1. MODULE 4 UPSTREAM PETROLEUM ECONOMICS 1

2. 2 Tutorial 1 : Technical Data input for Economic Evaluation Field ‘Sparco’, located south east of the country, at 40 m water depth, with Gas Speculative Resource (SR) of 100 Bscf Well test indicate well deliverability of 10 MMscf/d per well for the reservoir around the area, with expected production decline after 75% reserves already produced Gas sales agreement signed for 5 years for 40 MMscf/d. Processed gas to be evacuated to sales point at Port Putra (25 km) Estimated well cost of $5 Million per well Require 1 Central Processing and 1 Wellhead Platforms to fully develop the resources at a cost of $ 90 million. Pipeline cost estimate = $1 MM/km Opex is expected to be 4% of cumulative Capex Estimate the production and cost parameters for the following conceptual development of Field ‘Sparco’

3. 3 Year 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Total No Wells Gas Sales(MMscf/d) Cum. Gas Sales/ Reserves (%) Facilities Cost(US$ MM) Pipeline Cost(US$ MM) Drilling Cost(US$ MM) Total Capex(US$ MM) Total Opex(US$ MM) Unit Development Cost (UDC)= US$ /Kscf Unit Operating Cost (UOC) = US$ /Kscf Unit Technical Cost (UTC)= US$ /Kscf TUTORIAL 1 : Generate Technical Data input for Economic Evaluation Estimate the production and cost parameters for the following conceptual development of Field ‘Sparco’

4. TUTORIAL 2 : Convert Technical Input Data Platform: US$ 80 Million spread over Year 1 and 2 Drilling : DM 120 Million spread over Year 2 and 3 Drilling costs will increase 10% p.a. in Real Term (RT) Facilities: Pesos 1 Billion in Year 1 Pesos 4 Billion in Year 2 Pesos 1 Billion in Year 3 Pipeline : US$ 5 Million in Year 1 US$ 30 Million in Year 2 Fixed Opex: 6% of Cumulative Capex to be paid in Pesos being indexed to local inflation rate Variable Opex : US$ 1.50/bbl Real Term (RT) being indexed to local inflation rate Oil Price: US$ 18/bbl, will increase by 2% p.a. in Real term (RT) Inflation rate : US$ 9% p.a.; DM 6% p.a. and Pesos 25% p.a. Exchange rate : 105 Pesos per 1 US$; 70 Pesos per 1 DM 4 Suppose you have been assigned to conduct an economic analysis for a Country A with relatively high inflation rate. The following costs data have been collected if we were to develop it today. What would be our technical input data be ?

5. Costs Data in RT Pesos Billion (1/1/Year 1)Year 1Year 2Year 3Year 4 Oil Production ForecastBbl/d40,00080,000 PlatformUS$ Mill FacilitiesPesos Bill. PipelineUS$ Mill. DrillingDM Mill. PlatformRT Pesos Bill. FacilitiesRT Pesos Bill. PipelineRT Pesos Bill. DrillingRT Pesos Bill. Total CapexRT Pesos Bill. Fixed Opex @ 6% Cum. CapexRT Pesos Bill. Variable Opex @ US$ 1.50/bblRT Pesos Bill. Pesos Escalation factor25% CapexMOD Pesos Bill. OpexMOD Pesos Bill. 5 TUTORIAL 2 : Convert Technical Input Data

6. TUTORIAL 3 : Calculate Cash Flow Production Data: First Oil beginning of Year 3 Technical Costs: Oil Price forecast: US$ 20/bbl, expected to remain constant thereafter Terms and Conditions: Royalty 25% Tax rate 20%, Tax losses not allowed Capital Allowance – Straight line at 25% p.a., Only start after First Oil production Year 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9 Annual Oil Production515 102.51.00.5 Year 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9 Platform30 Facilities1530 Tangible Drilling1015104 Intangible Drilling2032155 Fixed Opex81415 Variable OpexUS$ 0.40/bbl produced The following offshore oil development project is being proposed. What would be your approach to address the opportunity ? 6

7. 1 2 Capital Allowance Calc.Year 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9 Platform Facilities Tangible Drilling Total Capex CA Year 1 Capex @25% CA Year 2 Capex @25% CA Year 3 Capex @25% CA Year 4 Capex @25% Total CA Tax Calc.Year 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9 Cash In Royalty Opex Income Before Tax Total CA Drilling costs Expensed Taxable Income Tax Paid @20% 7 TUTORIAL 3 : Calculate Cash Flow

8. The following offshore oil development project is being proposed. What would be your approach to address the opportunity ? 3 Net Cash Flow Calc.Year 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9 Cash In Royalty @25% Opex Capex Tax Cash Out Net Cash Flow 8 TUTORIAL 3 : Calculate Cash Flow

9. 9 TUTORIAL 4 : Fiscal Terms Computational Logic Concession Agreement Input Variable Gas Sales Gas Price Capex Opex Royalty Rate Depreciation Rate Tax Rate Computational Logic Revenue – Cash In Royalty Opex Income Before Tax Capital Allowance Taxable Income Tax Paid Income After Tax Capex Cash Out Net Cash Flow After Tax Provide the logic for Contractors’ Net Cash Flow calculations using the provided input variables

