PTRL 4011 Field Development and Economics Project Page 1

Final Year Thesis

PTRL 4011
Skua Field Evaluation

Guide to Study

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1. Introduction
In this course, you will be required to study and report on the engineering and
economics of an oil and gas discovery. The discovery is called the Skua
discovery. Skua was a discovery in the Vulcan Sub-basin offshore northern Australia
in the Timor Sea. It was discovered in the 1980s, produced during the early 1990s
and then abandoned.

We have obtained data on the Vulcan Sub-basin and the Skua field from the
Australian Geological Survey Organisations archives.

1.1 Timetable
The timetable and milestones for the course are shown in Table 1.1.

Table 1.1

Session Week Topic Supervisors Submission

date #

1
S2 Economics Michael Skinner
2
Stuart Walsh
3 Traiwit Chung
4 Jack Lin 20 Aug 2017
Huifang Song
5
S2
6
Furqan Hussain
7
Engineering TBA
8
TBA
9 8 Oct 2016
10
Michael Skinner
11
S2 Valuation Stuart Walsh 20 Oct 2016
12
TBA
S2 13 Presentations Various TBA

Footnotes
# Submit electronic copies of reports and assessment/plagiarism cover sheets to
Moodle by 17.00 pm on the submission day. A final copy of the comprehensive
report is required in week-13.

Minimize the size of your file. Include a signed assessment cover sheet as the first
page.

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1.2 Marks
The maximum marks will be as shown in Table 1.2

Table 1.2

Component Maximum Marks (%)

Economic Model * SY/FL
Engineering Report * SY/FL

Written Report 70

Participation marks 10

Oral/poster presentation 20

Total 100%
*SY/FL: satisfactory or fail

Note: Lecturers are not officially permitted to disclose to students the marks
they award for any part of the thesis. The UNSW administration has the
responsibility to issue marks.

1.3 Component marks

(a) Written report
For the economic model, students should submit their economic model in the form
of an Excel file. Students must supply a report for Engineering and Valuation. For
the reservoir engineering report, students must also attach the optimized reservoir
model (*.DATA file).
In week-13 students are required to submit a comprehensive thesis report. This
report is worth 70% of the Thesis-B marks. Distribution of the report marks are as
following:

a. Lit review/background and putting the results in context (10%)

b. Execution of the research project, quality of analysis, discussion of
results, (50%)
c. Conclusions and value added (20%)
d. Document presentation (20%)

Reports must be individual models/reports. It should be clear from these that they
are entirely your own original work. This means that each report should include a
signed assessment/plagiarism cover sheet. You should sign and scan the plagiarism
cover sheet before you include it in your report.

(b) Participation marks

Students are required to meet weekly with their supervisors. Supervisors will mark
the students based on their progress. This component is worth 10% of the Thesis-B
marks.

(c) Oral/poster presentation

Students are required to present their Thesis results to the school academics in
week-13. This component is worth 20% of the Thesis-B marks. Further details about

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this will be provided closer to the date.

1.4 Report format

Use these notes as a guide to the layout of your reports in text form. In particular,
follow these rules

(a) The format of the title of the file containing your submission should be
Student number - Name Subject. Please use the short form of your name.
(b) The main text should be in Trebuchet 11 point.
(c) The left hand side header should read "PTRL 4011 Final Year Thesis.
(d) The right hand side header should read "Page X"
(e) You should put a line under the header.
(f) The left hand side footer should show the short form of your name
(g) The right hand side footer should show the date (eg "1 October 2014")
(h) You should put a line above the footer.
(i) Headers and footers should be in Trebuchet 11 point.
(j) As a general rule, the contents of reports should be (in this order)

Introduction (context and aims)

Abstract or summary (should include major analysis and findings)
Assumptions
Method
Results & discussion
Conclusion
References
Glossary
Appendices

(k) The report should have a title page.

(l) Final Report should be no longer than 40 pages. This includes the title page,
introduction, summary, assumptions, methods, results & discussion,
conclusion, references and glossary section, but does not include the
appendices section.

(m) The appendices section should only include tables and figures. It should not
include any detailed analysis or results.

1.5 Data
In addition to the data given in references, additional data will be uploaded on
Moodle.

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2. Objectives
The objective of the thesis is to value the field under study. You will study and
report on the economics, reservoir engineering and development of the field under
study.

