SPE Seminar: Introduction to E&P Economics & Commercial November 17 th , 2016 Lamé Verre Principal A&A Alaric & Associates
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Who Are We? § Alaric & Associates is an independent oil and gas consultancy firm , focused on serving clients in the upstream and midstream sectors . § We are a professional service firm that provides a broad spectrum of professional expertise, including: § Strategy Advisory & Professional Support on q Business Development q Market Entry Strategies. § Economic Evaluation Services § Corporate Finance Advisory § We are headquartered in London (UK), with growing presence in Asia and Africa. We work with you to make value added decisions. 3 Alaric & Associates
Outline Overview of E&P Economics & Commercial • Why is it necessary? 1 • When is it required? 2 • Who does it? 3 • What inputs are required? 4 • How is it performed? 5 • And so what? 6 4 Alaric & Associates
Why is it Necessary? § To assess the inherent E&P project and decision risks § To evaluate investment returns § To make informed decisions on how to efficiently allocate capital Exploration Field in Mature Acreage Development Field Higher Lower Risk Risk Discovery Field Decommissioning under Recently Appraisal on Stream These risks are dependent on where we are within the E&P lifecycle 5 Alaric & Associates
When is it Required? Field/Asset Lifecycle Enhanced Decommission/ Exploration Appraisal Development Operation Production Abandonment § Acquiring rights • Further seismic • Concept selection § Produce § Maximize recovery § At end of surveys economic life § Geological, • Detailed § Process § Extend field life safely and cleanly • Appraisal drilling economic using Enhanced Oil § Gravimetric plug and abandon § Transport appraisal Recovery (EOR) Magnetic, wells • Studies techniques § Sell § Seismic surveys • Detailed § Decommission • Geological Engineering and dispose of § Exploration modeling facilities and Drilling • Financing • Initial economic pipelines appraisal • Development drilling • Facilities • Pipelines At every point during the E&P Asset Lifecycle to ensure value creation and delivery 6 Alaric & Associates
Who Does It? An Integrated Workflow & Team is highly recommended Updated Assumptions Approvals, Economics Subsurface Asset Management, Engineering & (G&G, Reservoir Planning/Budget, Engineers) Commercial Decision Making Development solutions STOIIP/GIIP/Production Discounted Cash Flow and Cost estimates Profiles Analysis § Wells (Number & § Calculate MCFS (min § NPV & EMV Location) com/eco field size) § IRR, PIR, MFE, § Facilities (topside & based on current eco. Payback subsea) ass. § Sensitivity Analysis § Pipelines § Production Profiles § Graphing § Product-2-market above MCFS (P10, P50 § ECF solutions & P90) § Tariffs Expense § CAPEX Schedule § # Wells (E, A & P) (Transport, extraction § etc. § HC mix and production) § Product data (shrink, § Tariff income yield etc.) § Other income § Peak rates § etc. 7 Alaric & Associates
What Inputs are Required? Commercial Agreements & Fiscal Regime Production Cash Flows Profiles Development Inputs Outputs Concept Cost Sensitivity Profiles Analysis Economic Model Hydrocarbon Key Prices Performance Indicators 8 Alaric & Associates
How is it Performed?...1/2 Discounted Cash Flow Analysis Full Cycle Point Forward Incremental • All investments including • Just looking at future cash • Sometimes projects cannot sunk cost flows be evaluated on a stand- alone basis • Full cycle measures better • Most investment decisions the overall investment are made on point forward • Key reasons include: Tax efficiency basis calculation, Project Timing, Size, part of exiting project By combining all the inputs in an economic model 9 Alaric & Associates
How is it Performed?...2/2 Full Cycle versus FID Point Forward Full Cycle from the beginning Point Forward from Final Investment Decision (FID) Incremental Exploration & Appraisal Development Capex Incremental Revenues Drilling (Tertiary Recovery) Base Revenues Opex Abandonment/ Decommissioning 10 Alaric & Associates
And So What?...1/2 Cost Categories and Unit costs - show efficiency in £/bbl. Finding/ Discovery Costs Enhanced Decommission Exploration Appraisal Development Operation Production /Abandonment Finding & Development (F&D) Costs Lifting Costs Capex/bbl. Opex/bbl. 11 Alaric & Associates
And So What?...2/2 Tracking Performance We bother because all E&P decisions and agreements have to make financial and economical business sense £ Key Performance Indicators § NPV = Net Present Value § IRR = Internal Rate of Return § PIR = Profit Investment Ratio § MFE = Maximum Financial Exposure § Payback § Sensitivity Analysis § Project Ranking § Portfolio Analysis 12 Alaric & Associates
Who’s Cash Flows? Typical Cash Flow Curve 10,000 Payback 8,000 6,000 Maximum Financial Decommissioning 4,000 Exposure USD MM 2,000 - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 -2,000 -4,000 Investment Phase Net Revenues After-Tax Cashflow Cum Cashflow The Project, The Company, The Lender, The Shareholder? 13 Alaric & Associates
Sensitivity Analysis Example Tornado Chart Production (Low/High) Discount Rate (+/- 2%) Oil Price ($45 / $75) Gas Price (+/- $1.00/Mscf) Capex (+/- 20%) Opex (+/- 20%) -1000 -500 0 500 1000 1500 2000 2500 3000 3500 4000 Base Case = NPV10 All Parameters & Variables should always be stress tested 14 Alaric & Associates
Thanks for listening. 15 Alaric & Associates
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