Petroleum Project Economics Econ210DPresentation 4Petroleum Project Appraisal and ScreeningWeek 4*

Petroleum Project Appraisal and ScreeningWeek 4

PaybackThis measures the length of time required for the net cash flows generated during production to cover the cash outflows during exploration and development.This occurs where the cumulative cash flow is zero.The option with the shortest payback is most preferred.

*Petroleum Project Appraisal and Screening Week 4

Petroleum Project Appraisal and Screening Week 4

Discounted Cash Flow*Discounted cash flows refers to the conversion of estimated future cash flows to present values using an interest rate known as Discount ratePetroleum Project Appraisal and Screening Week 4

Petroleum Project Appraisal and Screening Week 4

Net Present ValueUses the present value factors from: 1/(1+r)nThe sum of all discounted cash flows at a given interest rateThe investment with the highest present worth is selected*Petroleum Project Appraisal and Screening Week 4

Petroleum Project Appraisal and Screening Week 4

Net Present ValuePetroleum Project Appraisal and Screening Week 4*Where: CFt = Cash Flow of a period t dt= Discount rate for period t n = Last period of economic horizon

Investment Decision:NPV > 0Project accepted NPV < 0Project rejectedFormula:

Petroleum Project Appraisal and Screening Week 4

Internal Rate of ReturnDiscount rate which gives a net present value of zero.Manually calculate via a trial and error approach.Software to calculate such as Microsoft excel.*Petroleum Project Appraisal and Screening Week 4

Petroleum Project Appraisal and Screening Week 4

Internal Rate of ReturnManual calculation stepsUse an interest rate which gives a slightly positive present worthUse an interest rate which gives a slightly negative present worthApply rate of return formula

*Petroleum Project Appraisal and Screening Week 4

Petroleum Project Appraisal and Screening Week 4

Discount rate and Net Present ValueDiscount RateNet Present ValueIR+veIR-vePW-vePW+veInternal Rate of Return0*Petroleum Project Appraisal and Screening Week 4

Petroleum Project Appraisal and Screening Week 4

Internal Rate of ReturnIR+ve = Interest rate with positive present worthIR-ve = Interest rate with negative present worthPW+ve = Positive present worthPW-ve = Negative present worth*Petroleum Project Appraisal and Screening Week 4

Petroleum Project Appraisal and Screening Week 4

Home WorkUsing the information in the following slide, calculate total cash inflow and total cash outflow.Using the cash flows determine: Payback, NPV and IRR.*

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YearOil Production MMbblsOil Price ($/BBL)Total Capex $mTotal Opex $m1986015.0-3001987019.2-2201988016.0-11201989019.6-11001990024.5-7701991221.5-10-1.41992420.6-7-2.81993818.5-4-8.419941517.20-19.619951418.40-15.719961422.20-13.319971220.60-11.31998914.40-9.61999819.30-8.22000730.30-72001625.90-5.82002526.10-4.82003431.10-2.72004241.40-1.32005056.500

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