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PPM Expert Visit - Indonesia, December 6-9, 2004 1
Petroleum economic modelling in general
Dr. Alfred KjemperudThe Bridge Group AS
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 2
Why economic modeling
• Economic models are mainly used for the following four reasons:
– Investment decisions– Budgeting– Annual reports– Risk analysis to understand the risk
elements within the business and within individual projects (sensitivities).
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 3
• Petroleum investments are– capital intensive – irreversible – high risk/uncertainty
• Investment decisions today are only unfolded in the uncertain future for both company and government
Investment Decisions
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 4
Modeling = Predicting
• Petroleum project modelling is based on – knowledge of fundamental elements in
technology and economics– empiric data– and a bit of artistry
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 5
Warning• All modeling is imperfect.
– It is always a simplification of reality– Depends on quality of input
• The challenge is to assess the weaknesses and discover flaws
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 6
Resource RentAllocation of revenues from Production
After Johnston (1995)
•Bonuses•Royalties•Prod. Sharing•Taxes•Gov. Participation
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 7
Costs
Income
Time
Government
Activities and cash flow
Pre-license Exploration Development Production AbandonmentProduction
Rehab.
Con
trac
t aw
ard
PDO
Lead Time
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 8
Input to cash flow models
• Production curve• Oil/gas price• Capex• Opex• Fiscal regime• Discount rate
Gross revenue
Net revenue
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 9
Production curve
Time
Volume
Build-up
Plateau
Decline
Cutoff
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 10
Factors determining production
• No of wells• Plateau factor (%)• Production rate per well• Plateau production rate• Remaining oil/gas at start decline• Decline rate (%)• Cut off rate
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 11
Oil ProductionOil Production
0.0
50.0
100.0
150.0
200.0
250.0
300.0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31
Year
Thou
sand
bbl
/yea
r
Oil [Thousand bbl/d]Assoc. Gas [Thousand o.e./d]
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 12
Gas ProductionGas Production
0.0
500.0
1000.0
1500.0
2000.0
2500.0
3000.0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31
Year
Gas
(Mill
ion
scf/d
ay)
Con
dens
ate
(Tho
usan
d bb
l/d)
Non Assoc. Gas [Million scf/d]Condensate [Thousand bbl/d
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 13
Statfjord Oil - NorwayOil Production - Statfjord, Norway560 million Sm3 (3520 Million bbl)
23 %
66 %
0
5
10
15
20
25
30
35
40
200220012000199919981997199619951994199319921991199019891988198719861985198419831982198119801979
Years
Mill
ion
Sm3
0 %
10 %
20 %
30 %
40 %
50 %
60 %
70 %
80 %
90 %
100 %
Oil Production
P/R percentage
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 14
Ula oil - NorwayOil Production - Ula, Norway
80 million Sm3 (503 Million bbl)
53.7 %
35.1 %
0
1
2
3
4
5
6
7
8
20022001200019991998199719961995199419931992199119901989198819871986
Years
Mill
ion
Sm3
0.0 %
10.0 %
20.0 %
30.0 %
40.0 %
50.0 %
60.0 %
70.0 %
80.0 %
90.0 %
Oil Production
P/R percentage
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 15
Oseberg Oil - NorwayOil Production - Oseberg Field, Norway
350 million Sm3 (2200 million bbl)
39.2 %
70.5 %
0
5
10
15
20
25
30
35
2001200019991998199719961995199419931992199119901989198819871986
Years
Mill
ion
Sm3
0.0 %
10.0 %
20.0 %
30.0 %
40.0 %
50.0 %
60.0 %
70.0 %
80.0 %
90.0 %
100.0 %
Oil Production
P/R percentage
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 16
Frigg Gas - NorwayGas Production - Frigg Field, Norway
116 billion Sm3 (4.1 TCF)
63.9 %
29.8 %
0
2
4
6
8
10
12
20022001200019991998199719961995199419931992199119901989198819871986198519841983198219811980197919781977
Years
Mill
ion
Sm3
0
0.2
0.4
0.6
0.8
1
1.2
Gasl Production
P/R percentage
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 17
Rules of thumb - 1TECHNICAL ASPECTS Rule of Thumb• Peak production/total reserves 10-12%• Decline rate 10-12%
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 18
Lead Time
02468
101214161820
1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990
22Lille Frigg
Statfjord Øst
Sleipner Vest
Statfjord Nord Hod
Øst Frigg Heimdal
CodTor Eldfisk
Edda Frigg
Ekofisk
Statfjord MurchisonValhall
Ula TommelitenGammaGullfaks
Oseberg
Snorre
Troll II
Gyda Veslefrikk
Sleipner Øst Gugne
Troll I
Loke HeidrunDraugen Oseberg Vest
Yme Frøy Tordis
Embla Gyda Sør
Gullfaks Vest
Albuskjell
Brage
Vest Ekofisk
Petr. res 9612067
Year of discoveryYea
rsfr
om d
isco
very
to p
rodu
ctio
n
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 19
Exercise - Production
• Construct a production curve for an oil field with 300 million barrels recoverable reserves which will be produced over 20 years. Lead time is 5 years and cut off rate is 10,000 bopd (Use Excel)
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 20
Input to cash flow models
• Production curve• Oil/gas price• Capex• Opex• Fiscal regime• Discount rate
Gross revenue
Net revenue
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 21
Oil prices through time
?
