Workshop

Simulated Licence Round

8th - 10th February 2012

Petroleum Economics

Workshop Outline … part 1

Workshop Outline … part 1

• You have been divided into groups of 8-9

• Each group is an exploration company (you’ll need a name) interested in bidding for blocks in an upcoming licence round

• The exercise will be run in parallel with 9 teams in each set

Set AGroup A1 Group A2 Group A3 Group A4 Group A5 Group A6 Group A7 Group A8 Group A9

Apampa Bakare Chukwudi Fadipe Fagbowore Ihe Obeahon Decroux Hennion

Anderson Barroso Viseras

Busch Charonnat Dieudonne El Hajbi Faure Gassabi Julkipli

Agrawal Alshawaf Alyapina Durongwattana

Haji Jasni Hou Imam Jehangir Petto

Baldwin Barkley Bullimore Devlin Dorai Harpin Hodgins Keay Lyne

Taylor Russell Riccio Baillet Cannelle Roblet-Bambridge

Varvara Patrick Burgess

Al Hooti Caratge Ceyhan Eres Guardia Haji Masri Kim Akatakpo Farhat Hussain

Rasheed Studer Tamunobereton-ari

Umoren Watson Zhang Kaewprain Kanafina Karalis

Sheyh Husein

Spyrou Fargo Segers Wood Tolessin Rajesh Kumar

Set BGroup B1 Group B2 Group B3 Group B4 Group B5 Group B6 Group B7 Group B8 Group B9

Izzidien Kaczmarczyk Karamessinis Lislaud McCaughan McDonald Mylonaki Pantin Rassuli

Jusoh Liew Nguyen Xiao Spronk Varadi Mago Valdivaiano Huertas

Khairullin Tariq

Phoowarang Sun Su Pointing Roberts Sinclair Smith

Thiakalingam Tranchina Twallin

McGreevy McKean Minns Eeva Dowdeswell Langan Lawry Reynolds Zheng

De Grouchy Dinwoodie Sloan Wang Zahari Kang Mohd. Asman Nnachetta Oboh

Kamaludin Nwachukwu Raphael Northall Oakley Okocha Paiva Almeda de Franca

Phillips Polisano

Kokoshina Li Ngeri Voake Loh Omofoma Sandiford Santacreu Llovera

Wilson

Prise

Geological Information

• You each have access to the same set of base data, which includes a map of the blocks on offer, prospect outlines, isopach data on the only prospective interval, and data on six wells adjacent to the blocks on offer

• Seismic data are first class over the entire area, and you have all mapped the top and base of the only prospective reservoir (a Tertiary channel sand) in an identical way.

• You therefore all have identical gross sand isopach interpretations (contour interval 100 ft) and prospect outlines:

Investment Appraisal Exercise9-block Licence Award Area

100

100

200

200 Forfar

Crieff

Brechin

EdinburghDundee

Glasgow

Helmsdale

Inverurie

.1

..

2

5

3

64

Orange areas are prospect outlinesBlack contours are 100 ft isopachs

Aberdeen

¡

¡

¡0

0

Geological Cross Section A-A’

Geological Cross Section B-B’

Prospect Details

Prospect GRV (k acre feet) Trap Type

Aberdeen 100 4-way dip

Brechin 250 Stratigraphic

Crieff 160 Stratigraphic

Dundee 250 4-way dip

Edinburgh 150 4-way dip

Forfar 175 Upthrown fault block

Glasgow 275 Stratigraphic

Helmsdale 200 Upthrown fault block

Inverurie 250 4-way dip

[Remember that units are tricky ... GRV is measured in acre feet, and reserves are quoted in barrels, so use the conversion factor of 7758 barrels per acre foot.]