10. 10 Production Sharing Agreement Provide the logic for Contractors’ Net Cash Flow calculations using the provided input variables Computational Logic Revenue Royalty Cost Ceiling Cost Incurred Cost Bank Cost Recovered Unrecovered Cost Profit Contr. Profit Contr. Entitlment (Cash In) Opex Income Before Tax Capital Allowance Taxable Income Tax Paid Income After Tax Capex Cash Out Net Cash Flow After Tax TUTORIAL 5 : Fiscal Terms Computational Logic Input Variable Gas Sales Gas Price Capex Opex Royalty Rate Depreciation Rate Tax Rate

11. 11 TUTORIAL 6 : Fiscal Terms Computational Logic Production Sharing Agreement Provide the logic for NOC’s Net Cash Flow calculations using the provided input variables Input Variable Oil Production Oil Price Capex Opex Royalty Rate Cost Ceiling Rate NOC Profit Rate Depreciation Rate Tax Rate Computational Logic Revenue Royalty Cost Ceiling Cost Incurred Cost Bank Cost Recovered Unrecovered Cost Profit NOC Profit NOC Entittlment (Cash In) Income Before Tax Taxable Income Tax Paid Income After Tax Cash Out Net Cash Flow After Tax

12. 12 Calculate Contractors’ Net Cash Flow using the provided input Input Variable Oil Price (US$/bbl)20.0 Royalty Rate10% Cost Ceiling Rate50% Contr. Profit Rate30% Depreciation Rate20% Tax Rate38% Year 1Year 2Year 3 Annual Oil Production2.06.05.0 Capex30.020.0- Opex10.0 Revenue Royalty Cost Ceiling Cost Incurred Cost Bank Cost Recovered Unrecovered Cost Profit Contr. Profit Contr. Entitlment (Cash In) Opex Income Before Tax Capital Allowance Taxable Income Tax Paid Income After Tax Capex Cash Out Net Cash Flow After Tax TUTORIAL 7 : Calculate Net Cash Flow under Production Sharing Production Sharing Agreement

13. 13 TUTORIAL 8 : Calculate Net Cash Flow under Production Sharing Production Sharing Agreement Calculate National Oil Company (NOC)’s Net Cash Flow using the provided input Input Variable Oil Price (US$/bbl)20.0 Royalty Rate10% Cost Ceiling Rate50% NOC Profit Rate70% Depreciation Rate20% Tax Rate38% Year 1Year 2Year 3 Annual Oil Production2.06.05.0 Capex30.020.0- Opex10.0 Revenue Royalty Cost Ceiling Cost Incurred Cost Bank Cost Recovered Unrecovered Cost Profit NOC Profit NOC Entitlment (Cash In) Income Before Tax Taxable Income Tax Paid Income After Tax Cash Out Net Cash Flow After Tax

14. A company makes a retirement offer to its employees as follows :- a) receives RM 60K at the end of the 10 th year or b) receives additional annual salary of RM 5000 for the next 10 years Mr A is thinking of participating in an investment project which offers average annual return of 6%. Would he be better off if he accepts option (b) and put all the additional salary into the investment scheme? 14 TUTORIAL 9 : Calculate Time Value Of Money Average Return6%RM ‘000 YearYear 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9Year 10Total Deposit Year Begin Balance Year End Gain RM ‘000 Total amount deposited in the Investment scheme Total Profit Gain Total Amount collected at the end of 10th Year

15. The forecasted Consumer Price Index is around 3% per year. Your company’s Cost of Capital is at 10%. What is the Present Value of the following Net Cash Flow ? Year 1Year 2Year 3Year 4Year 5Year 6Year 7Total Net Cash Flow-60-921016317711720336 Discount Rate @ 3% Discounted NCF @3% Discount Rate @ 10% Discounted NCF @10% 15 TUTORIAL 10 : Calculate Time Value Of Money

16. 16 TUTORIAL 11 : Calculate Economic Indicators A project requires US$ 260 Million of total Investment, which excludes exploration Sunk Cost of US$ 32 MM. First oil is expected to be in year 4. Below is the forecasted annual Net cash Flow for your assessment. Calculate the economic indicators for the project life at January Year 3. IRR NPV @0% NPV @10% NPV @15% Maximum Cash Sink Paybac k Undisc. PIR Year 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Total Net Cash Flow (32) - (260) 90 80 70 58 86 Cum. Net Cash Flow Discount Factor @ 10% 1.00 0.91 Discounted Net Cash Flow Discount Factor @ 15% 1.00 0.87 Discounted Net Cash Flow

17. Calculate the economic indicators for the previous project for look forward Year 3. Sunk cost of US$ 32 Million in year 1 is now excluded. Year 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Total Net Cash Flow- - (260) 90 80 70 58 118 Cum. Net Cash Flow-- Discount Factor @ 10% 1.00 0.91 Discounted Net Cash Flow - - Discount Factor @ 15% 1.00 0.87 Discounted Net Cash Flow- - IRR NPV @0% NPV @10% NPV @15% Maximum Cash Sink Paybac k Undisc. PIR 17 TUTORIAL 12 : Calculate Economic Indicators