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ECONOMICS
• Other measures
OIL AND GAS PRICES
• Major Players
• Refinery Yields
• Products Prices
• Timing
• Transportation
• Other fees and Profit Margin
MAJOR INTERNATIONAL
PETROLEUM COMMODITY
MARKETS
• NYMEX (New York Mercantile Exchange)
Theory of Equivalence
NPV
• Consistently the most reliable and most frequently
used in practice
• Takes into account timing of future cash flow
• Tells us how much an investment is better or
worse than putting money into the bank or some
alternative investment
• Makes large projects more attractive than smaller
ones, no indication of investment efficiency.
• Highly dependent on discount rate
ECONOMIC INDICATORS
IRR
• It is the after tax return equivalent to putting an
investment in an interest bearing account.
• Frequently used as an initial screening device
• Tends to favour high initial earnings projects over
long-lived projects
• Can produce multiple values, and ambiguous.
• Could be difficult to calculate (trial and error)
ECONOMIC INDICATORS
PAYBACK (PB)
• Indicates length of investment “exposure”,
or break-down point of a project.
• Easy to calculate and understand
• It ignores the timing or variations of cash
flow before payback
• Useful as an initial indicator of the merits of
a project
ECONOMIC INDICATORS
DPIR
• defined as the net cash flow of the project
per dollar of capital investment
• used as quick “first look” investment
criteria
• excellent for ranking projects
• highly dependent on discount rate
• measures investment efficiency
ECONOMIC INDICATORS
CASH FLOW ANALYSIS
Capital Costs
• One-time costs usually incurred at the beginning of a
project. They are usually large expenditures incurred
several years before any revenue is obtained.
• Examples
• Tankers
• Pipelines Construction
• Process facilities
• Camps and Accommodations
• Storage vessels
BASIC DEFINITIONS
Operating Costs
Occurs regularly and are necessary to maintain
operations.
Usually expended in terms of expenditure per year or per
unit production.
Examples
• Field labour cost
• Maintenance cost
• Office overhead
• It can be fixed periodic/annual amount or can be variable and
determined as a function of production rate.
Petroleum Fiscal Terms
Government Take
• In many projects worldwide, government take is
over 50% of net pre-tax cash flow. It includes:
• Royalties
• Profit Sharing
• Taxes
• JV S vs PSC
CASH FLOW ANALYSIS
Conclusion
• Net cash flow gives the forecasted actual money
spent and received. It correctly represents the size
and timing of cash flow.
= $264,000 - $110,000
= $154,000
EXAMPLE ECONOMIC
CALCULATION
= 110,000/ 264,000/9
= 3.75 Years
EXAMPLE ECONOMIC
CALCULATION
Uncertainty
The range of values within which the actual value is
expected to fall
Contingency
• Provision for variations to the basis of a plan or cost
estimate which are likely to occur and which cannot be
specifically identified at the time the plan or estimate was
prepared.
• It provides an equal chance of over run or under run.
ELEMENTS OF PROJECT RISK
MANAGEMENT
• Risk Identification
• Risk Quantification
• Risk Response Development
• Risk Response Control
PROJECT RISK MANAGEMENT