The objectives of this part of the thesis are as follows -

(a) To construct in Excel an economic model.

(b) To simulate production from the discovery.
(c) In combination with (b), to optimize the development of the discovery.
(d) To place a value on the discovery with a view to making a bid for it.

3. Economic model
The purpose of developing the economic model is to enable you to perform an
economic analysis of each of your field development plans and production profiles,
as well as, assessing the impact of different assumptions about costs and prices
using sensitivity analyses and Monte Carlo Simulations.
Therefore you need to construct your economic model on a single sheet containing
all input data, calculations and results. This means that you can have one sheet for
each case that you might examine.

3.1 Assumptions
Please use the following additional assumptions and data as appropriate

(a) When you build the economic model, assume data for the production, past
exploration costs, future real capital costs, and future real operating costs as
shown in Table 1. When you use the model later in the project, you will enter your
own data for these variables.

(b) Assume that the oil price, gas price, capital and operating costs are escalated
at 3% per year. In the calculation of nominal costs, assume that the cost data in
Table 1 is estimated with products and services priced as at Future Year 1, that the
costs are incurred at the end of the years shown and that the oil price is received
at the end of the years shown. Therefore, for instance, the nominal oil price and
the costs in future year 2 are 3% more than the real price and costs shown.
When you use the model later in the project, you should enter your own escalation
assumptions based on your own view of the future of inflation rates.

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Table 1 Benchmark data for economic model

Actual Real Realoilprice=$20/bbl

Oil Gas exploration development Realgasprice=$2/Mcf
prodn prodn costs costs Realfixedopex=$20
Year* (Mbod) (MMcfd) ($MM) ($MM) MM/y
2009 1 Realvariableoilopex=
2010 8 $1/bbl
2011 3 Realvariablegasopex
2012 10 $1/Mcf
2013 4 Realabandonmentcost
2014 7 =25%ofreal
2015 1 developmentcosts
2016 10 50
2017 150
2018 60 10
2019 50 10
2020 40 10
2021 30 10

2022 20 10

* Future Year 1 = 2016, Year 2 = 2017, etc

3.2 Design

We recommend that you design your economic model with these features -
(a) See Appendix 1 for an example of the suggested layout for each sheet of your
model.
(b) Ensure that your model will allow you to carry out sensitivity and Monte Carlo
analyses on key input variables including production, price, capex and opex.
(c) Ensure that you allow all costs and price to be individually escalated with
individual escalation rates and escalation start years. Construct your cash flows
in nominal terms only.
(d) Use the same sheet for data, the cash flow derivation and the results (see the
notes and suggested layout in Appendix 1).
(e) Use the same format for each sheet. We recommend that you go across the
page for the yearly data and down the page for the variables. Reserve the left
hand side (LHS) of the spreadsheet to define your variables. Then allow two
columns on the LHS as spares. Then allow one column on the LHS for totals.
The remaining columns are for each year of analysis. See the suggested layout
in Appendix 1.
(f) Make sure that, for any given row, the same formula appears in each year.
(g) Remember that you will need to define some variables as probability
distributions for Monte Carlo simulation (for instance, the real oil price, the
total real capex, the total real opex, the escalation rates, and the reserves).
(h) Ensure that the model has the capability to handle cash flow forecasts of 40
years.

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(i) Use currency units of US$MM throughout.
(j) Allow for a variable discount year
(k) Make sure that fixed and variable operating costs occur in all years of
production.
(l) Ensure that your economic model calculates automatically the end of the
economic life of the field based on before tax cash flows, and automatically
allocates abandonment costs in the correct year. Your automated economic life
calculation should be able to handle any one of seven types of net cash flow.
See Appendix 2 for examples.
(m) We provide data on capital and operating costs to help you design the field
development when the economic model is complete. This is given in Appendix
3. The data will be needed when you do the simulation and field development
section in the middle of the session
(n) Include PRRT and income tax calculations in the model.

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4. Reservoir simulation and development

This stage of the thesis involves designing the development of the field and then
deciding how much you would recommend that your company should offer to
purchase it.
You will use the geological model developed in Thesis-A to prepare your dynamic
simulation model. Then you will use this model to run various development scenarios.

