PMRE/BUET & UH IELE WORKSHOP
Investment Project Analysis
Dhaka, Bangladesh. January 9-12, 2005
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
1
Investment Project Analysis
• Applicable to all capital projects regardless
of the dollar value
• Provides effective and consistent evaluation
of investment opportunities
• Determines the most financially attractive
projects
• Critical to financial decision-making
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
2
Investment Project Analysis
• The focus is on capital investment
analysis
• Also used in:
– Asset valuation
– Strategic and Tactical Plan
– Asset sales
– Opportunities for improvements
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3
Investment Project Analysis
• The results of this evaluation process
are dependent upon the validity and
reliability of the assumptions used in
the analysis.
• Therefore, it is critical that the
assumptions be carefully and
realistically formulated.
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4
Other Considerations For
Financial Decision Making
• Strategic implication of project
• Environmental implication
• Enhancement of the company’s
reputation
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5
Investment Project Analysis
Concepts
Time Value of Money
Present value theory.
This concept states that a dollar today is
worth more than a dollar tomorrow since the
dollar can be invested to earn money in the
interim period.
•Future dollars in cash flow schedules are
therefore discounted.
•The higher the discount rate, the less the
future dollar is worth today.
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
6
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
7
Present Value Theory
Spreadsheet Demonstration
Switch to Spreadsheet
Cashflow Analysis – Basics.xls
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8
Investment Project Analysis
Concepts
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
9
Economic Analysis Concepts
All project economic analysis should be performed based on the
following concepts:
Net cash flow to energy inc.
The cash flow from investment proposals must be analyzed on a
comparable basis in order to determine which proposals have the
greatest economic value to Energy Inc. Therefore all investments should
be evaluated on the basis of after-tax U.S. Dollar cash flow to Energy
Inc. A project's cash flow should include all foreign tax effects, such as
income and remittance taxes, and any U.S. Income tax effects.
Weighted average cost of capital (WACC)
This is the rate used to discount future project net cash flow. The cost of
capital is the weighted average after-tax cost of debt, preferred and
common stock in Energy Inc.‘s capital structure. The WACC is
calculated by the finance department and issued by the comptroller.
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
10
Economic Analysis Concepts
Current dollar basis.
All cash flow should be stated in current (nominal) dollars (i.e. actual
amounts which are expected to be expended or received each year).
Current dollar forecasts represent changes due to inflation and any
real price change above or below inflation. The rates used should be
consistent with the most recent forecast provided by corporate.
Foreign currency exchange rates.
Forecasted cash flows based on local currencies should be converted
into U.S. Dollars using current currency exchange rates.
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
11
Economic Analysis Concepts
Full cycle or full life economics.
• Economic value of an asset that was acquired in the
past and had its value enhanced through additional
investments.
• Results do not represent the current economic value to
the firm since the analysis includes prior investment,
revenue and expenses.
• Results include the benefit of hindsight and are useful
to improve decisions made in the future.
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
12
Economic Measures
The following four measures are commonly
used in project analysis. Each one provides
important information on the attractiveness of a
project.
• Net Present Value (NPV)
• Present Worth Payout (PWP)
• Discounted Cash Flow Return on Investment
(DCFROI or IRR)
• Present Worth Index (PWI)
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
13
Economic Measures
Net Present Value (NPV)
The net present value is the economic value expected to be
generated by the project at the time of measurement. It
represents the value being added to the Company by making
the investment.
Decision Rule – NPV>0
Limitations
– A larger investment will normally have a larger present value. A ranking
based simply on net present value would therefore tend to favor large
investments over small investments.
– Does not consider length of time to achieve that value.
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
14
Economic Measures
Present worth index (PWI)
PWI measures the relative attractiveness of projects per
dollar of investment. The ratio of the present value of cash
inflows to the present value of the cash outflows.
Designed to address the limitation of NPV cited above .
Limitations.
