Input economic: analysis setup

You are now ready to evaluate the economic potential of the Alpha prospect. Select the full cycle analysis using the window command and browse to the setup page in the gFullCycle notebook.

Edit the default values for the start year of the project. Set the NPV year equal to the project start year that we assume is 1999.

Edit the discount rate that is used to calculate the NPV of future cash flows. Let us assume that you use a 10% discount rate.

You can ignore the required internal rate of return parameter in this first pass analysis. And you can start by using the deterministic estimation engine with the mean resource estimates from your technical evaluation of Alpha.

Input economic: ED&P activity parameters

The ED&P (exploration, development and production) parameters define the duration of the different phases of the exploration project from seismic acquisition through exploration and appraisal to field development and production. The ED&P parameter also define the activity levels in the different phases. In particular, the parameters are used to generate a hydrocarbon production profile.

For the Alpha oil case, you have the following estimates for the relevant parameters that need to be edited:

Effective production well drilling rate is 8 wells pr. year, 0% of the production wells are drilled prior to start of production and the initial effective production rate of a single well is 300 bbl/day. You anticipate that the initial seismic campaign will take 6 months, the single exploration well will take 6 months, while the single appraisal well will take another 6 months and field development is planned to take 2 years. The plateau production rate is estimated to be 13% of recoverable reserves. Production will start declining when 50% of recoverable reserves remain and the decline rate is 18% pr. year.

The effective production well drilling rate, the proportion of wells drilled prior to start of production and the effective initial oil production rate are parameters defined in the reserve independent ED&P parameter page, while the other parameters are set in the reserve dependent ED&P table page.

You also need to indicate that associated gas is re-injected in the reserve independent parameter page.

Again, you can enter each parameter estimate as a constant – implying that there is no uncertainty in the estimate. Or you can signal uncertainty by entering minimum and maximum values that imply a certain range in the estimate.

Results economic: hydrocarbon production profile

Do an initial estimation -- by clicking the CALC button on the toolbar or by pressing F9 -- to check that the hydrocarbon production profile is OK. Browse to the HC Flow Diagram page to see a graphical representation of the production profile. The HC Flow table page provides the same information in table format. In addition, the HC Flow table page shows the production well drilling profile. You note that the plateau rate of 2.18 million bbls/year (6000 bbls/day) requires 34 wells.

Input economic: cost parameters

Now that you have an acceptable activity profile, you need to edit the unit activity cost parameters.

The costs of seismic, exploration wells, appraisal wells and production wells are defined on the plateau production level independent cost parameter page, while the field development costs other than drilling costs and operating costs are defined on the plateau level dependent cost table page.

The following cost estimates apply for the Alpha case:

Cost of seismic is USD 250,000.-, cost per exploration well is 1.6 million USD, cost per appraisal well is 1.3 million USD and cost pr. oil producer is 1.3 million USD. Development costs other for the producers is 19.0 million USD, while operating costs are 3.7 USD/bbl.

Enter development costs as a fixed item in the plateau production level dependent cost table, while operating costs have only a component that varies with the oil production level. The fixed operating cost is therefore set to 0.

Input economic: petroleum price & cost inflation scenario

The economic scenario page is used to define the future price level of hydrocarbon products. It is also used to define assumptions concerning cost inflation. Economic scenario parameter estimates are entered directly in the notebook page.

For the Alpha prospect, let us assume that your current estimate is an oil price at USD 14 pr, bbl until 2001 and thereafter a 1% yearly price increase.

You select oil price in the scenario item list, and edit in 14 in the base price column and 0% in the inflation rate column. You then add another element by clicking Add, set the date at 2001, edit in 0 in the step column and 1% in the inflation rate column.

You select the cost inflation item and edit in a 1% yearly cost inflation rate.

Input economic: fiscal regime

Fiscal regimes worldwide typically appropriate a significant proportion of the net value created in petroleum exploration projects. Accurate modeling of fiscal conditions is therefore important.

GeoX provides flexible functions for modeling all possible fiscal regime components. You can model not only income taxes, but also revenue taxes, production taxes, project fees and production sharing contracts (PSC). For the Alpha case, however, we only consider a corporate income tax (30%) and royalty (5%). For income taxes, OPEX is expensed and CAPEX is expensed according to a 5-year, linear depreciation schedule. The royalty is expensed in the corporate income tax.

You first define the royalty, as it can be expensed for the corporate income tax.

Select the fiscal regime page, remove any default tax items and add in a revenue tax that you label "Royalty". Edit the tax rate to 5%.

Now add in an income tax that is labeled "Corporate income tax". The tax has four sub-pages. You need only consider the tax and depreciation sub-pages.

Select the tax subpage, make sure that gross revenue is the tax basis, set the trigger to "none" and edit in the 30% tax rate in the tax rule table. Also note that the project is ring fenced and that there is a 10-year carry-forward.

Now select the depreciation subpage, select CAPEX in the expenses and tax list, move it to the deductible items list and then select the linear depreciation type in the depreciation rule table (by clicking the item in the table). Edit in the 5-year depreciation rate in the years column. Similarly, select OPEX in the expenses and tax list and move it to the deductible items list. You do not need to edit the OPEX depreciation rule as expensed is the default setting. And finally select the Royalty tax and move it to the deductible items list.

Results economic: cash flow

Do a new estimation -- by clicking the CALC button on the toolbar or by pressing F9 -- to check that the cash flow profiles are OK.

Browse the main cash flow results by accessing the project cashflows page. The left-most column gives the sum of the different cost and revenue elements, while you can scroll the whole project life cycle using the scroll bars on the notebook page. The timing of the cost items should mirror your ED&P activity modeling and the cost levels should mirror both activity levels and activity costs.

Results economic: summary

The summary table presents the estimated performance of the project in terms of NPV (net present value) and IRR (internal rate of return) for the mean expected resource estimate produced by the technical evaluation of Alpha.

The EMV (expected monetary value) is the estimated monetary value given an outcome of the costs associated with drilling a dry well times the dry hole risk and the estimated NPV times (1 – the dry hole risk).

The after-tax NPV for the mean resource estimate of 16.8 million barrels is 16.5 million USD and the after-tax EMV is 5.7 million USD.

Results economic: spider diagram

The spider diagram indicates how sensitive the calculated NPV and IRR estimates are to your assumed input estimates for oil prices, total CAPEX (capital expenditures) and total OPEX (operating expenditures).

The sensitivity analysis on the initial review suggests a relatively marginal project, as after tax returns are just zero at 30% less attractive assumptions concerning oil prices.

Results economic: summary table and diagram

To get an integrated review of the Alpha prospect uncertainties, do a Monte Carlo sampling of the full distribution of alternative resource outcomes. Select the stochastic estimation on the Setup page. Also set the required IRR (the internal rate of return required for a discovery to be developed) to 18%.

Press F9 or click the CALCULATE button to start the Monte Carlo estimation.

The system displays a panel that shows how the simulation is progressing. Once completed, browse the Summary table and the Summary diagram pages to review the full cycle, integrated uncertainty evaluation of the Alpha prospect. The results will in part depend on what uncertainties you have assigned to the different full cycle input parameter estimates.