Course Description

Given the current volatility in oil prices, the economic evaluation of upstream oil and gas investments is crucial. Business decisions such as asset acquisitions, lease-buy assessments, exploration drilling options, oil and gas field development, equipment purchases, and fiscal negotiations all require thorough economic analysis.

The "Petroleum Economics, Risk & Decision Making" course provides participants with an in-depth understanding of the economic and risk analysis techniques employed in the oil and gas industry today. This course covers essential topics such as cash flow analysis, economic indicators, risk analysis, and fiscal analysis, which are vital for assessing investments in the international upstream oil and gas sector.

Participants will gain practical instruction and develop a strong grasp of the analytical techniques used, reinforced through hands-on exercises and real-world examples.

Who Should Attend?

This course is designed for E&P professionals needing a detailed understanding of upstream petroleum economics, including:

• Geoscientists
• Reservoir Engineers
• Production Engineers
• Petroleum Engineers
• Planning and Development Analysts/Executives
• Commercial Analysts/Executives/Managers
• Business Planners/Analysts/Executives/Managers
• Production Sharing Executives/Managers
• Project Executives/Managers
• Petroleum Economists
• General Managers
• Finance and Account Executives/Managers

Course Objectives

• GAIN a thorough understanding of oil & gas economic evaluations
• UNDERSTAND and APPLY economic indicators to assess oil & gas industry projects
• QUANTIFY and MANAGE uncertainty and risk
• APPLY Monte Carlo Simulation and other statistical methods in risk analysis for exploration and production investments
• UNDERSTAND, EVALUATE, and MODEL both fiscal and production sharing contract (PSC) terms

Course Schedule

Day 1: Cash Flow Analysis

• Net Cash Flow
• Definitions, Gross revenue, Capital costs, Operating costs, Abandonment costs, Government Take, Net cash flow summary, Worksheets
• Economic Life
• Reserves, Abandonment
• Net Cash Flow and Profit
• Net cash flow, Profit, Income Tax, Loss carry forward, Depreciation as costs are incurred, Depreciation matrices, The tax effect of past exploration, Go forward and full cycle economics
• Production Sharing Contracts
• Royalty tax regimes, Production sharing contract regimes, Contractor's gross revenue in one year, Contractor's revenue over project life, Contractor's net cash flow, Sliding scale profit sharing, Cost recovery ceilings, Worksheets
• Sunk Costs
• Inflation, Illustration, Depreciation and escalation, Nominal net cash flow, Real net cash flow, Calculating real after-tax net cash flow, Working in real terms
• Depreciation
• Straight line, Declining balance, Double declining balance, Units of production, Sum of the years digits, Worksheets

Day 2: Economic Indicators

• Net Present Value (NPV)
• Time value of money, Future value, Present value, Discount factors, NPV when discount rate is zero, NPV when time is zero, Present value of a stream of cash flows, Worksheets
• Features of NPV
• Nominal and real NPVs, Discounting and deflation, Defining nominal and real NPVs, Calculating nominal and real NPVs, Presenting nominal and real NPVs, Worksheets
• Internal Rate of Return (IRR)
• NPVs and simple project cash flows, Definition of internal rate of return, Multiple internal rates of return, Example of multiple IRRs, The meaning of NPV in the example, Worksheets
• Comparing Investments
• Example comparison, Nominal and real IRRs, Definitions, Example of nominal and real IRR, Worksheets
• Capital Productivity Index (CPI)
• Definition, CPI example, Alternative definition, Investment multiple example, Disadvantages of CPI, The use of CPI in capital rationing, Lumpy investments, Worksheets
• Payback
• Undiscounted payback, Discounted or compounded payback, Disadvantages of payback
• Discounting Methods
• Mid-year discounting, Comparing end and mid-year discounting, Discounting to different dates, Using spreadsheet functions, Worksheets
• Comparison of Economic Indicators
• Case examples, Field development, Introduction, Example oil field development, Before take net cash flow, Government take, Net cash flow after take

Day 3: Risk Analysis

• Introduction
• Uncertainty in oil and gas projects, Risk-free return, Company risk premium, Risk of proposed project, Treatment of risks in project appraisal, Treatment of company risks, Treatment of risk for proposed project
• Sensitivity Analysis
• Discrete Probability Distributions
• The mean of a probability distribution, Standard deviation, P90, P50, P10
• Exploration Drilling Decisions
• Decision alternative, Outcome or event, Conditional value, Expected value of outcome, Expected value of decision, Coin toss example, Exploration drilling decision, Expected value balance risk and reward, Meaning of expected value, Expected value is not most likely value, Expected value is a methodology, Probabilities must add up to one, EVs can be arithmetically manipulated, EV implies impartially to money, Expected value lines, Using EV in farmout decisions
• Defining Success
• Many Outcomes
• Decision Tree Analysis
• Solution, What the decision tree has told us, Sensitivity analysis, Negative values in decision trees
• Value of Information
• Continuous Probability Distributions

Day 4: Fiscal Analysis

• Fiscal Regimes
• Introduction, Aims of petroleum fiscal regimes, State participation, State royalties, Cost recovery provisions, Profit sharing provisions, Domestic obligations, Surplus profits taxes, Income taxes, Special levies and taxes, Bonuses
• Types of Fiscal Regime
• Royalty-tax regimes, Production sharing contract regimes, Structure of royalty tax regimes, Structure of PSCs
• The Mathematics of Tax and PSC Systems

Day 5: Integrative Exercises and Case Studies

• Case Study 1: Field Development
• Introduction, Example oil field development, Before take net cash flow, Government take, Net cash flow after take
• Case Study 2: Production Sharing Contracts
• Contractor's gross revenue in one year, Contractor's revenue over project life, Contractor's net cash flow, Sliding scale profit sharing, Cost recovery ceilings, Worksheets
• Case Study 3: Risk and Sensitivity Analysis
• Applying Monte Carlo Simulation, Sensitivity analysis, Decision tree analysis, Value of information
• Case Study 4: Fiscal Analysis
• Comparing fiscal regimes, Economic efficiency of fiscal regimes, Example of fiscal efficiency, The effect of royalties, Comparison of royalty and ROR tax, The effect of cost recovery ceilings, The effect of production triggers, The effect of depreciation
• Final Review and Wrap-Up
• Q&A session, Discussion of key concepts, Review of course objectives, Feedback and evaluations