c
 

 


 
 c
 c 
 
 

  


‡ Minerals are found only in certain favoured

places. There is no question of locating a mine
anywhere else except where it is found in
commercial quantities.

‡ The minerals are exhaustible

‡ The minerals are found in places where they may

not be needed and used.
 c 
 
 

  


‡ There is always a very large excess capacity

built into the system. Therefore the normal
laws of supply and demand, marginal costs,
etc are not often readily applicable in the
case of minerals.

‡ Very long term forecasts have to be made

 c 
 
 

  


‡ Mineral economics is bound up with politics very

intimately.

‡ Mineral industries are extremely well organized in

the hands of a small number of integrated firms
who have considerable power in regulating
supply, demand and prices. Thus normal
economic mechanisms are simply not operative
under these conditions in their classical forms.
  
  

‡ Petroleum getting more difficult to find

‡ Smaller fields
‡ Aging facilities and staff
‡ Harsher terrains of discovery
‡ Environmental challenge
‡ Unstable prices
‡ Community issues (in developing countries)
‡ Technology and higher business costs
‡ Depleting reserves
  
  

‡ Companies have tried to meet these

challenges through:
‡ Cost reduction measures
‡ Staff rationalization
‡ Vertical integration
‡ Strategic business units
‡ Portfolio diversification

‡ Other measures
 
 c
 

‡ There are 5 factors that determine the price of

crude oil:

‡ Market (Supply and Demand)

‡ Reliability (Production rate)
‡ Location (Transportation)
‡ Quality (Refining cost and Yield)
‡ Availability (Reserves)
 c  !"

‡ Oil Price /bbl

‡ = Base Price/bbl + A (API) - B (% S)

‡ Base price = current price for 0 API oil

‡ A= Scale factor for API gravity
‡ B = Markdown Factor for presence of sulphur
 #

‡ A marker crude is an oil from a specified

field or region which is traded in spot
markets and considered a standard
 $$ "%#

‡ Perceived to represent µfair value¶

‡ Traded in liquid and transparent markets
‡ Wide range of buyers and sellers
‡ Supply is freely tradable
‡ Adequate reserves
‡ Production is strategically situated
‡ Politically acceptable to producers and end users
‡ Spot price is widely reported
‡ Reasonably immune to manipulation
  
&


‡ There are 2 basic types of markets in crude oil:

‡ The µWet¶ or cash Market, and

‡ Futures market where trades are made through a

formal commodities exchange for some specified
future delivery date.
  
&


‡ The bulk of the world¶s crude oil traded

internationally never reaches an open market in
the literal sense.

‡ They are handled within the integrated operations

of the majors and in direct deals or contarct
arrangements between producers and consuming
governments as well as other players.

 c
&

‡ Little happens in the industry without the Spot

Market, particularly the Rotterdam spot market.

‡ The spot Market refers to one-off or spot sales of

crude oil in tanker loads. This is usually crude oil
that is surplus to the requirements of direct
purchasers. Companies that are short of crude also
resort to the spot market to make up the balance.

 c
&

‡ However, price movements in the spot market do

not necessarily reflect real market conditions as
can fluctuate widely and involve relatively small
amounts of crude oil on a global scale.

‡ During surplus, spot prices tend to fall below

official prices, while they can rise steeply during
peiods of shortages.

 c
&

‡ Major Players

‡ The major international oil companies

‡ Traders
‡ Brokers
‡ Independent oil companies

'&c



‡ In a netback transaction, crude oil is sold on

the basis of the price that the buyers expect
to receive for his final products, rather than
the price set by the producer at the time of
sale.
 c

'&
 

‡ Refinery Yields
‡ Products Prices
‡ Timing
‡ Transportation
‡ Other fees and Profit Margin
 (

 

 
c
 

)
&

‡ NYMEX (New York Mercantile Exchange)

‡ IPE (International Petroleum Exchange

London)

‡ SIMEX (Singapore Mercantile Exchange)

 c
 c( 

 


‡ In any decision making process, one must

account for the benefits and costs of a
project

‡ In a typical project, the costs occur at the

beginning of the project and the benefits
occur over a period of time.

