Decisions can only be made if the difference between alternatives can be quantified. Economic evaluation provides the metrics to compare different development options. Income is generated from oil and gas production while expenditures are split in Capital Expenditures (CAPEX) and Operating Expenditures (OPEX). Cubes3 staff can build economic models and use them to generate key economic parameters used in decision making.
Oil and gas developments are subject to various fiscal terms, which need to be modelled to calculate the economic parameters. The main fiscal agreements are Tax Royalty, Production Sharing Contracts and Technical Services Agreements. The models calculate how the revenues are split between royalties, taxes and profits and how these are divided amongst the companies and the local authorities. A thorough understanding of the fiscal terms is required to make the best investment decisions.
Oil and gas prices
The price is a (very important) input in the economic calculation. Prices may be based on existing contracts or on assumptions related to the demand and supply of oil and gas in the near and mid term future. Each company has its own independent view of future prices. Economists generally calculate the break even price for a development – i.e. Price at which the NPV =0- to get a better understanding of the viability of the project.
The main economic parameters are:
NPV (dollars) – Net Present Value is total cumulative cash flow at a chosen discount rate
IRR (%)– Internal Rate of Return, discount rate at which the NPV = 0
VIR (ratio) – NPV/CAPEX, profitability index or value investment ratio at chosen discount rate
Cash sink (dollars) – maximum debt, before the project starts to generate income
Pay out time (years) – Time when cumulative cashflow goes from negative to positive (at chosen discount rate)
UDC ($/b)- Unit Development Cost, total CAPEX /total Production
UTC ($/b) – Unit Technical Cost, total costs (CAPEX + OPEX)/total Production