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2003 Course Petroleum Economics

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Total No. of Questions : 6] [Total No. of Pages : 4 [3664] - 318 P 1217 B.E. (Petroleum Engineering) PETROLEUM ECONOMICS (2003 Course) Time : 3 Hours] [Max. Marks : 100 Instructions to the candidates: 1) Answers to the two sections should be written in separate answer books. 2) Answer two questions from Section I and two questions from Section II. 3) Neat diagrams should be drawn wherever necessary. 4) Figures to the right indicate full marks. 5) Use of cm scale graph paper is allowed. 6) Assume additional data, if necessary. SECTION - I Q1) a) b) Q2) a) b) Write a detailed note on guidelines given by SPE and UN for the evaluation of petroleum reserves and resources. [15] How is reserves estimation carried out using different methods? What are the likely errors in the calculations? [10] An offshore prospect is projected to produce 12,000 BOPD from [9] following cost expenditures : i) Well cost : 100 million dollars, ii) Production facilities : 100 million dollars. iii) Direct operating costs : $ 5/bbl. iv) Other costs : 60 million dollars. What is the breakeven oil price for the project over the first five years of operations for possible payout? Write notes on any two of the following : [16] i) Crude oil differential, ii) Crude oil pricing mechanism and factors controlling oil price, iii) Oil Trading, iv) Gas Economy. P.T.O. Q3) a) b) The company management is thinking of investing $50 MM in a small field, which has economically producing capacity of 12 years. The project would require an investment of $ 5 MM at year 5 and again at year 10 of $ 5 MM. Annual maintenance cost would be $ 1 MM throughout the tenure of the project. The interest rate for the first eight years is 10%, and for the last four years will be 12%. What is the present worth of this cash flow? Draw a cash flow diagram for the above data. [15] How is sensitivity analysis helpful in handling uncertainty? Discuss with suitable examples. [10] SECTION - II Q4) a) b) Following information is available on reserves, production and demand : Name Proven Prod. Prod. Prod. Demand Demand Demand Reserves 2006 2007 2008 2006, 2007, 2008, Billion MM Million Million Million bbl BOPD BOPD BOPD BOPD N. America 63.8 13.9 13.9 14.04 23.54 23.56 23.66 S. America 102.2 6.89 6.81 6.94 4.66 4.86 4.69 Eurasia 105.9 14.93 15.44 16.25 19.45 19.60 19.57 Middle east 726.6 23.16 22.51 20.90 4.31 4.37 4.44 Africa 101.8 7.8 7.86 7.96 2.44 2.47 2.51 Asia Pacific 47.7 7.97 7.91 7.94 21.05 21.16 21.74 Analyse the data and give your comments on following points : i) Plot the information on production and demand to infer future trends for the same. What may be the production and demand forecast for the year 2009? ii) What are the existing reserves to production ratio? Where is the highest ratio observed? Compare the production and demand to ascertain the likely areas of greater demand. [15] Initial cost of equipment is $ 45,000 and its salvage value towards the completion of useful life is $ 5,000. Service life of the reactor is 10 years. Calculate its depreciation using Straight Line (SLD), Declining Balance (DBD) and Double Declining Balance (DDB) methods. Prepare a plot of book value against number of years and compare the results obtained with different methods. [10] [3664] - 318 -2- Q5) a) b) The company management is considering a proposal of buying drilling rights for a large block of good potential. $ 5 MM are required to secure drilling rights. No seismic coverage is available which is estimated to cost $ 2MM. Two reservoir sizes are possible, a large reserve with a NPV of $ 75 MM and a smaller marginal worth a NPV of $ 30 MM excluding development costs. Two exploration strategies are under consideration : Drill exploratory wells on the basis of available geological knowledge, Spend on seismic and take decision after confirmation or drop acreage, It is also possible to drill second exploratory well if first well is dry. The company management is uncertain about the prospect and has thus given a task for evaluation. Here are some details : Drilling a wildcat is $ 8 MM each. If second well is dry the field has to be abandoned. Following is the probability of occurrence of different events : Outcome One wildcat Second wildcat One wildcat Second Drilled on drilled drilled on Wildcat Geological on geological Seismic Drilled on control control Seismic Large Field 0.05 0.075 0.15 0.20 Marginal Field 0.05 0.075 0.15 0.20 Dry Hole 0.90 0.85 0.70 0.60 Construct a suitable decision tree taking into consideration different possibilities and data available. Solve the tree using conventional approach and give solution with proper justification. Show calculations at every step. [15] Write notes on any two of the following : [10] i) Petroleum accounting system, ii) Petroleum concessionary contacts, iii) Investment yardsticks in the economic evaluation of E and P company, iv) Risk analysis. [3664] - 318 -3- Q6) Use production data given in table 1 for this calculation. [25] Year BOPD 1 1050 2 1170 3 1305 4 1455 5 1761 6 1761 7 1761 8 1542 9 1351 10 1183 11 1037 12 908 13 795 14 697 15 610 Following are the assumptions for the analysis : a) Oil price is $ 60 and escalation of 1.50% is assumed. Initial Investment is $ 27 MM and production cost is $ 4.00 BOPD. b) Royalty is 10% on annual production, which has to deducted from gross revenue. c) Rate of return is 10%. d) Cost recovery is 80% and is allowed to deduce with the commencement of commercial production. The unrecovered cost is allowed to carry forward to next year. e) Profit petroleum is to be shared between government and contractor @ 60% and 40% respectively. f) Contractor is entitled to pay 30% income tax on profit. Prepare a tabular form giving details of cumulative production, gross cash flow, royalty, net cash flow, cost recovery, recovered cost, profit petroleum, government share and contractor share, NPV for contractor BFIT and AFIT. How is one barrel distributed? [3664] - 318 -4-

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