&
c
 c( 

 
 )


‡ Setting an economic objective based on

corporate economic criteria
‡ Formulate scenario for the projects
‡ Collecting all relevant Technical and
economic data
‡ Making Economic calculations
‡ Making Risk Analysis
‡ Selection of optimum development plan
 
 



 
 
 *



‡ Predicting future operating costs

‡ Economic limits of producing wells (or plants in
downstream projects)
‡ Field life (or project life)
‡ Failure Analysis
‡ Price-effect cost escalation
‡ Risks
‡ Funding


 *  )

""% +, 

‡ When cash flows can be traded for one another in

a financial world, those cash flows are considered
equivalent to each other.

Economic equivalence depends upon

‡ Interest rate
‡ Time
 c( 
  


‡ When conducting a cost benefit analysis of

any project, if the benefits are received in
the future, we cannot directly compare the
front cost to the future benefits unless we:
‡ Convert the future benefit to equivalent
present benefit, or
‡ Convert the present cost to equivalent future
cost
  





‡ They reduce net cash flow projection to single

numbers
‡ Measures the relative economic attractiveness of
the cash flow
‡ Tells us whether one investment gives a greater
economic benefit than other investments
    






‡ Net present value (NPV)

‡ Internal rate of return (IRR)
‡ Pay back time (PB)
‡ Discounted profit ± to investment ratio
(DPIR)
‡ Unit technical cost (UTC)
  





c*
‡ Consistently the most reliable and most frequently
used in practice
‡ Takes into account timing of future cash flow
‡ Tells us how much an investment is better or
worse than putting money into the bank or some
alternative investment
‡ Makes large projects more attractive than smaller
ones, no indication of investment efficiency.
‡ Highly dependent on discount rate
  






‡ It is the after tax return equivalent to putting an
investment in an interest bearing account.
‡ Frequently used as an initial screening device
‡ Tends to favour high initial earnings projects over
long-lived projects
‡ Can produce multiple values, and ambiguous.
‡ Could be difficult to calculate (trial and error)
  





c)'&c'
‡ Indicates length of investment ³exposure´,
or break-down point of a project.
‡ Easy to calculate and understand
‡ It ignores the timing or variations of cash
flow before payback
‡ Useful as an initial indicator of the merits of
a project
  





c

‡ defined as the net cash flow of the project
per dollar of capital investment
‡ used as quick ³first look´ investment
criteria
‡ excellent for ranking projects
‡ highly dependent on discount rate
‡ measures investment efficiency
 




 - )


‡  %"  %     ,  

$  ./  ",  %  /"
"% $0

‡ " $ "%  %"  $ %" $"

"% 0"$   " "0    "$
%"  ,$0 $  " 10# !
'
c

c 
- )


‡ ' / /"% %" $$,$$"

$ " $ "% ,$0 $$ $, 2

‡ %%  3$  %"   /"%$

‡
$0 $ "% / $"
‡ -     %$"  3  "/"$
‡ " /$ "% "0      %"
‡
$0 $ "% " 
‡
$$ " " 
‡ " /0 $
 '
 



 

/$"$
‡ One-time costs usually incurred at the beginning of a
project. They are usually large expenditures incurred
several years before any revenue is obtained.

‡ .0/
‡
 #
‡ c/ " $ $"
‡ c" % $
‡ 0/  "00"$" 
‡ $"!,
 '
 



 

/$ !"$
  !      $" 0 $
"/$" 
 ./   $0 "% ./ $ /  " /
 $ /" $" .