• You have each planimetered the prospect maps in the same way, and have assessed the gross rock volumes of the various prospects as follows:

More Geological Information

You all have the following information, and only this information, from the 6 wells drilled nearby:

Well N/G Porosity SHC Re FVF (RB/STB)

1 0.80 0.32 0.80 0.45 1.15

2 0.60 0.26 0.00 N/A N/A

3 0.50 0.28 0.85 0.35 1.15

4 0.30 0.25 0.00 N/A N/A

5 0.65 0.28 0.00 N/A N/A

6 0.40 0.22 0.60 0.30 1.15

Wells 1, 3 and 6 all recovered oil, GOR about 100 scf/Bbl, gas volumes sufficient only for platform fuel

Upstream Oil Industry ... volumetric assessment - recap

Recoverable Hydrocarbons

GRV (Gross Rock Volume)*N/G (Net reservoir to Gross rock ratio)*Ø (Porosity)*Shc (hydrocarbon saturation of pore fluids)*1/FVF (Formation Volume Factor)*RF (Recovery Factor)

Basis: correlation with nearby wells/data

Assessing Risk - recap

• Play Chance (%)Reservoir presence (%) * Reservoir Effectiveness (%)Seal presence (%) * Seal Effectiveness (%)Source presence (%) * Source maturity (%) * Source migration (%)

• Prospect Specific Risk (%)Trap presence (%) * Trap effectiveness (%)Reservoir presence (%) * Reservoir Effectiveness (%)Seal presence (%) * Seal Effectiveness (%)Source presence (%) * Source maturity (%) * Source migration (%)

Overall Chance of Success = Play Chance * Prospect Specific Risk

Assessing Risk

Assume the following:

• Play is proven

• Prospect Specific Risks are independent

• Remember we are using a dice to decide when a well is successful, therefore your chance of success can only be

1/6 (16.67%)

2/6 (33.33%)

3/6 (50%)

4/6 (66.67%)

5/6 (83.33%)

6/6 (100%)

Workshop Output … part 1

• Assign an input distribution to Ø, N/G, Shc, FVF for each

prospect.

• You are supplied with the GRV and Re distributions to use in

the work file

• Complete a volumetric assessment of the nine blocks

available for bid.

• Estimate the chance of success for each prospect

• Tabulate both unrisked and risked Resources for each prospect

• Consolidate your risked and unrisked recoverable Resource

estimates to give the total Resource potential of the nine

blocks

• Calculate the chance of making at least 1 discovery if all 9

prospects are drilled

Workshop Outline … part 2

Workshop Outline … part 2• Continue to work in your groups.

• Use your volumetric and risk assessment of the nine blocks available for bid.

• You are required to prepare cash bids for those blocks you wish to acquire, and each team has a budget of $1 billion for that purpose, $250 million from retained profits from the business and a $750 million borrowing facility.

• Produce a risked valuation of each prospect and rank them in order of attractiveness to you.

• Prepare a bid for at least 4 of the blocks

Workshop Outline … part 2

• If your bids are unsuccessful, or you choose not to spend all of your budget, then any remaining retained profits are invested safely at 6% pa compound interest, after tax, for the period during which exploration, appraisal and production activity takes place … the borrowing facility not needed is not used.

• The successful bidder for each block will be decided by the Petroleum Minister based on the highest cash bid. The outcome of an exploration well on each of the prospects is determined by the throw of a dice. The values of each of the companies are determined by the Present Values of the discoveries, plus the compounded present value of unspent retained profits, less abortive costs.

Economic Modelling

• Assemble the cash flows by year, considering the magnitude and timing of all the costs associated with purchasing, developing and producing the prospect.

• You will be provided with a simple cash flow model

• Calculate NPV’s and EMV for each prospect (3 point)

Project schedule

2012 2013 2014 2015 2016 2017 2018 2019 ……

yr 0 yr 1 yr 2 yr 3 yr 4 yr 5 yr 6 yr 7

Acquire licence x

2D seismic x

Drill Expl. well x

(if successful)

3D seismic x

Drill Appr. Wells x

Dev CAPEX x x x

Dev Drilling x

1st production x

Economic Input

• Costs: all amounts expressed in real US$

• Licence Acquisition - whatever you bid, in year zero

• CAPEX, DRILLEX, OPEX, [ABEX] - Costs for all of these depend on field production rates. The following slides allow you to estimate costs for your prospects.

