The course provides a comprehensive overview of the practices of exploration and development petroleum economics and its application in valuing oil and gas assets to aid corporate decisions.
Participants will construct economic models, to include basic fiscal terms, production and cost profiles and project timing. The resulting model will provide insights of how the various inputs impact value and their relative affect through sensitivities – field studies will be used throughout the course.
The course is designed for
- Professionals who need to learn about the industry
- Personnel within the industry
- Technical support staff entering the industry
- Technical staff who want to expand their understanding of the industry
- Students considering the industry as a career
CASH FLOW ANALYSIS
Net Cash Flow
Discussion of the main components and relative importance of components of cash flow for an oil and gas investment (production, price, revenue, operating costs, capital costs, abandonment costs and fiscal costs). Discussion of typical net cash flow projections for petroleum
Economic Life and Reserves
Discussion of the main components and relative importance of components of cash flow for an oil and gas investment (production, price, revenue, operating costs, capital costs, abandonment costs and fiscal costs). Discussion of typical net cash flow projections for petroleum.
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 profit.
Cash Flow and Tax
How tax is incorporated into cash flow projections. The basic rules for calculating tax worldwide. Loss carry forward and the effect of different petroleum tax regimes.
Cash Flow and PSCs
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.
The treatment and mistreatment of sunk costs in cash flow analyses and petroleum property acquisitions.
Incorporating Inflation into Cash Flow Projections
How to inflate the components of cash flows. The conventions and the jargon. Worked examples of the effects of inflation.
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.
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.
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.
Calculation and use of payback and discounted payback indicators. The use of discounted payback in petroleum fiscal regimes. Problems with payback.
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.
EXAMPLE ECONOMIC EVALUATIONS
Incremental economics using the economic indicators discussed earlier. This includes a discussion of the effects of fiscal relief on exploration and field development decisions.
Defining and using probability distributions. Means, standard deviations, levels of confidence. Industry standard reserves definitions and classifications. Deterministic and probabilistic analysis. Using the statistics - P90, P50, P10, mean - the pitfalls. Combining probabilistic variables. Adding reserves. Estimating reserves and costs - the errors people make.
Monte Carlo Simulation
The mechanics of Monte Carlo simulation. Choosing probability distributions. The pitfalls of Monte Carlo simulation and how to avoid them. Deriving oil in place, economics and reserves probabilistically.
The definition, meaning and examples of Expected Value in oil and gas drilling decisions. EV versus probability of success lines. Using EV to compare drilling and farmout decisions. The effect of fiscal relief on exploration decisions. Analysing exploration portfolios.
EXAMPLE PSC ANALYSES
Analysis of the fiscal regime in an example country. How the fiscal components work. The effect of fiscal terms on field development decisions and incremental investments.
WORLDWIDE FISCAL TERMS
The economic effect of fiscal terms across the world - severity and efficiency.
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Esanda Engineering Ltd
Esanda is an independent upstream oil and gas consultancy specialising in industry specific training and field development planning services. Our operations are supported by our UK and Australia offices.
Esanda is a specialist training provider serving the global upstream oil and gas industry. Our training providers are practicing industry specialists who develop our in house courses and work with clients to build bespoke training for their staff.
We pride ourselves on being able to bring hundreds of man years of experience to the training sector and the positive feedback we receive from our satisfied clients.
Our courses evolved over 15 years ago with a focus on Field Development Planning, which included a strong emphasis on costing and economic analysis as well as concept selection for our clients. The range of clients includes those involved in Onshore, Offshore, Subsea, GTL, LNG and unconventional developments. This work and client training has allowed us to build strong expertise in these areas with practical and up to date knowledge of the subject areas.
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