– It is not a good indicator of the significance of a project.
– Is dependent on cost of capital used. If cost of capital is over or
underestimated could result in selection of wrong project.
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15
Economic Measures
Present worth payout (PWP)
payout measures the time that the net investment
will be at risk. The longer the payout period, the
more chance for some unfavorable circumstance
to occur.
Limitation:
– Disregards cash flows received after the payout period.
It does not directly measure the value created by the
project.
– Is dependent on cost of capital used.
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16
Economic Measures
Discounted cash flow return on investment
(DCFROI/IRR).
Measures the efficiency of the project in producing
value without reference to any predetermined cost of
capital. The discount rate which equates the project's
discounted net cash inflows with its discounted net
cash outflows.
Decision rule – IRR>Cost of capital.
Limitation:
– Favors projects with a quick payout or short-term in nature.
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
17
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
18
Present Value Theory
Spreadsheet Demonstration
Switch to Spreadsheet
Cashflow Analysis – Basics.xls
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
19
Summary of Economic Measures
Measur
e
NPV
Strength / Purpose
Weakness / Drawback
Measures the economic value expected to be
Does not consider time length to achieve that
generated by the project at the time of investment. It value. Is dependent on cost of capital used.
represents the value being added to the Company
by making the investment.
PWP
Measures the time that the net investment will be at
risk. The longer the payout period, the more chance
for some unfavorable circumstance to occur. Is also
a value indicator. If a project that is expected to last
10 years has a 3 year payout, then 30% of the
project's life is committed to recouping investment
and 70% is devoted to creating value for the
company.
Only measures the project result up to the time
of payback. Disregards any cash flow received
after payback. Is dependent on cost of capital
used. Is not a measure of risk, only of time.
PWI
Measures the efficiency of invested capital. For
every dollar invested, how efficient is it in producing
value. Best measure for comparing and deciding
between mutually exclusive projects.
Is dependent on cost of capital used. If cost of
capital is over or underestimated could result in
selection of wrong project.
DCFROI Measures the efficiency of the project in producing
value without reference to any predetermined cost of
capital. When compared to the cost of capital
DCFROI can be an indication of how effective a
particular project is in adding value.
There are many reasons why an investment with
a lower DCFROI could be preferred to a higher
one. DCFROI assumes that project cash flows
are reinvested at the same rate of return as the
project generates. Favors projects with a quick
payout or short-term in nature. It is a useful
indicator when considered with the other 3 for
comparing projects.
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
20
Economic Measures
Therefore, it is important to use all the
four economic measures (NPV, PWI,
IRR and PWP) for investment project
analysis.
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
21
Investment Project Analysis
Concepts
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
22
Fiscal Model
Contracts
• Concession Contract
• Participation Joint Venture Agreement
• Production Sharing Agreement
• Service Contracts
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23
Fiscal Model
Royalties & taxes
• Royalties & tariffs
• Federal income tax
• State and local taxes
– Severance tax
– Ad Volorem tax
• Foreign tax credit
• Investment tax credit
• Wind fall tax
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24
Fiscal Model
Depreciation, depletion & amortization (DD&A).
Recovery of the cost of a fixed asset by allocating the cost over the
estimated life of the asset.
• Methods.
–
–
–
–
–
Straight-line decline (SLD).
Sum-of-the-year’s digit (SYD).
Declining balance (DB).
Double declining balance (DDB).
Unit of production. (UOP)
Restoration and abandonment, Salvage value.
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
25
Investment Project Analysis Concepts
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
26
Input Elements
Costs
• Capital cost estimate
• Operating cost estimate over the life of the project
Revenue
• Production forecast
• Price forecast
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
27
Input Elements
Capital expenditure
Cash expenditures required to obtain the forecast benefits of a project,
e.g., Acquisition of property, plant, and equipment, development costs,
construction costs,
For example oil & gas development
Geoscientists and engineers define and plan and cost out the optimum
way to exploit the asset.
