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2003 Course Petroleum Economics

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Total No. of Questions : 06] [Total No. of Pages : 4 [3864]-351 P1311 B.E. (Petroleum Engineering) PETROLEUM ECONOMICS (2003 Course) Time : 3 Hours] [Max. Marks :100 Instructions to the candidates: 1) Solve any two questions each from section I and section II. 2) Answers to the questions of both the sections should be written in separate answer books. 3) Use graph paper wherever necessary. 4) Assume additional data if required. SECTION - I Q1) a) b) List the projects which would be acceptable under Payout Period (PP), Actual Value Profit / Investment Ratio (AVI), and Net Present Value (NPV) at 12%. If a budget of $ 2000 M is available for investment, which two projects would be recommended by using above investment yardsticks? [15] 6 Table 1: Net Cash Flow, in $ M (M=10 $) Year A B C D E 0 -1000 -1000 -1000 -1000 -1000 1 600 700 210 10 900 2 400 500 210 20 200 3 300 200 210 50 100 4 200 100 210 100 50 5 50 50 210 200 50 6 20 10 210 300 10 7 10 10 210 400 10 8 10 10 210 500 10 9 5 10 210 500 0 10 5 10 210 400 0 Explain Exponential Decline and Hyperbolic Decline models with suitable diagrams. [10] P.T.O. Q2) a) b) Q3) a) b) Write notes on any two of the following: [16] i) Oil price differentials, ii) Resource classification system recommended by SPE, iii) Factors controlling oil pricing in international market, iv) Reserves to production ratio, v) Reserves accretion and discovery of field size scenario in past 20 years. The company management is interested in investing fifteen million dollars in a medium size field, which has economically producing capacity of 12 years. The project would require an investment of $ 150,000 at year 6 and again at year 9 of $ 70,000. Annual maintenance cost will be $ 35,000 throughout the tenure of the project. The interest rate for the first six years is 10%, and for the next six years will be 12%. What is the Present Worth of this cash flow? Draw a cash flow diagram for the above data. [9] Oil is currently sold for $ 60 /bbl from an oil field. It is anticipated that the price will increase at a rate of general inflation, which is forecast to be at the rate of 4.25% per year for first three years and then drop to an annual rate of 3.75% thereafter. Develop a forecast of oil prices for the period of 6 years from the level of $ 60 /bbl. It is believed that particularly for last two years of production, produced oil will have low API and, higher sulphar content. As a result price differential of 6% would be anticipated. What would be the oil price during last two years if oil differential is encountered? [10] Three alternatives are available for consideration where the factors of risk and uncertainty are same for all proposals. Details of investments are given below: Details X Y Z Initial Investment $5,00,000 $8,00,000 $9,00,000 Annual Expenses $15,000 $22,000 $25,000 Annual Revenue $75,000 $100,000 $1,40,000 Tenure (Years) 20 20 20 Salvage Value $50,000 $60,000 $70,000 If company s cost of capital is 15% which alternative should be selected? The company has enough funds to invest in all alternatives. Give your decision on Net Present Value (NPV), and incremental investment analysis. Also find out preferred investment ranking using above methods. [15] [3864]-351 2 Q4) a) b) Q5) a) b) c) SECTION - II Give a broad classification of Petroleum Fiscal System. Write a detailed note on Production Sharing Contract (PSC) in exploration and production of oil and gas in India. What is the importance of tax holidays in PSC?[15] A piece of equipment having a negligible salvage is estimated to have a service life of 10 years. The original cost of equipment is $ 80,000. Determine the following: i) Depreciation charge for the fifth year, if Double Declining Balance (DDB) and Sum of Years Digit Depreciation (SYD) are used. ii) Percent of the original investment paid off in the first half of the service life using DDB and SYD method. [10] A wildcat well is being considered in a relatively unknown but highly promising area. Available data indicates that three separate horizons independent from one another would most possibly be producing. Create a decision tree for the success and failure for the horizons(X,Y, and Z) to illustrate the probability of occurrence of these events with possible outcome of events. [10] Construct a critical path to develop a medium size field for which details are given below: [10] i) Twenty four development wells ($1.5MM each)-one third will be injectors. ii) Three platforms - two for wells, the other for production/injection equipment and pipeline terminus. ($ 200 MM each) iii) Wells take about one month to drill. Up to two rigs/platform. iv) Platforms manufactured in one and a half years- tow out time one month during weather window in Summer.(Tow out costs $10MM) Setup time is three months for drilling/well platform, five months for production platform. v) Pipeline lay time is about 14 months. (Cost $150 MM) vi) Production commissioning and final permit take two months. ($ 5 MM) vii) Overhead and other ongoing costs = $ 1 MM/month. The main idea of this exercise is to avoid waste of time, labor and material. 1) Draw a critical path diagram for this project. Assume a starting date of December, 1, 2010. 2) Determine the time length of the critical path. 3) Plot cumulative costs as a function of time. How cost in E and P business varies as a function of different factors [5] like climate and depth of water. [3864]-351 3 Q6) Details of production profile and expenditure required are given in the following table for a field under consideration for procurement. [25] Year Oil production, Exploration and Development Production cost, MM bbl/year cost, $ MM $MM 1 25 2 25 3 25 4 25 5 250 6 4.56 250 27 7 6.84 41 8 9.12 54 54 9 9.12 10 9.12 54 11 9.12 54 12 9.12 54 13 9.12 54 14 9.12 54 15 7.69 46 16 6.49 38 17 5.47 32 18 4.62 27 19 3.90 23 20 3.29 50 19 Total 106.7 650 631 Prepare a tabular form of the data giving details of annual production, cumulative production, gross cash flow, royalty, net cash flow BFIT and AFIT, government share and contractor share, NPV for contractor BFIT and AFIT. Following are the assumptions in the preparation of spreadsheet and further calculations: a) Oil price is $ 68 per barrel and will remain constant throughout the project tenure. b) Royalty is 10% of annual revenue/ annual production. c) Time value of money is 10%. d) Cost recovery is 70% , and remaining cost is allowed to carry forward for next year. e) Profit petroleum is shared between government and contractor at 60: 40 proportions respectively. f) Income tax is 30%. Calculate the contractors NPV before tax and after tax. Derive distribution for one barrel of oil or $ 68 using above assumptions keeping in mind contractor and government? [3864]-351 E E4 E

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