02 Rm Defining Value Feb08

Reservoir Management Defining Value

DELIVERING KNOWLEDGE. DEVELOPING COMPETENCE. 1 1

© 2008 PetroSkills LLC, All Rights Reserved

Setting Strategies • How Will You Define Success? – What Value Criteria Will You Maximize • Different Stakeholders May Have Different Objectives • Objectives Can (And Probably Will) Change With Ti Time

Reservoir Management Defining Value © 2008 PetroSkills LLC, All Rights Reserved

2.2

International Oil Companies (IOC’s) • Overall goal—maximize shareholder return

– Stock p price g growth,, dividends • Investments measured by numerical economic criteria

– Discounted cash flow present value (PV) ( ) – Discounted cash flow rate of return (ROR) – Discounted Return on investment (DROI) • Sometimes actions are taken to emphasize another criteria

– Reserve replacement – Production rates – Minimize expenditures (OPEX (OPEX, CAPEX) Reservoir Management Defining Value © 2008 PetroSkills LLC, All Rights Reserved

2.3

National Oil Companies (NOC’s) • Time value of money not so important • G Generally ll iinfluenced fl db by political, liti l socioeconomical, and regional interests • Short Sh t term t cash h flow fl vs. llong-term t employment l t

Reservoir Management Defining Value © 2008 PetroSkills LLC, All Rights Reserved

2.4

Net Cash Flow Analysis • Yearly or Monthly Analysis Net Cash Flow = Net Revenue – Net Expense – Local Taxes – Net Investment

• Economic Yardsticks

Reservoir Management Defining Value © 2008 PetroSkills LLC, All Rights Reserved

2.5

Net Revenue • Schedule of Gross Oil and Gas Production * • Mineral Ownership (Less Royalties) = • Net Oil and Gas Production * • Oil and Gas Price Forecasts = • Net Oil and Gas Revenue

Reservoir Management Defining Value © 2008 PetroSkills LLC, All Rights Reserved

2.6

Net Expenses and Local Taxes • Net Expenses for Operating and Maintaining Wells – Field Personnel – Electrical – Chemicals – Pump Replacements • Local Taxes – Percentage of Net Revenue – Variable by Area – Distinct from Corporate Taxation Reservoir Management Defining Value © 2008 PetroSkills LLC, All Rights Reserved

2.7

Net Investment • Ownership Share of Required Investments – Drilling and Completion – Facilities – Transportation – Processing

Reservoir Management Defining Value © 2008 PetroSkills LLC, All Rights Reserved

2.8

Example Net Cash Flow Worksheet

Year

Net Revenue (M$)

Net Expense (M$)

Net Taxes (M$)

Net Income (M$)

Net Investment (M$)

Net Cash Flow (M$)

Time Zero 2005 2006 2007 2008 2009

0 250 500 450 400 360

0 24 24 24 24 24

0 18 35 32 28 25

0 209 441 395 348 311

320 0 0 0 0 0

-320 209 441 395 348 311

2025

100

24

7

69

0

69

Total

5,970

552

418

5,000

320

4,680

Reservoir Management Defining Value © 2008 PetroSkills LLC, All Rights Reserved

2.9

Project Cash Flows Project A Net Cash Flow Profile

Project B Net Cash Flow Profile

100

120

80

100

60 40 20 0 1

2

3

4

5

Net Ca ash Flow ($MM)

Net Cash Flow ($MM M)

120

Year

80 60 40 20 0 1

2

3

4

5

Year

• Both Projects Require Identical Investment • Which Do You Prefer? Why?

Reservoir Management Defining Value © 2008 PetroSkills LLC, All Rights Reserved

2.10

Time Value of Money Project B Net Cash Flow Profile

120

120

100

100

Nett Cash Flow ($MM)

Net Cash Flow ($MM)

Project A Net Cash Flow Profile

80 60 40 20 0 1

2

3 Year

4

5

80 60 40 20 0 1

2

3

4

5

Year

• Discounting Used to Compare Projects on a “Present Value” Basis Value • Discount Factor Based on Corporate Guidelines

Reservoir Management Defining Value © 2008 PetroSkills LLC, All Rights Reserved

2.11

Discount Factor (DCF) •

Example Discount Rate (i) of 12% / year DCF = 1.0 / (1.0 + i )n where n = number of period, i = discount rate (fraction)

•

Sample Calculations Year (n) Time 0

DCF 1.0000

1

0 0.8929 8929

2

0.7972

3

0.7118

4

0.6355

5

?

20

? Reservoir Management Defining Value © 2008 PetroSkills LLC, All Rights Reserved

2.12

Compare The Discounted Values Project B Net Cash Flow Profile

120

120

100

100

Net Cash Flow ($MM)

Net Cash Flow ($MM))

Project A Net Cash Flow Profile

80 60 40 20 0 1

2

3 Year

4

5

80 60 40 20 0 1

2

3

4

5

Year

• A = 100 * 0.8929 • B = 20 * (0.8929 + 0.7972 + 0.7118 + 0.6355 + ?)

Reservoir Management Defining Value © 2008 PetroSkills LLC, All Rights Reserved

2.13

Use NCF to Find DNCF

Year

Net Cash Flow (M$)

Disc 12% Net Cash Flow (M$)

Time Zero 2005 2006 2007 2008 2009

-320 320 209 441 395 348 311

-320 320 186 352 281 221 176

2025

69

4

Total

4,680

1,640

• DCF = 12% / yr • Higher DCF values reduces DNCF • Rate of Return is DCF That Yields DNCF = 0 • DROI = DNCF/ Disc Di IInv

DROI O = 1640 / 320 32 = 5.12 2 Reservoir Management Defining Value © 2008 PetroSkills LLC, All Rights Reserved

2.14