N014 Petroleum Economics and Risk Analysis

This course will explain the petroleum economics techniques that are applied in the oil and gas business to assist decision making on either the investment of capital or the divestment of assets. This course will focus on the conversion of hydrocarbon volumes to ‘dollars’ and the requirement for consistent means of determining the attractiveness of investment opportunities, from exploration, through appraisal and new field development to new field developments to portfolio management decisions. The course materials include many exercises to embed the principles of petroleum economics and some related financial concepts across the E&P asset life cycle. A feature of this course is the use of AGR TRACS MCApp tool for Monte Carlo simulation.

Introduction

• The global oil and gas industry; distribution of reserves; world supply and demand; trends for the future
• The role of petroleum economics in decision making

Development Economics

• The input required for constructing a project cash flow (exercise)
• Principles of cash flow analysis
• Constructing the project cash flow (exercise)
• Indicators from the undiscounted project cash flow (exercise)
• Petroleum Fiscal Systems ; tax and royalty, Production Sharing Contracts
• The principles of discounting
• Discounted cash flow (exercise)
• Indicators from the discounted cash flow (NPV, IRR)
• Use and abuse of EXCEL to calculate NPV, IRR
• Calculating the cost of capital (weighted average cost of capital)
• Profitability indicators and efficiency ratios (exercise)
• Project screening and ranking (exercise)
• Sources and measures of inflation
• Incorporating inflation into the project economics (exercise)
• Understanding real terms, money of the day, Internal Real Rate of Return
• Sensitivity analysis and spider diagrams (exercise)

Incremental Economics

• Defining an incremental project
• Analysis of incremental project economics; alternative methods
• Risking incremental projects; appropriate discount rates
• Operational decision making (2 exercises)

Risk and Uncertainty Analysis

Defining Uncertainty and Risk; Statistician’s vs Practitioner’s View

• Identifying relevant parameters which exhibit uncertainty
• Expressing uncertainty as probability distributions
• Basic statistics
• Distribution types (normal, triangular, log-normal, etc.)
• Dependent and independent variables (Bayes theorem)
• Combining uncertainties
• Monte-Carlo methods, parametric methods
• Getting to know AGR TRACS MCApp (or @RISK) for Monte Carlo simulation (exercise)

Exploration Economics

• Understanding and incorporating exploration risk (cased study based exercise)
• Introduction to gambling theory exercise
• Introduction to decision tree analysis (exercise)
• Exploration ranking using expected monetary value EMV (exercise)
• Exploration risking (exercise)
• Detailed decision tree analysis
• Use of MCApp to create P90, P50, P10 estimates
• Combining continuous distributions with decision tree analysis

Economics of Appraisal

• The objectives of appraisal; Value of Information (VOI) concepts
• VOI calculations in appraisal (exercise)
• Appraisal planning for maximum value (exercise)

Heuristics - Human Bias in Uncertainty Estimation

• Identifying human bias
• The impact of human biases (examples)
• How to manage human bias

Risk and Uncertainty in Development Planning

• Causes and consequences - the Bow Tie Model (exercise)
• Managing risk - the risk register and action plan (exercise)

Portfolio Management

• Portfolio management theory
• Why and how companies diversify in the oil industry
• Managing a group of assets; use of Boston Consulting Group matrix (group exercise)
• Use of comparative indicators: NPV/bbl, net income per day
• Presentations for the groups on portfolio recommendations