t forget the
costs are linked to
daily production rate
not annual volume of
oil
Operating Costs (Opex)
Annual fixed OPEX:
Production rate (stb/d)
Total FPSO OPEX (US$ million REAL)
25,000
35
50,000
50
100,000
80
150,000
100
200,000
125
250,000
140
Minimum fixed OPEX = US$35 per year
Annual variable OPEX:
Production rate (stb/d)
Total FPSO Variable OPEX (US$/bbl REAL)
25,000
1.25
50,000
1.10
100,000
0.85
150,000
0.70
200,000
0.60
250,000
0.50
Tip: Plot fixed and variable OPEX vs. Production rate and use plots to interpolate. Don’t forget the
costs are linked to daily production rate not annual volume of oil
Production forecasts
• The reservoirs are capable of producing 14% of the total
resources per year at peak, and the facilities and wells
should be costed accordingly.
• Assume peak production is achieved instantaneously
• Production will decline after 5 years on plateau or once 70%
of the field's resources have been produced
• Declining reservoir pressure means that production rates
decline by 20% per year (declining balance basis).
Production profile example
100 MMbbls
Annual
Production
(MMbbls)
14.00
14.00
14.00
14.00
14.00
11.20
8.96
7.17
2.67
Cumulative
Production
(MMbbls)
14.00
28.00
42.00
56.00
70.00
81.20
90.16
97.33
100.00
100.00
100.00
100.00
%age of
Resources
Produced
14%
28%
42%
56%
70%
81%
90%
97%
100%
100%
100%
100%
Average Daily
Production
Rate (stb/d)
38,356
38,356
38,356
38,356
38,356
30,685
24,548
19,638
7,321
Further Economic Input
• Oil price, discount rate, inflation rate - some
analysts currently advise $95/bbl flat real and
10% nominal, respectively. Please use these
assumptions. The model will assume that the
general inflation rate is 2% per annum.
• Tax Rate - Corporation tax is currently levied at
50% of net revenues (i.e. gross revenues minus
allowable expenditure) ... the spreadsheet does
the calculation for you.
Oil forecast examples
Oil price
Quality Differential – 95% of Brent
EMV
Probability
%
Unrisked Risked
Resources Resources
MMbbls MMbbls
Unrisked
NPV10
£MM
Risked
NPV10
£MM
30%
P10
0.00%
0.00
0.0
P50
0.00%
0.00
0.0
P90
0.00%
0.00
0.0
40%
Success
30%
0.00%
100.00%
Dry
Σ=
100.00%
0
0.00
0.0
100.00%
0.00
Risked Mean Resources
0.0
EMV10
Tip on how to get started
•
To do the valuation rigorously would require you to compute 27
net cash flows representing the P90, P50 and P10 cases for
every prospect.
•
To save time plot unrisked NPV10 against unrisked recoverable
resources. Complete as many cases as you can but do enough to
define the shape of the curve.
•
Fit a trend line to the data and extract function
•
Use this to compute the NPV10 for your 27 cases and then the
EMV10 of each prospect
NPV10 vs. Field Size Plot
Minimum Commercial Field Size
Cost of Failure
Probability
%
Unrisked Risked
Resources Resources
MMbbls MMbbls
Unrisked
NPV10
£MM
Risked
NPV10
£MM
30%
P10
0.00%
0.00
0.0
P50
0.00%
0.00
0.0
P90
0.00%
0.00
0.0
40%
Success
30%
0.00%
Cost of failure if
discovered volume is
< minimum
commercial field size
100.00%
Cost of failure
after dry hole
Dry
Σ=
100.00%
0
0.00
0.0
100.00%
0.00
Risked Mean Resources
0.0
EMV10
Cost of Failure (after dry hole)
2011
2012
2013
2014
Total
Seismic
US$ REAL
Expl Drilling
US$ REAL
0.0
0.0
Probability
%
Unrisked Risked
Resources Resources
MMbbls MMbbls
Total
US$ REAL
0.0
0.0
0.0
0.0
0.0
Unrisked
NPV10
£MM
Risked
NPV10
£MM
30%
P10
0.00%
0.00
0.0
P50
0.00%
0.00
0.0
P90
0.00%
0.00
0.0
40%
Success
30%
0.00%
100.00%
Dry
Σ=
100.00%
0
0.00
0.0
100.00%
0.00
Risked Mean Resources
0.0
EMV10
Total
US$ MOD
0.0
0.0
0.0
0.0
0.0
Total
£ MOD
0.0
0.0
0.0
0.0
0.0
Disc. Total
£ MOD
0.0
0.0
0.0
0.0
0.0
After Tax
0.0
Cost of Failure (after appraisal)
Seismic
US$ REAL
2011
2012
2013
2014
Total
Expl Drilling Appr Drilling
US$ REAL
US$ REAL
0.0
0.0
Probability
%
Total
US$ REAL
0.0
0.0
0.0
0.0
0.0
0.0
Unrisked Risked
Resources Resources
MMbbls MMbbls
Unrisked
NPV10
£MM
Risked
NPV10
£MM
30%
P10
0.00%
0.00
0.0
P50
0.00%
0.00
0.0
P90
0.00%
0.00
0.0
40%
Success
30%
0.00%
100.00%
Dry
Σ=
100.00%
0
0.00
0.0
100.00%
0.00
Risked Mean Resources
0.0
EMV10
Total
US$ MOD
0.0
0.0
0.0
0.0
0.0
Total
£ MOD
0.0
0.0
0.0
0.0
0.0
Disc. Total
£ MOD
0.0
0.0
0.0
0.0
0.0
After Tax
0.0
Tax position
• Assume that this will be your first asset and your
company is not yet in a tax paying position
• Tax losses will be carried forward until they can be
used (the model will do this for you)
• If you are unsuccessful there will be no tax relief on
your failure costs
Bid Table
• Bids to be delivered in sealed envelope by lunch time on Friday
•You must bid for at least 4 prospects
• List all 9 prospects in order of preference and indicate which you
are submitting a bid for.
• You should use EMV as the basis of your bids
• If you decide to offer a premium over the EMV remember that the
unrisked success NPV’s should be able to cover the bid
• Label the bid sheet and envelope with your company name
• Each team will only be awarded one prospect
• Do not exceed your overall budget limit of $1000 million