• Forecast production – you will need to turn your recoverable oil volumes into annual production data (see following slides)

• Bids must be made in US$

Seismic Costs

Assume the following:

• 2D seismic costs US$1.5 million to acquire

• 3D seismic costs US$6.0 million to acquire

• 3D seismic takes 1 year to acquire and interpret

Drilling Costs (Drillex)Assume the following:

• all E&A wells cost US$35 million (REAL)

• Exploration well is drilled in 2012

• all successes require appraisal (2014)

• number of appraisal wells is related to level of resources (1 well for every 30 MMbbls)

• Recovery of oil is around 10 MMbbls per development well

• all Dev wells cost US$30 million (REAL)

Assume the following:

• Subsea completion costs US$35 million (REAL) per producing well

FPSO Costs (CAPEX)

Production rate (stb/d) 25,000 50,000 100,000 150,000 200,000 250,000Total FPSO CAPEX (US$ million REAL) 400 570 1,000 1,425 1,875 2,325

Tip: Plot CAPEX vs. Production rate and use plot to interpolate. Don’t forget the costs are linked to daily production rate not annual volume of oil

Minimum CAPEX = US$400 milllion

Assume CAPEX is spent evenly over 3 years prior to first production

FPSO Costs (CAPEX)

Tip: Use the plot of CAPEX vs. Production rate to derive a relationship between production rate and cost. Use this relationship to interpolate for the CAPEX in your cases. Don’t forget the costs are linked to daily production rate not annual volume of oil

Operating Costs (Opex)

Production rate (stb/d) 25,000 50,000 100,000 150,000 200,000 250,000Total FPSO OPEX (US$ million REAL) 35 50 80 100 125 140

Annual fixed OPEX:

Minimum fixed OPEX = US$35 per year

Annual variable OPEX:

Tip: Plot fixed and variable OPEX vs. Production rate and use plots to interpolate. Don’t forget the costs are linked to daily production rate not annual volume of oil

Production rate (stb/d) 25,000 50,000 100,000 150,000 200,000 250,000Total FPSO Variable OPEX (US$/bbl REAL) 1.25 1.10 0.85 0.70 0.60 0.50

Production forecasts

• The reservoirs are capable of producing 14% of the total resources per year at peak, and the facilities and wells should be costed accordingly.

• Assume peak production is achieved instantaneously

• Production will decline after 5 years on plateau or once 70% of the field's resources have been produced

• Declining reservoir pressure means that production rates decline by 20% per year (declining balance basis).

Production profile example

Annual Production (MMbbls)

Cumulative Production (MMbbls)

%age of Resources Produced

Average Daily Production Rate (stb/d)

14.00 14.00 14% 38,35614.00 28.00 28% 38,35614.00 42.00 42% 38,35614.00 56.00 56% 38,35614.00 70.00 70% 38,35611.20 81.20 81% 30,6858.96 90.16 90% 24,5487.17 97.33 97% 19,6382.67 100.00 100% 7,321

100.00 100%100.00 100%100.00 100%

100 MMbbls

Further Economic Input

• Oil price, discount rate, inflation rate - some analysts currently advise $95/bbl flat real and 10% nominal, respectively. Please use these assumptions. The model will assume that the general inflation rate is 2% per annum.

• Tax Rate - Corporation tax is currently levied at 50% of net revenues (i.e. gross revenues minus allowable expenditure) ... the spreadsheet does the calculation for you.

