Cash Flow Components and ECONOMIC INDICATORS
Why petroleum economics is required to make
investment decisions
Distinguishing cash flow from income and profit
Sources of revenue and cost
Treatment of capital expenditures (capex)
Depreciation methods and their objectives
Key information derived from financial statement
Operating expenditures (opex) and their fixed, variable and marginal components
Discounting and time-value considerations
Manipulating the present value and future value formula
Inflation, real and nominal (money-of-the-day) values
Capital budgeting and capital efficiency
Weighted-average cost of capital (WACC) and discount rates
Factoring in historic (sunk) costs into cash flow analyses
Valuing incremental investments
ECONOMIC INDICATORSand yardsticks used to rank asset values (NPV, IRR, MIRR etc.)
Hurdle and minimum acceptable rates of return
Annual worth and annuity calculations for lifecycle costing
Discounted payback, financial exposure and breakeven analysis
Project lifecycles, optimum economic life and multi-year cash flows
2 Upstream Petroleum Economics
In order to value upstream oil and gas assets and make decisions on upstream investments it is necessary to integrate economic, technical and fiscal analysis. This module provides delegates with the information necessary to understand such integrated analysis.
How cash flows through upstream companies and assets
Oil and gas price forecasting
Petroleum reserves categories and their valuation
Oil and gas production profiles and decline forecasts
International fiscal designs and systems
Regressive and progressive royalties and taxes
Mineral interest and concession agreements
Production sharing contracts and agreements (PSCs and PSAs)
Cost recovery mechanisms, depreciation, depletion and amortisation (DD&A)
Producer, government and joint venture partner takes: shares of revenues and costs
Loss carry forwards, limitations upon them including ring fences
Farm-out, farm-in and joint venture relationships and terms
Working and carried interests: paying, revenue and earning components
Project finance and evaluation of equity and debt supported cash flows
Leveraging projects with debt and establishing debt repayment schedules
Capital cost budgeting, estimating and monitoring
Achievement analysis and earned value in project management
3 Midstream and Downstream Petroleum Economics
Midstream (transportation and storage) and downstream petroleum project economics require different approaches to the upstream sector. Tariffs, margins, long-term contracts and market demand forecasts often determine the economic viability in these sectors.
Oil and gas transportation options and their economics
Pipeline and facility tariffs: levelised, incremental and rolled-in options
Rate building methodologies to establish facility tariffs
Liquefied natural gas (LNG) shipping economics and netback calculations
Underground natural gas storage (UGS) economics
Gross product worth (GPW) of refined products and crack spreads
Cost and revenue components associated with refineries
Gross, semi-variable, and net refinery margins and net cash values
Petroleum product distribution logistics and economics
Gas to liquids (GTL) economic issues
Retail fuel margins
Gas to power: combined cycle gas turbine (CCGT) economics
Significance of non-fuel and convenience store revenues in retail fuel site economics
4 Managing and Mitigating Uncertainty and Risk
Investments in the petroleum industry are subject to a wide range of uncertainties. This module explains how cash flow analysis can be adjusted for risk and uncertainty.
Definitions of risk and uncertainty
Seeking and valuing upside opportunities
Risk versus reward and risk capacity
Applying probabilities to quantify uncertainty
Sub-surface risks impacting the upstream sector
The need to evaluate a wide spectrum of above-ground risks
Geopolitical risks and opportunities
Environmental, community, safety and security issues
Holistic approach to risk analysis
Quadruple bottom line approach: integrating financial, societal, safety and environmental benefits
Expected value concepts and calculating expected monetary values (EMVs)
Hedging strategies to mitigate market and price risks
Valuing derivatives (futures, swaps and options)
5 Sensitivities, Simulations and Decision Analysis
Techniques that recognize that many potential economic outcomes are possible for each asset depending upon technical, commercial and fiscal uncertainties are widely used in the petroleum industry. This module describes the most common techniques.
Deterministic versus probabilistic methodologies
Establishing ranges and cases to test base case assumptions
Spider diagrams and tornado charts
Decision trees: static and dynamic models
Decision models, game theory and guidelines to provide flexibility
Establishing probability distributions to represent uncertainty
Selecting and sampling appropriate distribution types
Representing distributions in cumulative frequency terms
Monte Carlo simulation techniques
Statistical analysis and interpretation of simulation results
The importance of graphics in presenting simulation results
Real options methodologies and valuations
Perceptions of risk, overview of utility theory and avoiding bias
6 Valuing Petroleum Assets, Portfolios and Companies
This module examines how oil and gas assets are valued bringing together the techniques described in previous modules.
Asset valuation process: fair market value, probability and risk
Risk adjustments when valuing petroleum reserve categories
The portfolio approach to asset and corporate management
Portfolio characterisation, balance and diversification
Asset portfolio theory, efficient frontiers and feasible envelopes
Asset correlation dependency and risk
Optimising portfolio combinations and risked values
DD&A calculations integrating reserves, production and capital cost information
Factors driving petroleum merger, acquisition and divestment valuations
Free cash flow and business valuation methods
Analyst and balance sheet approaches to valuing listed companies
Inputs and outputs required for corporate valuation models
Deferred considerations and earn-outs in acquisition and divestment deals
Effective valuation of debt, price hedges and tax synergies in acquisitions and divestments
Competitive bidding: theory, practice, risks and pitfalls.
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