4.1 Field development.

There are many possibilities for designing the development of the Skua discovery
conceptually. The possible development scenarios should take into account the
following (this is by no means an exhaustive list) -

Example list of factors which affect field development design

The oil in place (for instance, 2P).
The reservoir configuration (shape, areal extent, reservoir depth, reservoir
thickness).
The water depth.
The peak field rate.
The duration of the peak rate.
The platform type (fixed or floating).
The number of platforms.
The type of wells (horizontal, deviated, vertical) and their completion (subsea or
platform).
The productivity of the wells.
The number of wells.
The location of the wells.
Where we perforate the wells.
Whether we need injection wells and, if so, how many
Whether we drill the wells before the platform is installed (pre-drilling) or from
the platform after it is installed.
The options for transporting the oil (pipeline or tanker).
The reservoir drive mechanism (for instance, natural depletion, water injection)
The options for gas disposal (selling or flaring the gas).

Each scenario would give a different production profile (for example, from
reservoir simulation), different economics and different reserves and recovery
factor (economic recovery of oil).

Using any one set of assumptions about field development, we can

1. Determine the production profiles for oil and gas (for instance, by reservoir
simulation).
2. Estimate the costs of development and operation.
3. Analyse the economics and so determine the NPV, the reserves and the recovery
factor.

The task is to optimise the development given that we do not know for certain the
oil-in-place or the behaviour of the wells or the oil price etc. There are no easy
answers and in the end it is a matter of professional judgment based on analysing
different possibilities.

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4.2. Field development cases

An analysis of all possible scenarios would be impractical and very time consuming.
In practice, only a few of the more likely scenarios would be examined. As a
guide, we recommend that you examine only the cases described below. This is a
recommendation. It is not intended to stop you from examining other cases if you
wish to do so.

Assume -

1. A single FPSO development.

2. Tanker transport to Singapore
3. Sub-sea completions.
4. Your 2P estimate of oil-in-place.

Based on these field development assumptions, choose the number of wells and the
location of each well.

4.3. Analysis

Based on the assumptions above, follow the procedure below to analyse field
development.

(a) Use the reservoir simulator to determine the production profile in annual time
steps.

(b) Estimate the capital costs for

The platform.
The topsides.
Drilling.
Sub-sea completions and tie-back to platform.
The onshore supply base.
Installation.
Miscellaneous (insurance, engineering, project management, contingency).

Assume that the real annual fixed operating costs are 5% of the total real capital
costs.

(c) Run the economics using the model you built at the start of the semester and
note the nominal NPV at a 10% discount rate as at 1 Jan 2015, the reserves and the
recovery factor.

In practice, steps (a) to (c) would be repeated for the 2P and 3P oil-in-place
estimates and an appropriate development concept chosen. However, in this case
you should assume only the 2P oil-in-place estimate.

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5.4. Valuation

5.1 Objective

One of the aims of this project is to assess the value of the Skua discovery with a
view to making a bid to acquire it.

In the valuation exercise you are asked to assess the value of the discovery and
recommend a board of directors what price it should offer for a 100% participating
interest in the property.

5.2 Monte Carlo simulation

A major problem we must overcome in putting a price on the Skua discovery is the
fact that there are large uncertainties in key variables to which the project is very
sensitive. These include, but are not limited to, oil price, capital costs and
reserves.

You are required to derive a probability distribution of the NPV of the Skua
discovery given uncertain inputs (for instance, capex, opex, oil price, escalation
rates). To do this you can use the @RISK Monte Carlo simulation software installed
on the computers in the computer lab. The software is an Excel add-in and so you
can use your economic models to derive the NPV distribution.

The economic parameters you will need for the study are future oil prices, cost and
price escalation rates and the discount rate. You are expected to make your own
assumptions for these variables. Please discuss these with the lecturer if you need
help.

The oil price has been very volatile in the past and is likely to continue to be
volatile in the future. If you wish you can get the Monte Carlo simulation software
to obtain a probability distribution of oil prices and then use this in your valuation.
Use your own views regarding what the probability distribution of future crude oil
prices should be.

As regards capital and operating costs, we suggest that you use a normal
probability distribution with the 10th percentile being 80% of the central estimate
of costs and the 90th percentile being 150% of the central estimate of costs.

In the first part of the thesis you estimated probability distributions for oil in place.
Based on the reservoir simulation exercise, you also estimated or used estimates of
recovery factors to derive reserves. Therefore, in addition to distributions for oil in
place, you could also derive probability distributions for reserves. We suggest
however, that for this exercise you use only the mean or expected value of the
probability distribution of reserves.