– Number of wells to be drilled
– Size of processing facilities
– Pipelines facilities to bring the products to point of sale
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
28
Input Elements
Operating expenses
• Fixed operating expenses - expenses directly attributable to the
project's operations but unrelated to the level of activity, e.g.,
Maintenance, manpower, etc.
• Variable operating expenses - expenses directly attributable to the
activity level of the project's operations, e.g., Fuel, power, feedstock
cost, etc.
• Overhead expenses - increases or decreases in expenses in
administrative functions which are indirectly attributable to the project,
e.g., Research and development, accounting, computer
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
29
Input Elements
Production forecast.
For example for an oil and gas prospect a multidisciplinary
asset development team made up of geoscientists and
engineers predict:
• Recoverable reserves.
• Reservoir performance.
• Optimum economic method of development.
• Production profile.
• Time schedule for future investments.
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
30
Input Elements
Price forecast.
In today’s era of price volatility, future price forecast are now as
important if not more important than other engineering analysis in
producing sound evaluation of projects.
To ensure consistency in project economic analysis prices used in the
analysis should be based on prices provided by corporate in its
periodic long term price forecast letter or other specific forecasts
approved by corporate.
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
31
Crude Oil Price Forecast
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32
Major Events and World Oil Prices
1970-2004
45
40
Nominal Dollars per Barrel
35
Iran-Iraq War
Venezuela Unrest
Saudis abandon "swing
producer" role
Operation Desert
Storm
OPEC cutbacks
30
25
20
Arab Oil
15 Embargo
10
5
9/11 attacks
Iraq Invades Kuwait
Iranian Revolution
Asian economic crisis; Iraq oilfor-food
0
1970
1975
1980
1985
1990
1995
Refiner Acquisition Cost of Imported Crude Oil (Saudi Light Official Price for 1970-73)
2000
2004
Source: EIA
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
33
Crude Oil Price Forecast
West Texas Intermediate Crude Oil Price
(Base Case and 95% Confidence Interval*)
60
40
30
20
Projections
10
Monthly
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
Jul-01
Jan-01
Jul-00
Jan-00
Jul-99
0
Jan-99
Dollars per Barrel
50
Short-Term Energy Outlook, Oct. 2004
*The confidence intervals show +/- 2 standard errors
based on the properties of the model. The ranges do not
include the effects of major supply disruptions.
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
34
Natural Gas Price Forecast
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
35
NaturalU.S.Gas
Price
Forecast
Natural Gas Spot Prices
(Base Case and 95% Confidence Interval*)
12.0
8.0
6.0
4.0
2.0
Projections
Monthly
Sep-05
May-05
Jan-05
Sep-04
May-04
Jan-04
Sep-03
May-03
Jan-03
Sep-02
May-02
Jan-02
Sep-01
May-01
Jan-01
Sep-00
May-00
Jan-00
Sep-99
May-99
0.0
Jan-99
Dollars per Thousand Cubic Feet
10.0
Sources: History: Natural Gas Week; Projections:
Short-Term Energy Outlook, Oct. 2004.
*The confidence intervals show +/- 2 standard errors based on
the properties of the model. The ranges do not include the
effects of major supply disruptions.
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
36
Input Elements
• Analysis is based on estimating the
expected timing and amount of a project's
cash flow elements
• Because it is developed from estimates,
contain uncertainties. The uncertainties
should be quantified through the use of
sensitivity analysis.
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
37
Cashflow Model
Production Sharing Agreement
Cost recovery
Profit split
Bonuses
Signature Bonus
Production bonus
Term
–
–
–
–
Exploratory Period
Production Period
Extension
Termination
Most of these
may be
negotiable
Exclusion of Areas (Relinquish Area schedule)
Minimum Work Program
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
38
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
39
Economic Models: Production Sharing
Contract
Spreadsheet Demonstration
Switch to Spreadsheet
Cashflow Analysis.xls
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
40
Sensitivity analysis
• Sensitivity analysis indicates the effect of a change in the
magnitude or timing of individual cash flow elements.
