Page 372 - Hydrocarbon Exploration and Production Second Edition

Petroleum Economics 359

14.6. Sensitivity Analysis

As discussed in Section 14.2, the technical, fiscal and economic data gathered
to construct a project cashflow carry uncertainty. An economic base case is
constructed using, for example, the most likely values of production profile and the
50/50 cost estimates, along with the ‘best estimate’ of future oil prices and the
anticipated production agreement and fiscal system.
In order to test the economic performance of the project to variations in the base
case input data, sensitivity analysis is performed. This indicates how robust the
project is to variations in one or more parameters, and also highlights which of the
inputs the project economics is more sensitive to. These inputs can then be addressed
more specifically. For example, if the project economics is highly sensitive to a delay
in first production, then the scheduling should be more critically reviewed.
Changing just one of the individual input parameters at a time gives a clearer
indication of the impact of each parameter on NPV (the typical indicators under
investigation), although in practice there will probably be a combination of changes.
The combined effect of varying individual parameters is usually closely estimated by
adding the individual effects on project NPV.
Typical parameters which may be varied in the sensitivity analysis are

Technical parameters
CAPEX
OPEX (fixed and/or variable)
reserves and production forecast
delay in first production.

Economic parameters

timing of fiscal allowances (e.g. ring-fencing)
discount rate
oil price
inflation (general and specific items).

If the fiscal system is negotiable, then sensitivities of the project to these inputs
would be appropriate in preparation for discussions with the host government.
When the sensitivities are performed the economic indicator which is
commonly presented is NPV at the discount rate which represents the cost of
capital, say 10%, this being considered as the true value of the project.
The results of the sensitivity analysis may be represented in tabular form, but a
useful graphical representation is a plot of the change in NPV(10) against the
percentage change in the parameter being varied, as shown in Figure 14.13. This is
sometimes called a spider diagram.
The plot immediately shows which of the parameters the 10% NPV is most
sensitive to – the one with the steepest slope. Consequently the variables can be
ranked in order of their relative impact.