Reservoir Management

Defining Value

DELIVERING KNOWLEDGE. DEVELOPING COMPETENCE. 1

1 2008 PetroSkills LLC, All Rights Reserved
 Setting Strategies

How Will You Define Success?

What Value Criteria Will You Maximize
Different Stakeholders May Have Different
Objectives
Objectives Can (And Probably Will) Change
With Ti
Time

Reservoir Management 2.2

Defining Value
2008 PetroSkills LLC, All Rights Reserved
 International Oil Companies (IOCs)

Overall goalmaximize shareholder return

Stock p
price g
growth,, dividends
Investments measured by numerical economic criteria
Discounted cash flow present value (PV)
( )
Discounted cash flow rate of return (ROR)
Discounted Return on investment (DROI)
Sometimes actions are taken to emphasize another
criteria
Reserve replacement
Production rates
Minimize expenditures (OPEX
(OPEX, CAPEX)
Reservoir Management 2.3
Defining Value
2008 PetroSkills LLC, All Rights Reserved
 National Oil Companies (NOCs)

Time value of money not so important

G
Generally
ll iinfluenced
fl dbby political,
liti l
socioeconomical, and regional interests
Short
Sh t term
t cash
h flow
fl vs. llong-term
t employment
l t

Reservoir Management 2.4

Defining Value
2008 PetroSkills LLC, All Rights Reserved
 Net Cash Flow Analysis

Yearly or Monthly Analysis

Net Cash Flow = Net Revenue

Net Expense
Local Taxes
Net Investment

Economic Yardsticks

Reservoir Management 2.5

Defining Value
2008 PetroSkills LLC, All Rights Reserved
 Net Revenue
Schedule of Gross Oil and Gas Production
*
Mineral Ownership (Less Royalties)
=
Net Oil and Gas Production
*
Oil and Gas Price Forecasts
=
Net Oil and Gas Revenue

Reservoir Management 2.6

Defining Value
2008 PetroSkills LLC, All Rights Reserved
 Net Expenses and Local Taxes

Net Expenses for Operating and Maintaining

Wells
Field Personnel
Electrical
Chemicals
Pump Replacements
Local Taxes
Percentage of Net Revenue
Variable by Area
Distinct from Corporate Taxation

Reservoir Management 2.7

Defining Value
2008 PetroSkills LLC, All Rights Reserved
 Net Investment

Ownership Share of Required Investments

Drilling and Completion
Facilities
Transportation
Processing

Reservoir Management 2.8

Defining Value
2008 PetroSkills LLC, All Rights Reserved
 Example Net Cash Flow Worksheet

Net
Net Net Net Net Net Cash
Revenue Expense Taxes Income Investment Flow
Year (M$) (M$) (M$) (M$) (M$) (M$)

Time Zero 0 0 0 0 320 -320

2005 250 24 18 209 0 209
2006 500 24 35 441 0 441
2007 450 24 32 395 0 395
2008 400 24 28 348 0 348
2009 360 24 25 311 0 311

2025 100 24 7 69 0 69

Total 5,970 552 418 5,000 320 4,680

Reservoir Management 2.9

Defining Value
2008 PetroSkills LLC, All Rights Reserved
 Project Cash Flows

Project A Net Cash Flow Profile

Project B Net Cash Flow Profile
120

100 120
M)
Net Cash Flow ($MM

80 100

ash Flow ($MM)

60
80
40
60
20

Net Ca
0 40
1 2 3 4 5
20
Year

0
1 2 3 4 5
Year

Both Projects Require Identical Investment

Which Do You Prefer? Why?

Reservoir Management 2.10

Defining Value
2008 PetroSkills LLC, All Rights Reserved
 Time Value of Money

Project A Net Cash Flow Profile Project B Net Cash Flow Profile

120 120

100
Net Cash Flow ($MM)

100

Nett Cash Flow ($MM)

80
80
60
60
40

20 40

0
20
1 2 3 4 5
Year 0
1 2 3 4 5
Year

Discounting Used to Compare Projects on a Present

Value Basis
Value
Discount Factor Based on Corporate Guidelines

Reservoir Management 2.11

Defining Value
2008 PetroSkills LLC, All Rights Reserved
 Discount Factor (DCF)
Example Discount Rate (i) of 12% / year
DCF = 1.0 / (1.0 + i )n
where n = number of period,
i = discount rate (fraction)
Sample Calculations
Year (n) DCF
Time 0 1.0000
1 0
0.8929
8929
2 0.7972
3 0.7118
4 0.6355
5 ?
20 ?

Reservoir Management 2.12

Defining Value
2008 PetroSkills LLC, All Rights Reserved
 Compare The Discounted Values

Project A Net Cash Flow Profile Project B Net Cash Flow Profile

120 120

100
Net Cash Flow ($MM))

100

Net Cash Flow ($MM)

80
80
60
60
40

20 40

0
20
1 2 3 4 5
Year 0
1 2 3 4 5
Year

A = 100 * 0.8929
B = 20 * (0.8929 + 0.7972 + 0.7118 + 0.6355 + ?)

Reservoir Management 2.13

Defining Value
2008 PetroSkills LLC, All Rights Reserved
 Use NCF to Find DNCF

Net Disc 12%

DCF = 12% / yr Cash Net Cash
Flow Flow
Higher DCF values reduces
Year (M$) (M$)
DNCF
Time Zero -320
320 -320
320
Rate of Return is DCF That 2005 209 186
Yields DNCF = 0 2006 441 352
2007 395 281
DROI = DNCF/ Disc
Di IInv 2008 348 221
2009 311 176

2025 69 4

Total 4,680 1,640

DROI
O = 1640 / 320
32 = 5.12
2
Reservoir Management 2.14
Defining Value
2008 PetroSkills LLC, All Rights Reserved