–
–
–
–
–
–
Sales demand
Prices
Investment amount and timing.
Operating costs.
Crude and gas production.
Tax rate or other government take.
• A "High" and "Low" case could be included as sensitivity.
• Probabilistic Risk Economics is also a type of sensitivity
analysis that may be conducted.
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
41
Energy Value Chain Investment
Risks
Exploration &
Production
Transportation
Conversion
1, 2, 3, 4, 5, 6
2, 3, 5, 6
2, 3, 4, 5, 6
Geologic risk = 1
Engineering risk = 2
Market risk = 3
Commodity price risk = 4
Financial risk = 5
Country risk = 6
End Use
3, 4, 5, 6
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
43
A Simple Decision Analysis
Framework
Assumptions:
Reserves
Capital
Expenditure
Oil/Gas Price
Probabilities
High
High
High
Drill
>0
<0
No
Drill
Median
Low
Median
Low
Median
Low
At the “decision node,” if the expected NPV>0 at the
required discount rate, then the choice is to drill. The
ENPV is the sum of the probabilities times the values
for all branches of the tree.
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
44
Investment Project Economics
Case Study
Opuamah Field Post Expenditure Review
Energy Inc. Lardistan
•
This case study illustrates how various aspects of
project economics impact decision making
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
45
Post Expenditure Review
• The Post-Expenditure Review process monitors the overall
effectiveness of capital investment program. After sufficient
operational results are available, the actual economic
performance of a project is compared with the original
estimate, made at the time the appropriation was submitted.
• The objective of a post expenditure review is to determine
the cause of differences between actual and projected
performance and apply the knowledge gained to future
investment evaluations. A greater understanding of the
reasons for success or failure should result in improved
investment evaluations and, consequently, better decisions.
• Energy Inc’s Projects Requiring Review: Project Gross Cost
exceeds $10 million.
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
46
Project Description
Opuamah Field
Nov. 1974 Energy Inc. signed PSC
1976
Opuamah`
Opuamah Gas Field Discovered,
water depth 500’
1980
Four appraisal wells drilled to
define 6 stacked Pleistocene
sandstone reservoir.
1981
Field declared commercial after
10 DSTs tested dry gas.
1992
Obtained appropriation approval
to develop Opuamah Field
Sept. 1993 Renegotiated PSC, extended
contract term.
1995
Drilled 5th appraisal well.
Installed drilling and production
platform and 32 miles 24”
pipeline.
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
47
Project Description
Opuamah Field Development
•
•
•
•
•
Production started Mar. 1996
8 Producing Wells
Wells capacity of 425 mmscfpd
Facilities limit 325 mmscfpd
2nd phase development drilling
of 6 wells in 2002-2003
• Compression required by 2006
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
48
COMPARISON OF
ORIGINAL & CURRENT ECONOMICS
Original approval
1992, Appropriation approval to
develop Opuamah Field
granted.
• Cost to cover
– 7 development wells
– Installation of platform and
pipelines
– Additional seven wells to be
drilled in 1998 and 2007
– Compression facilities
– Abandonment expenses
Actual
• 9 wells were drilled
63.7 68.3
27
23.5
2.6 2.3
NPV ($MM)
DCFROI (%)
PWI
Original Current
The NPV calculated for the current
economics is 7.2% higher than for the
original economics.
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
49
Principal Factors Impacting the
Economics
Original Economics
Changes due to:
Total Sales Volume (GSC)
Inflation
CAPEX
Production Profile (GSC & PSC)
OPEX
Start-Up Delay
Price (GSC)
Contractor Share (PSC)
Current Economics
63.70
21.00
10.00
3.00
2.05
(2.85)
(4.80)
(9.85)
(13.95)
33.0%
15.7%
4.7%
3.2%
-4.5%
-7.5%
-15.5%
-21.9%
68.30
7.2%
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
50
Principal Factors Impacting the Economics
Renegotiated Production Sharing Contract
• The 1974 PSC was being renegotiated by the partners at the
time when the original request
for approval was prepared.
