Petroleum Engineering Group Project - Essay Example

Petroleum Engineering Group Project Economic Forecast The Petrel Re is in a mission of producing the best development strategy for a field by integrating the process the processes connected with geosciences, reservoir, drilling, completion and production engineering. On the economic forecast part, this project will be aimed at calculating the NPV, Cash Flows, payback diagram as well as the sensitivity graph of NPV vs. oil price. However, to be able to do so, the project will also look at the production forecast for the next 20 years which is the estimated economic time for the project. This part of the project will therefore use the petrel data of our group team and apply in the excel spreadsheet to calculate the required values. Revenue and Cash Flow Validation In this operation, there was both the capital expenditure (CAPEX) as well as the operating expenditure (OPEX) that will be involved in the initial years of the project, hence hindering any revenue generation in the initial years of operation. It therefore means that, the cash flow during the initial years will only consist of the CAPEX and the OPEX data before revenue generation begins. The project needed a capital injection for the first three years of operation before, hence no revenue for this period. On the fourth year, however, the project begins generating revenue. This is explained that, the project will begin producing oil on the fourth year with no or zero water at the beginning. The production will then continue after which, from the sixth year on to the ninth year, more water will be produced; hence the revenue is expected to reduce as less oil will be produced to increase the revenue. After year nine, the oil production is again expected to increase with a decrease in the production of water, hence there will be a rise in the NPV once again as oil production is expected to follow such a trend of increasing initially up to year seven where it will again be expected to decrease and again rise after year nine. This trend is demonstrated in the table below. Net Present Value Outcomes Net Present Value is the difference between the present value of the cash inflows and the present value of the cash out flows. To calculate the Net Present Values, the project cash flows are discounted using an appropriate rate which is usually the minimum rate of the return required by the investors. The appropriate cash flows in this case are the after tax cash flows and the net cash flow is therefore estimated on an after tax basis. For this project, the appropriate discounting rate used was 7%. The various applicable rates for each year were calculated in the discounting table as shown in the excel file. Computation of Net Present Values therefore employs the use of the already calculated cash flows as shown in the table below. Each cash flow for each year must be multiplied by an appropriate discount factor of the corresponding year to give the discounted cash flow. When the cumulative of the discounted cash flow is determined, it becomes the net present value of the project. As shown in the table below, the NPV of the project begin as negative numbers as the project needs to first pay the CAPEX/OPEX used in the initial costs of the project. This goes on for the first 5 years 3 months. After paying back the initial costs, the project begins to record positive NPV due to the increase in the cash flow from the revenue generated from oil production. The highest NP is achieved in the 20th year, where $1,329,628,640 was obtained. This becomes the year that creates a turning point in the production rate of oil, as years that follow will have a reduced production, that generates reduces revenue, hence reduced cash flow and net present value. The general criterion for the NPV is always that; the project should be accepted when the net present value is positive and rejected when it is negative. In this case, the NPV is positive; hence the project should be undertaken. Revenue and Cash Flow Validations Year Capex $ Opex $ Oil Price $/bbl Oil PDN (bbl) Oil Revenue $ PRT % CT % ST % Cash Flow Cumulative cash flow 1 12,000,000 0 80 0 0 7% 20% 0.05 0 -12,000,000 2 9,000,000 0 80 0 0 7% 20% 0.05 0 -21,000,000 3 9,000,000 0 80 0 0 7% 20% 0.05 0 -30,000,000 4 0 4,380,000 80 7,300,000 584,000,000 7% 20% 0.05 394,141,600 364,141,600 5 0 4,380,000 80 5,840,000 467,200,000 7% 20% 0.05 314,717,600 678,859,200 6 0 4,380,000 80 4,672,000 373,760,000 7% 20% 0.05 251,178,400 930,037,600 7 0 4,380,000 80 3,737,600 299,008,000 7% 20% 0.05 200,347,040 1,130,384,640 8 0 4,380,000 80 2,990,080 239,206,400 7% 20% 0.05 159,681,952 1,290,066,592 9 0 4,380,000 80 2,392,064 191,365,120 7% 20% 0.05 127,149,882 1,417,216,474 10 0 4,380,000 80 1,913,651 153,092,080 7% 20% 0.05 101,124,214 1,518,340,688 11 0 4,380,000 80 1,530,921 122,473,680 7% 20% 0.05 80,303,702 1,598,644,390 12 0 4,380,000 80 1,224,737 97,978,960 7% 20% 0.05 63,647,293 1,662,291,689 13 0 4,380,000 80 979,789 78,383,152 7% 20% 0.05 50,322,143 1,712,613,827 14 0 4,380,000 