Page 363 - Hydrocarbon Exploration and Production Second Edition

350 Constructing a Project Cashflow

60
CT 30% +
SC 20%
50
Royalty off new oil
PRT allowance
PRT SPD doubled PRT zero for new fields CT 30% +
40
Oil Price (MOD US $/bbl) 30 PRT Cross Field SC 20%
70%
PRT 50% existing fields
E&A allowance out
allowance
45%
20
SPD out
APRT + 1/1/03
PRT Royalty
75% abolished for
10 CT reduced
all old fields
to 31%
PRT APRT out Royalty off CT reduced
60% E&A allowance new gas to 30%
0
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Figure 14.8 UKCS ¢scal system changes.

the net cashflow turns permanently negative due to decreasing revenues (e.g.
revenues are less than royalty plus OPEX in a tax/royalty system) then the project
should be halted, and decommissioning planned. The first oil date is important
because it indicates the point at which gross revenues commence. For most projects
this is the point at which a positive annual net cashflow starts.
The most negative point on the cumulative net cashflow indicates the maximum
cash exposure of the project. If the project were to be abandoned at this point, this is the
greatest amount of money the investor stands to lose, before taking account of specific
contractual circumstances (such as penalties from customers, partner claims, contrac-
tors’ claims). It also represents the funds which are required to finance the project – if
the maximum exposure is greater than the company’s capacity to raise capital then the
investor may consider farming out a portion of the project to a joint investor.
The point at which the cumulative net cashflow turns positive indicates the
payback time (or payout time). This is the length of time required to receive
accumulated net revenues equal to the investment. Payback time is primarily an
indicator of risk – the longer the payback the more risky the project, but it says
nothing about the net cashflow after the payback time and does not consider the
total profitability of the investment opportunity. Some smaller industries use payback
as a primary criterion for investment – it is not a bad measure as one can argue that
one of the first rules of investment is to get the investment funds back – payback time
indicates how long this will take.
The cumulative net cashflow accrues to the investor at the end of the economic
lifetime of the project. Of the indicators mentioned so far, this is probably the most
important as it measures the final prize.