Page 369 - Hydrocarbon Exploration and Production Second Edition

356 Economic Indicators

technique to calculate what discount rate reduces the NPV of the net cashflow to
zero. Care should be taken when the net cashflow has more than one change of sign
(such as a phased project with a delayed significant investment), as multiple solutions
for IRR will exist.
So, with a final economic indicator added, it is worth summarising the measures
of project attractiveness in the following section.

14.4. Economic Indicators

In Section 14.2, a number of economic indicators were derived from the
annual net cashflow; the most useful being the economic life of the project, determined
when the annual net cashflow becomes permanently negative.
The cumulative net cashflow was used to derive ultimate cash surplus – the final
value of the cumulative net cashflow; maximum exposure – the maximum value of the
cash deficit; payback time – the time until cumulative net cashflow becomes positive.
The shortcoming of the maximum exposure and payout time is that they say
nothing about what happens after the net cashflow becomes positive (i.e. the
investment is recouped). Neither do they give information about the return on the
investment in terms of a ratio, which is useful in comparing projects.
We have discussed the derivation and importance of NPV, often considered as
the most important indicator in the upstream business. It is appealing in its simplicity
but is one-dimensional in that it does not test efficiency of investing a constrained
amount of capital.
A common ratio which indicates the efficiency with which the project creates
profit is the

Cumulative net cashflow
PIR ¼
Total capital expenditure
This may be more useful if the net cashflow items are discounted, for example
10% NPV
10% PIR ¼
10% PV CAPEX
where 10% is the assumed cost of capital.
This indicator is particularly useful where investment capital is a main constraint.
It is a measure of capital efficiency, sometimes referred to as NPV/NPC (net present
cost), or the PV ratio.
Per barrel costs (costs per barrel of development and production), also referred to
as unit costs, unit technical costs or development and lifting costs, are useful when
production throughput or export production levels are the constraint on a project, or
when making technical comparisons between projects in the same geographical area.

CAPEX þ OPEX $
Per barrel cost ¼
Production bbl