## Petroleum Economics and Risk Analysis

### Course overview

The course provides a comprehensive overview of the practices of exploration and development petroleum economics and its application in valuing oil and gas assets to aid corporate decisions.

Participants will construct economic models, to include basic fiscal terms, production and cost profiles and project timing. The resulting model will provide insights of how the various inputs impact value and their relative affect through sensitivities – field studies will be used throughout the course.

### The course is designed for

- Professionals who need to learn about the industry
- Personnel within the industry
- Technical support staff entering the industry
- Technical staff who want to expand their understanding of the industry
- Students considering the industry as a career

### Course outline

#### Internal Rate of Return (IRR)

The definition and application of IRR. Calculating the IRR.

**Problems with IRR**

Multiple IRRs – when, how often and how they arise. How the NPV and IRR measures can give conflicting results and how to resolve this. The effect of project delays and the use of IRR.

**Payback**

Calculation and use of payback and discounted payback indicators. The use of discounted payback in petroleum fiscal regimes. Problems with payback.

**Capital Productivity Index (CPI)**

Calculation and use of CPI. The use of CPI in oil companies and petroleum fiscal regimes. Capital rationing. Problems with CPI.

**EXAMPLE ECONOMIC EVALUATIONS**

Incremental economics using the economic indicators discussed earlier. This includes a discussion of the effects of fiscal relief on exploration and field development decisions.

**RISK ANALYSIS**

**Probability Analysis**

Defining and using probability distributions. Means, standard deviations, levels of confidence. Industry standard reserves definitions and classifications. Deterministic and probabilistic analysis. Using the statistics - P90, P50, P10, mean - the pitfalls. Combining probabilistic variables. Adding reserves. Estimating reserves and costs - the errors people make.

**Monte Carlo Simulation**

The mechanics of Monte Carlo simulation. Choosing probability distributions. The pitfalls of Monte Carlo simulation and how to avoid them. Deriving oil in place, economics and reserves probabilistically.

**Exploration Decisions**

The definition, meaning and examples of Expected Value in oil and gas drilling decisions. EV versus probability of success lines. Using EV to compare drilling and farmout decisions. The effect of fiscal relief on exploration decisions. Analysing exploration portfolios.

#### EXAMPLE PSC ANALYSES

Analysis of the fiscal regime in an example country. How the fiscal components work. The effect of fiscal terms on field development decisions and incremental investments.

#### WORLDWIDE FISCAL TERMS

The economic effect of fiscal terms across the world - severity and efficiency.

#### CASH FLOW ANALYSIS

Net Cash Flow

Discussion of the main components and relative importance of components of cash flow for an oil and gas investment (production, price, revenue, operating costs, capital costs, abandonment costs and fiscal costs). Discussion of typical net cash flow projections for petroleum

#### Economic Life and Reserves

Discussion of the main components and relative importance of components of cash flow for an oil and gas investment (production, price, revenue, operating costs, capital costs, abandonment costs and fiscal costs). Discussion of typical net cash flow projections for petroleum.

#### Distinction between Cash Flow and Profit

How cash flow is distinguished from profit. The role of depreciation. When we use cash flow and when we use profit.

**Cash Flow and Tax**

How tax is incorporated into cash flow projections. The basic rules for calculating tax worldwide. Loss carry forward and the effect of different petroleum tax regimes.

**Cash Flow and PSCs**

The basic economic distinction between tax regimes and production sharing contract regimes. How to make cash flow projections for production sharing systems worldwide. Cost recovery and profit sharing arrangements.

**Sunk Costs**

The treatment and mistreatment of sunk costs in cash flow analyses and petroleum property acquisitions.

**Incorporating Inflation into Cash Flow Projections**

How to inflate the components of cash flows. The conventions and the jargon. Worked examples of the effects of inflation.

**Real and Nominal Cash Flows**

The distinction between real and nominal cash flows. Fiscal drag and the problems associated with taking short cuts to derive real cash flows. Common misunderstandings in the use of real cash flows.

**ECONOMIC INDICATORS**

**Introduction**

The need to measure net cash flow projections with single indicators. The indicators used in the oil and gas industry. The importance of time.

**Net Present Value (NPV)**

The time value of money. Compounding and discounting. Using a discount factor table and measuring the effect of time and discount rate. Discounting a cash flow projection and calculating NPV. Understanding the meaning, uses and features of NPV. Valuing petroleum properties using NPV.

Location | Start Date | End Date | Cost | Trainer | Book |

Upon request | Dr Guy Allinson | Make enquiry |

*"The instructor made this course very intellectual. He brought and made his experience available. He suggested new technologies and provided extra materials and references."*- Saudi Aramco – Chevron/Kuwait

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