Page 352 - Hydrocarbon Exploration and Production Second Edition

Petroleum Economics 339

From this overview, it is apparent that the project must generate sufficient return
on the money absorbed to at least pay the interest on loans and pay the dividend
expected by the shareholders. Any remaining cash generated can be used to pay off
loans or reinvested in the same or alternative projects. The minimum return
expected from the investment in a project will be further discussed in Section 14.4.
Take, for example, the investment opportunity to be the development of an oil
field. Within the project box, the cashflow of the project is the forecast of the money
absorbed and the money generated during the project lifetime. Initially the cashflow
will be dominated by the CAPEX required to design, construct and commission the
hardware for the project (e.g. platform, pipeline, wells, compression facilities).
Once production commences (possibly 3–8 years after the first CAPEX) gross
revenues are received from the sale of the hydrocarbons. These revenues are used
to recover the CAPEX of the project, to pay for the OPEX of the project (e.g.
manpower, maintenance, equipment running costs, support costs), and to provide
the host government take which may in the simplest case be in the form of taxes and
royalty.
The oil company’s after-tax share of the profit is then available for repayment of
interest on loans, repayment of loan capital, distribution to the shareholders as
dividends or reinvestment on behalf of the shareholders in this or other projects.
So, from the oil company’s point of view, the balance of the money absorbed by
the project (CAPEX, OPEX) and the money generated (the oil company’s after-tax
share of the profit) yields the project net cashflow, which can be calculated on an
annual basis. It is often referred to simply as the project cashflow.
The project cashflow forms the basis of the economic evaluation methods
which will be described. From the cashflow a number of economic indicators can be
derived and used to judge the attractiveness of the project. Some of the techni-
ques to be introduced allow the economic performance of proposed projects to
be tested against investment criteria and also to be compared with alternative
investments.

14.2. Constructing a Project Cashflow

The construction of a project cashflow requires information from a number of
different sources. The principal inputs are typically shown in Table 14.1.
The data gathering process can be lengthy, and each input will carry with it a
range of uncertainty. For example, early in the appraisal stage of the field life the
range of uncertainty in the reserves and production forecast from the field may be
750%. As further appraisal data is gathered this range will reduce, but at the
decision point for proceeding with a project, uncertainties of 725% are common.
The uncertainty may be addressed by constructing a base case which represents
the most probable outcome, and then performing sensitivities around this case to
determine which of the inputs the project is most vulnerable to. The most
influential parameters may then be studied more carefully. Typical sensitivities are
considered in Section 14.6.