ECONOMIC ANALYSIS

Economic Analysis 5 Discount Rate ¾10% -12% -15% ¾an annual percentage that is used to discount or reduce the value of future income for the time valu...

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Petroleum Policy & Management Project

ECONOMIC ANALYSIS Redentor D. Pascual Department of Energy 3rd Workshop on Philippine PPM Sulu Sea Case Study August 25-30, 2004 Baguio City, Philippines

Outline • Results of Prospect Analysis • Production Profile • Economic Analysis – – – – – –

Elements Field Development Market Fiscal Regime Economic Indicators Results

• Sensitivity Analysis • Decision Tree

Economic Analysis

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Results of prospect analysis From GeoX Resource Assessment • Volumetric Parameters • Reservoir Parameters • Risk Parameters

Result/Prospect Size

Results of Prospect Analysis

Economic Analysis

Prospect

Prospect A

Oil Originally in Place

532 MMBO

Recoverable Resource

159 MMBO

Probability of Discovery

14%

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Production Profile • Factors determining production – – – – – – – –

Number of wells Plateau Production Rate Production Period Cut-off Rate Lead Time to Production Plateau Factor Remaining oil/gas at start decline Decline Rate

Production Profile Production Curve 50000

Prospect A

Production (bbls)

40000

30000

20000

10000

0

Year

Economic Analysis

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Economic Analysis-Elements • Cost Data – Exploration/Sunk costs (historical costs) – Capital expenses (one-off costs) – Operation expenses (periodic costs)

• Discount rate – Philippine Discount Rate (10% - 12% - 15%)

• Inflation rate – 3.0% average for year2003 (NEDA)

• Oil Price - ($21 - $25 per barrel) • Project Net Cash Flow

Cost Estimates Cost Parameter Exploration Costs Capital Expenses 15% Contingency Expanded Capex Operating Expenses Total Costs Total Project Costs

Economic Analysis

Prospect A 47.85 589.00 88.35 677.35 447.10 1083.95 1172.30

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Discount Rate ¾ an annual percentage that is used to discount or reduce the value of future income for the time value of money (Hyne, Norman J., Dictionary of Petroleum Exploration, Drilling & Production). ¾ 10% - 12% - 15%

Inflation Rate Inflation Rate from 1999 - mid 2004 14

Inflation Rate (%)

12 10 8 6 4 2

May

Jan

Sep

Jan

May

Sep

May

Jan

Sep

May

Jan

Sep

May

Jan

Sep

May

Jan

0

Month (1999 - mid2004) Source: National Statistics Office NEDA/10 June 2004

Economic Analysis

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World Oil Price

Project Net Cash Flow Project Cash Flow 600

Ye arly Ne t C asf Flow (million US$)

500

4000

400 3000 300 200

2000

100

1000

0 0

Ne t C ash Flow, cumulative (million US$)

5000

-100 -1000

-200 -300

-2000

Ye ars Net Cash Flow After Tax

Economic Analysis

Net Cash Flow, Cumulative

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Field Development • Fixed Structure (Platform, Concrete Gravity Structure) • Floating Production Storage and Off-loading (FPSO) vessel

Field Development – Fixed Structure option 2 BRIDGE LINKED PLATFORMS

CONCRETE STORAGE

TANKER

CALM BUOY

SCHEMATIC OF FIXED PRODUCTION PLATFORM

Economic Analysis

STERLING ENERGY PLC

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Field Development – FPSO option

Source: From the gallery of PetroCanada

Market • Oil – Domestic market • Petron, Shell refineries

– External market • as stipulated in the signed contract

Economic Analysis

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Fiscal Terms -

Royalty/ies: None Cost oil: 70% of gross income Depreciation: DDB or Straight Line Method Income tax: 32% paid out of Gov’t share Profit oil: 60-40 (Gov’t. – Contractor share) FPIA: 7.5% maximum = 30% participation (minimum of 15% Filipino participation) - State Participation: Not required

Fiscal Terms • Contract area: 800-15,000 km2 (offshore) 500-7,500 km2 (onshore) • Contract term: 7 yrs exploration + 3 yrs extension 25 yrs production + 15 yrs extension • Signature Bonus: US$50,000 – US$250,000 • Other Bonuses: Negotiable (Discovery & Production) • Training Fund: Negotiable