Oil forecast examples

Oil price

Quality Differential – 95% of Brent

EMVProbability Unrisked Risked Unrisked Risked

Resources Resources NPV10 NPV10% MMbbls MMbbls £MM £MM

30%P10 0.00% 0.00 0.0

40%P50 0.00% 0.00 0.0

Success30%

0.00% P90 0.00% 0.00 0.0

100.00%

Dry

100.00% 0 0.00 0.0

Σ = 100.00% 0.00 0.0Risked Mean Resources EMV10

Tip on how to get started

• To do the valuation rigorously would require you to compute 27 net cash flows representing the P90, P50 and P10 cases for every prospect.

• To save time plot unrisked NPV10 against unrisked recoverable resources. Complete as many cases as you can but do enough to define the shape of the curve.

• Fit a trend line to the data and extract function

• Use this to compute the NPV10 for your 27 cases and then the EMV10 of each prospect

NPV10 vs. Field Size Plot

Minimum Commercial Field Size

Cost of FailureProbability Unrisked Risked Unrisked Risked

Resources Resources NPV10 NPV10% MMbbls MMbbls £MM £MM

30%P10 0.00% 0.00 0.0

40%P50 0.00% 0.00 0.0

Success30%

0.00% P90 0.00% 0.00 0.0

100.00%

Dry

100.00% 0 0.00 0.0

Σ = 100.00% 0.00 0.0Risked Mean Resources EMV10

Cost of failure after dry hole

Cost of failure if discovered volume

is < minimum commercial field

size

Cost of Failure (after dry hole)

Seismic Expl Drilling Total Total Total Disc. TotalUS$ REAL US$ REAL US$ REAL US$ MOD £ MOD £ MOD

2011 0.0 0.0 0.0 0.02012 0.0 0.0 0.0 0.02013 0.0 0.0 0.0 0.02014 0.0 0.0 0.0 0.0Total 0.0 0.0 0.0 0.0 0.0 0.0

After Tax 0.0

Probability Unrisked Risked Unrisked RiskedResources Resources NPV10 NPV10

% MMbbls MMbbls £MM £MM30%

P10 0.00% 0.00 0.0

40%P50 0.00% 0.00 0.0

Success30%

0.00% P90 0.00% 0.00 0.0

100.00%

Dry

100.00% 0 0.00 0.0

Σ = 100.00% 0.00 0.0Risked Mean Resources EMV10

Cost of Failure (after appraisal)

Probability Unrisked Risked Unrisked RiskedResources Resources NPV10 NPV10

% MMbbls MMbbls £MM £MM30%

P10 0.00% 0.00 0.0

40%P50 0.00% 0.00 0.0

Success30%

0.00% P90 0.00% 0.00 0.0

100.00%

Dry

100.00% 0 0.00 0.0

Σ = 100.00% 0.00 0.0Risked Mean Resources EMV10

Seismic Expl Dril l ing Appr Dril l ing Total Total Total Disc. TotalUS$ REAL US$ REAL US$ REAL US$ REAL US$ MOD £ MOD £ MOD

2011 0.0 0.0 0.0 0.02012 0.0 0.0 0.0 0.02013 0.0 0.0 0.0 0.02014 0.0 0.0 0.0 0.0Total 0.0 0.0 0.0 0.0 0.0 0.0 0.0

After Tax 0.0

Tax position

• Assume that this will be your first asset and your company is not yet in a tax paying position

• Tax losses will be carried forward until they can be used (the model will do this for you)

• If you are unsuccessful there will be no tax relief on your failure costs

Bid Table

• Bids to be delivered in sealed envelope by lunch time on Friday

• You must bid for at least 4 prospects

• List all 9 prospects in order of preference and indicate which you are submitting a bid for.

• You should use EMV as the basis of your bids

• If you decide to offer a premium over the EMV remember that the unrisked success NPV’s should be able to cover the bid

• Label the bid sheet and envelope with your company name

• Each team will only be awarded one prospect

• Do not exceed your overall budget limit of $1000 million