Once you have derived the probability distribution of NPV, make a note of its
mean, standard deviation, and 10th, 50th and 90th percentile.

Based on the results of the Monte Carlo simulation, decide what you consider to be
the most appropriate price you recommend the board should offer for the
discovery. Explain why you choose this value.

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Appendix 1

Design and layout of economic model

Worksheets
We recommend that you use a single page / worksheet for

1. Field data including production profiles for oil and gas, exploration, capital and
fixed and variable operating costs.

2. Economic assumptions including the definition of the years, the discount date
and escalation rates for oil and gas prices, capital and operating costs. Allow each
price and cost variable to have its own separate escalation rates.

3. The before and after tax net cash flow in nominal terms over the economic life
of the field.

4. Results including -

(a) NPV (nominal only). The NPV is to be presented in tabular and graphical form
for discount rates from 0% to 100% in steps of 5%.

(b) IRR (nominal only)

(c) Payout (based on nominal net cash flow)

(d) Discounted CPI (nominal only)

5. The page should include both past and future years and should have a similar
format.

7. We recommend that you use the Group/Ungroup feature of Excel to expand

and contract groups of rows and columns (click on Data, Group, Rows). This
will allow you and the marker to view the spreadsheet easily

8. Do not hide any worksheets, rows or columns.

9. Do not use passwords.

10. Do not use macros.

We recommend that you use a separate page / worksheets for a graph of nominal
NPVs against discount rate.

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Appendix 1 Example layout for economic model. Examine this for layout only. Ignore
the text and the numbers.

Titles Case descriptions

Australian PRRT regime Discovery 600 Bcf & gas price $3/Mcf
Hypothetical discovery Escalation 3%
Offshore Gas Discovery PRRT and income tax at 36%
31 July 2002 NOC working interest 0%
12:15

Project net cash flow over economic life Units Spare Spare Total 1 2 3 4 5 6 7 8 9 10
total project
Oil sales MMbbl 0.0
Oil price $/bbl Esc
Oil revenue $MM 0.0
Gas sales Bcf 600.0 30.00 30.00 30.00 30.00 30.00 30.00 30.00
Gas price $/bbl Esc 3.00 3.09 3.18 3.28 3.38 3.48 3.58 3.69 3.80 3.91
Gas revenue $MM 2,642.6 98.35 101.30 104.33 107.46 110.69 114.01 117.43
Gross revenue $MM Esc 2,642.6 98.35 101.30 104.33 107.46 110.69 114.01 117.43
Acquisition costs $MM Esc 0.0
Exploration costs $MM Esc -10.0 -10.00
Development costs $MM Esc -334.2 -31.87 -98.47 -169.05 -34.82
Production costs $MM Esc -467.9 -17.41 -17.93 -18.47 -19.03 -19.60 -20.19 -20.79
Abandonment costs $MM Esc -157.2
Project net cash flow for economic life $MM 1,673.3 -41.87 -98.47 -169.05 46.11 83.36 85.86 88.44 91.09 93.82 96.64

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Appendix 2 Types of net cash flow (examples only)

Type no 1 2 3 4 5 6 7 8 9 10
1 7 7 7 7 7 7 7 7 7 7
2 -7 -7 -7 -7 -7 -7 -7 -7 -7 -7
3
4 7 7 7 7 7 7 7 7
5 7 7 7 7 7 7 -7 -7 -7 -7
6 -7 -7 7 7 7 7 7 -7 -7 -7
7 -7 7 -7 7 7 -7 -7 -7 -7

Explanation

Your economic life logic should find the year in which the end of economic life occurs for each of the net cash flow types shown
above. In these examples, the cash flow is zero or +$7 or -$7 each year. In your model, the level of the net cash flow will vary.

Type 1 All positive End of economic life = year 10.

Type 2 All negative No project and no net cash flow.
Type 3 All zero No project and no net cash flow.
Type 4 Positive until year 8 and then zero End of economic life = year 8.
Type 5 - Positive until year 6 and then negative End of economic life = year 6.
Type 6 Negative until year 3, then positive until year 7 and then negative End of economic life = year 7.
Type 7 Zero or negative until year 3, then positive until year 4, then negative for 1 year, then positive until year 6 and then negative
End of economic life = year 6.

School of Petroleum Engineering, UNSW Session 2 - 2016