.0/
‡ Field labour cost
‡ Maintenance cost
‡ Office overhead
‡ It can be fixed periodic/annual amount or can be variable and
determined as a function of production rate.
 c$"0 
0
", 0 $
#
‡ In many projects worldwide, government take is
over 50% of net pre-tax cash flow. It includes:

‡ Royalties
‡ Profit Sharing
‡ Taxes
‡ JV S vs PSC
 - )


‡ $"

‡ Net cash flow = cash received ± capital

expenditure ± operating expenditure ±
royalties, taxes, profit sharing.
 c



‡  " $ ! " /$ /"$ ! "0/ 

 " $"  !$.3$
‡ " "$%$"$"$0" %"3$
 "/"$/ $" "% /$ "$

‡ c"%$4  ,5 / $ /.5

"/.5 "$6$.6/"%$ !6$
 -*c



       
 7 8 9 : ;
„
     
? V
     
?

     
V     



á

 7
 8
 9
 :
 ;
„
     

V
     
?


    

     

 -*c



" "
‡ Net cash flow gives the forecasted actual money
spent and received. It correctly represents the size
and timing of cash flow.

‡ c"%$ $% " $ $"

‡ It is inappropriate for making investment decisions
because it does not represent actual money flow.
‡ Used for annual reporting to stockbrokers and
assessing tax liability.
 <c   





Capital Investment = $110,000

Net Operating Income:
Year Income
1 $40,000
2 $40,000
3 $40,000
4 $40,000
5 $40,000
6 $30,000
7 $20,000
8 $10,000
9 $4,000
 <c   





Net Cash Recovery = ™ Ix - P

= $264,000 - $110,000
= $154,000
 <c   





Payback Time = P/ ™ Ix/N

= 110,000/ 264,000/9
= 3.75 Years
 <c   





Discounted Profit = NPV(I) ± NPV(P)

Assuming i=9%
1ST 5 Yrs: $200,000(Fc, 9%, 5 yrs)
=$162,400
6th Yr : $30,000* Fc (1 yr)* Fsp (5 yrs)
= $30000* 0.958*0.6
= $18,281
 <c   





7th Yr : $20000* 0.958*0.596

= $11,419.36

8th Yr : $10000* 0.958*0.547

= $5240.26

9th Yr : $4000* 0.958*0.502

= $1923.37
 <c   





NPV (I) = $199,664.29 (@9 %)

Discounted Profit = $199664.29-110000

= 89,664.29 (@ 9%)

NPV(I) @ 25% = 136,595.4 Profit =$26595.4

NPV(I) @40% = 104833.2 Profit = -$5166.77
IRR = 37%
 
 *


 c( 

&  

V

   

‡ á 
 
‡ Project costs are uncertain
‡ Schedules are uncertain
‡ Scope of work is often uncertain
‡ External factors are uncertain
‡ But the project manager must never be uncertain.
 
&   


)

‡ Derivation of cash flow and the measurement of

economic worth are based on the assumption that
investments are risk-free.

‡ Assessment of risk and uncertainty is important to

decision making

‡ Analysis allows one to select the appropriate

discount rates which account for risk and
uncertainty.
  



 
&
#
The probability that a certain undesirable outcome will occur

 $ $
The range of values within which the actual value is
expected to fall

" $ ! 
‡ Provision for variations to the basis of a plan or cost
estimate which are likely to occur and which cannot be
specifically identified at the time the plan or estimate was
prepared.
‡ It provides an equal chance of over run or under run.
  
c( 

&
  

‡ Risk Identification
‡ Risk Quantification
‡ Risk Response Development
‡ Risk Response Control
 c( 

&  

"c"= $# !0 $ $# >

‡ Identifying risks and uncertainties

‡ Calculating the cost of contingency
‡ Calculating the schedule contingency
‡ Calculating the estimate accuracy
‡ Calculating the sensitivity of cost, schedule, or profitability
to specific risk factors
‡ Identifying the elements of risk that contribute most to
current inconsistency
‡ Defining a program to reduce and manage risk