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 22
Input to cash flow models
• Production curve• Oil/gas price• Capex• Opex• Fiscal regime• Discount rate
Gross revenue
Net revenue
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 23
Expenditures = Cost• Capital expenditure
– Wells– Constructions - Facilities– Pipelines
• Operating expenditures– The cost of running the operations
• Fixed Opex• Variable Opex
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 24
Capex and OpexCapex and Opex
0
50
100
150
200
250
300
350
400
450
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
Years
Mill
ion
USD
0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
TOTAL CAPEX [Million USD, inflated]Varible OpexTOTAL OPEX [Million USD, inflated]
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 25
Well cost - Asia
bbl Sm3Expl.
Well cost Test
Appraisal no. of wells Well cost
Duration (years)
Averages, Capex
(USD/bbl)Capex
(USD/Sm3)First
oilYearsField life (years)
Averages, Opex
(USD/bbl)Opex
(USD/Sm3)10 1.6 6.9 1.14 1 6.7 1.8 5.16 32.46 3.8 6.4 6.72 42.325 4.0 7.43 1.31 1.43 7.29 1.83 4.34 27.27 4.17 6.86 5.30 33.3450 7.9 7.43 1.31 2.14 7.29 2.17 3.68 23.13 5.17 9.00 4.93 30.99
125 19.9 7.43 1.31 2.29 7.29 2.83 2.93 18.43 6.33 13.00 4.41 27.76250 39.7 7.43 1.31 3.14 7.29 3.67 2.51 15.79 7.67 16.86 3.89 24.47500 79.5 7.43 1.31 3.86 7.29 4.17 2.09 13.17 8.33 19.57 3.47 21.84
160.00 25.44 7.34 1.29 2.31 7.19 2.74 3.45 21.71 5.91 11.95 4.79 30.12
AveragesField size Exploration Appraisal Development/operation
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 26
Opex (usd/bbl)(Norwegian fields 1998)
0.0
5.0
10.0
15.0
20.0
25.0
30.0
0 10 20 30 40 50 60 70 80
Fields
USD
/BB
L
Series1
Average 4.4
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 27
Facility Cost Estimates
Unit cost ($MM)Exploration Well 3-4Appraisal Well 2-4Development 1-1.5CPP 300-500WP (4 legs) + Sealines 13 - 18LQ 40-60 (100 - 200 POB)FSO 1 MMbbl 100Booster Compressor 0.4-0.5
Pipeline 16 " 0.4 MM$ / kmPipeline 24 " 0.6 MM$ / km
Ref. Anon Punnahitanon, PPM
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 28
Yearly opex as % of total capex(Norwegian fields 1998)
Yearly opex as % of total capex
0.00 %
1.00 %
2.00 %
3.00 %
4.00 %
5.00 %
6.00 %
7.00 %
0 10 20 30 40 50 60
Fields
%
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 29
Model checks• Several checks of the results should be
performed– Royalty % per year– Profit share % per year– Production plot– Capex and Opex plot– Depreciation plot
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 30
Rules of thumb -2• BASIC ASSUMPTIONS Rule of Thumb• Capex/bbl 3-5 usd• Capex as % of Gross Revenue 10-20%• Opex/bbl 3-5 usd• Opex/peak year as % of total Capex 4-8%
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 31
Input to cash flow models
• Production curve• Oil/gas price• Capex• Opex• Fiscal regime• Discount rate
Gross revenue
Net revenue
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 32
Share, take and profit margin• Gross project revenue 100• -Royalty 0• Net project revenue 100• Total cost -40• Profit basis (Operating income) 60• Taxes 35• Net after tax income 25
– Contractor take 42% (25/60)– Contractor profit margin 25% (25/100)– Contractor share 65% (25+40/100)
– Government take 58% (35/60)
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 33
The Government Choice
NorwayUnited KingdomPakistanTunisiaNew Zealand
Concessionary Systems
Limited usage
Pure Service Contracts
ArgentinaBrazilVenezuelaThe Philippines
Risk Service Contracts
Service Contracts
AngolaIndonesiaIndiaNigeriaGabon
Production Sharing Contracts
