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Project Economics, Risk and Uncertainty Analysis

Competency Statement:

Perform economic analysis of petroleum projects under conditions of uncertainty. Develop simple examples of project metrics using spreadsheet Monte Carlo simulations for stochastic analysis. Build financial models to show project cash flow streams for both capital investment and income cash flow and calculate key metrics such as profit/investment ration, profit, payout period, net present value, internal rate of return and expected monetary value. Where there are uncertainties in the variables, use standard software to prepare sensitivity and stochastic analysis to show the potential variations in the metrics because of these uncertainties.

Learning Objective:

In this module you will learn:

  • To analyze the economics of a prospect under conditions of uncertainty
  • To build deterministic and stochastic models
  • To build E&P financial models to demonstrate project cash flows
  • To calculate project economic metrics including profit/investment ratios, profit, payout period, net present value, internal rate of return and expected monetary value
  • To prepare sensitivity and stochastic analysis to measure potential variations in project metrics

Read all the reference material included under the Reference Selector and Field Data and Reference tabs.

Assignment Instruction:

In this Action Learning Module you will learn how to prepare a typical Prospect Economic Metrics Profile for a Southeast Exploration Prospect by answering a set of questions. You will be asked to consider two funding scenarios:

(a) where the prospect capital is fully funded with shareholder equity funds and

(b) where 50% of the funds are obtained through debt financing.

Initially you will develop the Profile for a set of “Base Case” assumptions and then you will learn how to analyze uncertainty in the key Base Case variables using the three traditional ways of analyzing uncertainty: Deterministic, Tornado Diagram and Monte Carlo Simulation

At the top of each assignment page we have provided you with downloadable Reference Files and links to IPIMS Background Knowledge. Please use these resources to assist in answering the assignment questions.  

At the end of the learning program you will be asked whether, as the Exploration Manager, you would approve the investment in this Prospect.



Oceana – A Petroleum Prospect Economics Workshop

Assignment Background

Your company has identified an exploration prospect in the Republic of Oceana, a small country in Southeast Asia, near Indonesia, and you, as Team Leader, have been asked to analyze the economics of the prospect and submit a summary of its key prospect metrics to management.

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You are to evaluate this exploration opportunity and build a financial model that will integrate the risks associated with this investment. The model will account for the proposed host country agreement and then incorporate revenue, capital and operating costs, financing costs, and tax projections for the life of the project. You will also be asked to submit your recommendation to management based on the performance metrics that are the outcome of your analysis

Analysis to Be Performed 

You will analyze your prospect economic metrics by completing a series of assignments. In doing so you will calculate each of the metrics and summarize them in an appropriate table to be provided to your management along with your recommendations as to whether the prospect should be pursued. 

You will need a computer with Excel or comparable spreadsheet software and, if possible, with Crystal Ball as an add-on in order to perform some of the project uncertainty calculations. If you do not have Crystal Ball you will be able to complete the exercises using an “IHRDC Apps” to perform the Tornado Diagram and Monte Carlo Simulation exercise that are located later in the learning assignments.

Assignment Memorandum

You have been provided with the following Confidential Memorandum from your Director of Regional Exploration.


Confidential Memorandum

Oceana Exploration Corporation

Southeast Asia Exploration Group

TO:  Director, Financial Analysis Group
FROM:  Director, Regional Exploration
RE: Summary of Exploration Potential of the Baru Prospect


This memorandum is a summary of our team’s analysis of the Baru Prospect, Republic of Oceana, including its exploration potential, dry hole costs, development options and operating costs, markets and estimate of reserves. We ask that you prepare the financial metrics for the opportunity by completing a series of assignments. 

The Baru Prospect is located onshore the Republic of Oceana in the East Oceana Basin. The main producing target is the Brad Sandstone, which we expect to penetrate at a depth of about 4500 feet below sea level. We have collected substantial data from two nearby analog fields owned by competitors that are producing from the same formation.

Our geological analyses of the basin and the prospect are based on the analysis of regional geological data, including well logs, geochemical data and a substantial 2D seismic survey, which we performed last year. A subsurface structural map of the prospect is shown in the image below.

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On the basis of the prospect information and the performance of two other existing fields we project the following prospect fundamentals: 

Project Development Schedule

We expect a project schedule (see below) that begins with three years of Exploration (E1-E3). If we have a discovery that is economical to develop, we will follow exploration with two years of Field Development (D1-D2), and 20 years of Production (P1-P20) when all developments and prospect rights must be returned to the host government. The project schedule is shown below.

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Exploration Risk

Our exploration team has analyzed the five major requirements of a prospect (source rock, migration path, reservoir rock, trap and seal) and has estimated that the probability of an exploration well success is 64%.

Host Country Bonus Payments

We have agreed to pay the host country two forms of bonus payments:

Signature Bonus (E1) $5,000,000
Discovery Bonus (E2) $10,000,000

 Exploration and Dry Hole Cost

We expect that we will need to commission a detail seismic survey in E1, drill an exploration well in E2 so as to “drill into and test the reservoir” with the following estimated costs: 

Year E1: Seismic Surveys and Interpretation $5,000,000
Year E2: Exploration Well $15,000,000

 Please note that these costs are subject to some uncertainty.

Appraisal of Discovery: Appraisal Wells

In order to confirm the discovery, evaluate the reservoir properties and the areal extent of the field we feel that there will be a need to drill at least two appraisal wells during Year E3.

Year E3: Two Appraisal Wells $ 30,000,000

All three wells will be vertical wells and can be completed as producers during the development period for an additional cost of $500,000 per well.

Expected Reserves and Market Prices

If we have a discovery we expect the hydrocarbons to be medium grade crude oil, which should sell at a small discount to the Dubai Marker Crude prices, and associated gas. We expect a gas-to-oil ratio (GOR) of about 750 SCF/stock tank bbls. We have a preliminary understanding from the Oceana Power Company that it will buy our produced gas for $2.50/MCF delivered at our field processing center.

On the basis of the existing 2D seismic survey and data from the other producing fields we estimate the crude oil resources to be approximately 500 million bbl of stock tank oil initially in-place (STOOIP).  We expect that the recovery factor will be equal to 20% of these resources if we rely on natural depletion drive, and up to 40% with enhanced recovery using bottom water injection. Because of its higher recovery factor we ask that this option we used in your analysis. 

End of Memorandum

Cash Flow Analysis of the Prospect

Your study team begins its financial analysis of the prospect by calculating its “best estimate” for both the Investment and Income Cash Flow projections.  Then you are to prepare the Investment Cash Flow projection by preparing the field development plan and its cost.

Field Development Plan

Your team plans to initiate enhanced recovery of the reservoir at the outset by installing water injection wells and treatment/pumping facilities during the Development Period. The reservoir engineering team recommends that the reserves be produced over a 20-year period at a fixed production rate of 32,000 STB/D for 11 years and declining 2000 STB/D annually through P20. The production rate in P20, then, will be 14,000 STB/D. The sustained production rate per well from P1 to P11 is estimated to be 2500 STB/D.

Facilities Needed to Develop the Field 

Your team estimates that it will take two years to develop the field (D1 and D2) and require 13 producing wells, which can be achieved by converting three exploration wells to producing wells and drilling 10 new development wells. It recommends using five water injection wells to replace the produced oil, surface separation facilities to separate and treat the produced fluids, a water treatment plant for the injected water and a 160- km crude oil pipeline, storage and port facilities to be located within the Oceana Industrial Park. These are all shown schematically below.


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