• The amended PSC provided for
a favorable share to the
contractor for the first 115 BSCF
to assist in early recovery of
costs.
• Significant effect on the project
NPV, reducing it by 21% despite
the early-life cost recovery
provision negotiated. Reduction
due to the lower contractor
share during the balance of the
project.
Rate
[mmscfd]
Original Assumed Amended
Cumulative Production Production Production
Production
Sharing
Sharing
Sharing
[bscf] Contract
Contract
Contract
<150
150-300
300-450
450-600
>600
<115
<115
<115
<115
<115
40%
35%
30%
25%
20%
60%
55%
50%
45%
40%
85%
85%
85%
85%
85%
<150
150-300
300-450
450-600
>600
>115
>115
>115
>115
>115
40%
35%
30%
25%
20%
60%
55%
50%
45%
40%
50%
45%
40%
35%
30%
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
51
CONTRACT SUMMARY
Energy Inc. (50%)
PSC till 2021 + extension
Production Split changed in Jul. 1998
Production Splits Operator
First 115 BCF
85%
0 - 150 mmscfpd
50%
151 - 300 mmscfpd
45%
301 - 450 mmscfpd
40%
Govt.
15%
50%
55%
60%
Govt. share settles all taxes and royalties.
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
52
Principal Factors Impacting the Economics
Gas Sales Contract
Two major factors with opposite
effects on the economics.
• Contract volumes start at
87 MMCFD in 1996,
increasing to 275 MMCFD
in 2003 and returning to
250 MMCFD from 2009
onward.
• Fixed Price of $0.91 USD
per MMBTU (escalated 4%
per year from 1993). 1998
price is $1.1194/MMBTU.
Item
1992 Gas Price [US$/mscf]
Annual Escalator [% pa]
Initial Rate
Maximum Rate
Max. Rate Year
Total Volume
[mmscfd]
[mmscfd]
[bscf]
Estimated
Gas Sales
Contract
0.9590
4
150
200
8
1,295
Actual Gas
Sales
Better
Contract (Worse)
0.9053 (0.0537)
4
87
275
8
1,720
(63)
75
425
Current Opuamah Field Gas Sales
Agreement
• Contract w/ National Gas Company
(NGC) for 20 years (1996 to 2015)
• Gas is sold on a take or pay basis
• Gas in excess of minimum daily
requirement sold at 20% discount
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
53
Principal Factors Impacting the Economics
120
2.5
100
2
80
1.5
60
1
40
Price, $/mscf
Two major factors with opposite
effects on the economics.
• The effect of the lower price
reduced the NPV by 15.5%.
• The higher sales volumes
resulted in an increase in
NPV of 33% even though
the sales volumes were
lower than projected for the
earlier years of the project.
Contractor Production, MMscfd
Gas Sales Contract
0.5
20
0
0
1992
1996
Current
2000
Original
2004
Price Original
2008
2012
Price - Current
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
54
2001 Production Performance
260
240
220
200
NGC in Pay position for 2000.
180
160
140
120
100
Higher demand from NGC in 2001.
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Plan
Actual
Contract
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
55
Production Profile
300
250
MMCFPD
200
150
100
50
0
2001
2003
2005
2007
Contract
2009
2011
2013
2015
Forecast
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
56
Energy Inc. Booked Reserves
BCF
MMBOE
Proved
330
55
Probable
140
23
Possible
480
80
Total
950
158
@ Dec 31, 2003
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
57
Principal Factors Impacting the Economics
Capital Expenditure
The original estimate - the first
seven development wells, of
which one was expected to be
dry.
Drilled eight development wells,
all of which were brought on
production, and one appraisal
well.