Contractual Systems
Petroleum Fiscal Arrangements
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 34
Elements in a PSC• Work Commitment• Bonus Payment• Royalties• Cost Recovery (Cost Oil)• Profit Oil• Government participation• Domestic Market Obligation• Ring fencing
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 35
Indonesia- PSC (4th Gen.)Mother of all PSCs
• (85/15 Split)– Royalty: 0%– FTP split 20%– Cost Oil : 100%– Profit Oil: 28.8462%– Tax Rate: 48%
• Effects– The split does not change with
the level of cost– Effective Gov. take is 85%
Contractor GovernmentGross
Revenues100
5.8First Tranche
Petroleum 14.220 %14.2 %
Net Revenues80
28.0 Cost Oil35 %
Profit oil52
15.0Profit oil to
Contr. 37.028.8462 %
Taxable20.8
-10.0 Tax 10.048 %
38.8After tax
entitlement 61.2
10.8Net Cash
Flow 61.2
15 % Take 85 %
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 36
FTP• Calculated from Gross Revenue• Works as a modified Royalty • Can cause premature abandonment
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 37
...where:Fn - the net income in year ni - discount rate n - total numbers of years (project duration)
F1
(1 + i)1F2
(1 + i)2Fn
(1 + i)n= + + ... +F0 +
Fn
(1 + i)n( )∑n = 0
n
NPV =
NPV formula (end year)
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 38
Time value of money
-500
0
500
1000
1500
2000
2500
3000
3500
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
Mill
ion
USD
Cash flow
Cummulative cashflow
Inflation corrected
+ Value of time corrected
Current Values
Real Values
Discounted Values
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 39
Present Value
Year Cash Flow NPV 5% NPV 10% NPV 15% NPV 20%2003 -200 -200.0 -200.0 -200.0 -200.02004 -50 -47.6 -45.5 -43.5 -41.72005 10 9.1 8.3 7.6 6.92006 100 86.4 75.1 65.8 57.92007 100 82.3 68.3 57.2 48.22008 200 156.7 124.2 99.4 80.4
SUM 160 86.8 30.4 -13.6 -48.3
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 40
Present Value - IRR
-100
-50
0
50
100
150
200
0 5 % 10 % 15 % 20 %
Discount Factor
NPV
IRR
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 41
Expected Monetary Value
• EMV=(R*SP)-(RC*(1-SP))
– EMV=Expected Monetary Value– R = Reward = Net Present Value (NPV) – SP= Success Probability– RC= Risk Capital = Bonuses, Dry Hole Cost, G&G
etc.
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 42
EMV - Example
• Assumptions• NPV = 120 million USD• RC = 15 million USD• SP = 22%
• EMV = (R*SP) - (RC*(1-SP))• EMV = (120*0.22) - (15*(1-0.22))• EMV = 14.7million USD
– Break even SP = 12.5% (EMV=0)
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 43
EMV curve
-40
-20
0
20
40
60
80
100
120
140
0 10 20 30 40 50 60 70 80 90 100
Probability of Success (%)
Mill
ion
USD
EMV curve
Risk capital
Reward (NPV)
Break even POS
Calculated EMV
Calculated POS
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 44
Synonyms•Net present value (NPV)
•Internal rate if return (IRR)
•Expected monetary value
•Present value•Discounted cash flow•Present value profit (PVP)•Present worth (PW)
•Rate of return (ROR)•Profit investment ratio (P/I ratio)•Return on investments (ROI)
•Expected value•Risked value
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 45
Basic assumptions• Start Year• Oil Price
– Starting value– Escalation– Model
• Inflation• Discount rate and year• Depreciation rules
PPM Expert Visit - Indonesia, December 6-9, 2004
PPM Expert Visit - Indonesia, December 6-9, 2004 46
GeoX Demonstration
• The structure and functionality of GeoX– Prospect Analysis– Discovery Analysis– Full Cycle Analysis
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