Economic Analysis

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Filipino Participation Incentive Allowance (FPIA) Schedule of Percentage Incentive Filipino Participation 30% - above 27.5% but less than 30.0% 25.0% but less than 27.5% 22.5% but less than 25.0% 20.0% but less than 22.5% 17.5% but less than 20.0% 15.0% but less than 17.5% Below 15.0%

Incentive Allowance 7-1/2% 6-1/2% 5-1/2% 4-1/2% 3-1/2% 2-1/2% 1-1/2% 0%

Economic Indicators • Net Present Value (NPV) • Internal Rate of Return (IRR) • Payback Period • Expected Monetary Value (EMV) • Total Government Take (TGT)

Economic Analysis

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RESULTS • Results of analysis (without FPIA) • Results of analysis (with 7.5% FPIA) • Results with different discount rate (without FPIA) • Results with different discount rate (with 7.5% FPIA)

Results of Economic Analysis Parameters

Prospect A

Resource

159 MMBO

POS NPV @ 10% IRR Payback

Economic Analysis

14% US$ 229 MM 21% 9 years

EMV

US$ 2 MM

TGT

US$ 517 MM

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Results of Analysis Prospect A

Parameters

@ $25/bbl

@ $40/bbl

US$ 329 MM

US$ 724 MM

24%

36%

9 years

8 years

EMV

US$ 16 MM

US$ 71 MM

TGT

US$ 660 MM

US$ 1239 MM

NPV @ 10% IRR Payback

Results of Analysis (with FPIA) Parameters

Economic Analysis

Prospect A @ $25/bbl

@ $40/bbl

NPV @ 10%

US$ 450 MM

US$ 919 MM

IRR

28%

41%

Payback

8 years

8 years

EMV

US$ 33 MM

US$ 98 MM

TGT

US$ 660 MM

US$ 1239 MM

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Results (FPIA vs. no FPIA) Parameter

Prospect A No FPIA

7.5% FPIA

NPV @ 10%

$229

$332

IRR

21%

24%

Payback

9 yrs

9 yrs

EMV

$2

$16

TGT

$517

$517

Results with different discount rates (w/o FPIA) Parameter

Economic Analysis

Prospect A 10%

12%

15%

NPV

$229

$160

$84

IRR

21%

21%

21%

Payback

9 yrs

10 yrs

11 yrs

EMV

$2

-$6

-$15

TGT

$517

$425

$319

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Results with Different Discount Rates & with 7.5% FPIA Prospect A

Parameter 10%

12%

15%

NPV

$332

$246

$150

IRR

24%

24%

24%

Payback

9 yrs

9 yrs

10 yrs

EMV

$16

$6

-$6

TGT

$517

$425

$319

Sensitivity Analysis Spider Diagram (NPV)

1600

1400

NPV (million US$)

1200

1000

800

600 Price

400

Capex Opex

200

0 30%

Economic Analysis

20%

10%

0%

10%

20%

30%

14

Sensitivity Analysis Spider Diagram (IRR)

45.0 %

40.0 %

35.0 %

30.0 %

IRR

25.0 %

20.0 %

15.0 % Price

10.0 %

Cap ex Op ex

5.0 %

0.0 % 30%

20%

10%

0%

10%

20%

30%

Decision Tree Analysis • Analysis of a series of connected decisions • Graphical presentation of a sequence of events/decision points and their possible outcomes • Expected Monetary Value (EMV) = ( VS * POS) - (VF * POF)

Economic Analysis

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Decision Tree Diagram 100.0% POS

29.1% POS

Discovery

Success

29.1% POS

689.6 (million US$) NPV 0.0% POS

689.6 (million US$) NPV

Explore 70.9% POS

Prospect

179 (million US$) EMV

Nonsuccess

0.0% POS

0.0 (million US$)

Dry

70.9% POS

-30.3 (million US$)

179 (million US$) EMV

Don’t Explore

0.0% POS

0.0 (million US$)

Thank you!!!

Economic Analysis

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