Actual facilities costs were only
4% higher than the estimate in
the original economics.
Capex Item
No. Wells
Platform
Pipeline
G&G
Appraisal Well
Development Wells
Original
Current
Economics Economics
mmUS$,
mmUS$, Percent
100%
100% Change
7
40.104
33.950
2.500
40.460
9
41.221
35.901
12.902
42.888
29%
3%
6%
-100%
100%
6%
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
58
Principal Factors Impacting the Economics
Capital Expenditure
Current view: Reduced
future costs, resulting in
an overall improvement in
NPV by 4.7%.
– No additional drilling in
1998
– 2nd phase drilling 2001
– Existing wells performing
better than expected.
70
60
50
40
MMUSD
30
20
10
0
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Current Original
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59
Operating Matrics
CAPEX
NPV @AFTER
1/1/01 ($MM)
- $160mm
CASH FLOW
CAPEX
15
10
35
30
25
20
5
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
May 2001 STV
15
10
5
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
CASH OPERATING EXPENSE
NET EARNINGS
2
30
1.5
25
20
1
15
10
0.5
5
0
2001
2002
2003
2004
2005
2006
2007
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
60
2001 Performance
Production
250
CAPEX
2
200
150
100
50
0
0
Cashflow
25
20
15
10
5
0
Net Income
6
4
2
0
Plan
Actual 8+4
Plan
Actual 8+4
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
61
Principal Factors Impacting the Economics
Operating Expenses
•
•
•
The original economics only
included direct operating costs
which have actually been lower
on average during the first three
years of the project.
Current projections track the
original estimates quite closely
in the middle and later years of
the project, while R&A costs
are now projected to be lower.
Operating expenses has
resulted in a reduction of the
NPV by 4.5%.
Opex Item
(Avg, 1st 3 yrs)
Direct OPEX
Overheads
Indir. Overheads
Others
Insurance etc.
Total
Original
Current
Economics Economic
mmUS$, s mmUS$, Percent
50% WI
50% WI Change
1.600
0
0
0
0
1.600
1.408
0.969
0.676
0.110
0.329
3.493
-12%
100%
100%
100%
100%
118%
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
62
Principal Factors Impacting the Economics
Inflation & Delay
Inflation.
Start-up Delay
• Original economics used the • First gas was achieved 11
months later than originally
1992 corporate estimates of
projected thereby delaying
future domestic U.S. Inflation
the project cash flow and
rates which averaged nearly
reducing the NPV by 7.5%.
4% over the life of the
project.
• Current corporate estimates
are in the range of 1.7% to
3%, and this has raised the
NPV by 16%.
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
63
Principal Factors Impacting the Economics
120
100
80
68.3
63.7
om
ic s
Ec
on
PS
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rr
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t
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ar
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ice
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nt
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cto
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ela
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/P
S
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at
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uc
tio
OP
E
C)
X
CA
PE
tio
In
fla
GS
C
)
n
Pr
od
To
ta
l
Sa
les
Or
ig
Vo
in
a
lE
co
lu
m
e(
no
m
ics
60
40
20
0
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
64
Principal Factors Impacting the Economics
IMPACT OF VARIABLES ON ORIGINAL NPV
% Change
Total Sales Volume (GSC)
Contractor Share (PSC)
Inflation
Price (GSC)
Start-Up Delay
CAPEX
Production Profile (GSC & PSC)
OPEX
-30% -20%
-10%
0%
10%
20%
30%
40%
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
65
Conclusions
The project economics were most
significantly impacted by factors that control
the revenue streams – price, sales volume
and production splits and also by the
inflation rate– rather than operational issues
such as CAPEX, OPEX or Start-Up Delays.
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
66
Conclusions
The current economics shows that the
Opuamah Gas Field Development Project
has maintained its position as an attractive
investment for Energy Inc. despite the
negative impact on revenues.
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
67