80 783,832 62,706,520 7% 20% 0.05 39,662,034 1,752,275,860 15 0 4,380,000 80 627,065 50,165,216 7% 20% 0.05 31,133,947 1,783,409,807 16 0 4,380,000 80 501,652 40,132,176 7% 20% 0.05 24,311,480 1,807,721,287 17 0 4,380,000 80 401,322 32,105,736 7% 20% 0.05 18,853,500 1,826,574,787 18 0 4,380,000 80 321,057 25,684,592 7% 20% 0.05 14,487,123 1,841,061,910 19 0 4,380,000 80 256,846 20,547,672 7% 20% 0.05 10,994,017 1,852,055,927 20 0 4,380,000 80 205,477 16,438,136 7% 20% 0.05 8,199,532 1,860,255,459 Net Present Value Outcomes Year Discount Factor Cash Flow Discounted Cash Flow Net Present Value $ 1 1 -12,000,000 -12,000,000 -12,000,000 2 0.935 -9,000,000 -8,415,000 -20,415,000 3 0.873 -9,000,000 -7,857,000 -28,272,000 4 0.816 394,141,600 321,619,546 293,347,546 5 0.763 314,717,600 240,129,529 533,477,075 6 0.713 251,178,400 179,090,199 712,567,274 7 0.666 200,347,040 133,431,129 845,998,403 8 0.623 159,681,952 99,481,856 845,998,403 9 0.582 127,149,882 74,001,231 1,019,481,490 10 0.544 101,124,214 55,011,572 1,074,493,062 11 0.508 80,303,702 40,794,281 1,115,287,343 12 0.475 63,647,293 30,232,464 1,145,519,374 13 0.444 50,322,143 22,343,031 1,167,862,405 14 0.415 39,662,034 16,459,744 1,184,322,149 15 0.388 31,133,947 12,079,971 1,196,402,120 16 0.362 24,311,480 8,800,756 1,205,202,876 17 1.362 18,853,500 25,678,467 1,230,881,343 18 2.362 14,487,123 34,218,585 1,265,099,928 19 3.362 10,994,017 36,961,885.15 1,302,061,813.00 20 3.362 8,199,532 27,566,826.58 1,329,628,640.00 Net Present Value Curve The net present value curve above shows clearly that, the positive production of oil begun from end of year 3. From this is when the production begun to increase with time with the rate of increase reducing between years 4 and year 9. From end of year 9 onwards, the production again increased highly leading to high cash inflows up to year 10 when the increase in production again begun increasing but at a decreasing rate. This went on until year 20 when the production of oil was at its peak and the cash inflow also was at peak. After that, the aquifer seemed to have been depleted, since there were little productions made which led to negative cash inflows, hence a decline in the net present value curve. Payback Period The payback period refers to the number of periods or years taken by the project to generate cash inflows which is sufficient enough to recover its initial costs (CAPEX and OPEX). This project is expected to generate irregular annual net cash inflows as have been shown by the tables above, hence, it’s payback period is determined by the cumulative earnings or summing up the net annual earnings up to the year when the initial cost (CAPEX) is fully recovered. Considering the calculated net annual incomes, the payback period therefore is arrived at to be in 4 years and 3 months from the initial year of project initiation. The general criterion on payback period is that; the project with the shorter payback period should be accepted and the project with the shortest payback period should be ranked first among alternatives. However, in a situation where there is only a single project, like our case, the project is accepted when the payback period does not much of the economic lifetime of the project. In this case, if the projects economic useful life is 20 years, and the payback period is in 5 years 3 months, it means that the project will have 14 years and 9 months of economic benefit; hence the project should be accepted since it is of much economic value for the better part of its economic lifetime. Oil Production (Barrels) Looking at both the graphs for the cash flow and that for the oil production, there is some resemblance in a far as the pattern in concerned. This shows that the cash flow of this project depends on the production rate of oil, operating expenses per year remaining constant. It therefore means that, when the oil production rate increases, the cash inflow also increase and when the production declines, the cash inflow also decreases, and that makes the pattern of the two graphs of oil production and that of cash flows to look almost alike as illustrated by the graphs above and below. Probability of Success Sensitivity analysis always allows the comparison of data when the figures are either increased or decreased from the base values, in order to find out how stable the production values can be and be relied upon in case of any adjustments in the values, may be due to production changes. The study therefore has investigated the possible adjustments on the oil price and the CAPEX to be able to establish the sensitivity of these values to either increase or decrease. Sensitivity of Oil Prices Vs. Net Present value Oil Price Factor $/bbl NPV($) %NPV -20% 64 429,374,600 -20.3542 -15% 68 448,801,580 -16.7506 -10% 72 465,712,172 -13.6138 -5% 76 481,328,852 -10.717 0% 80 539,104,892 0 5% 84 540,283,920 0.218701 10% 88 548,892,927.00 1.815609 15% 92 555,832,792.00 3.102903 20% 96 646,925,870 20 From the table and the graph above, it is very clear that an increase in the oil price increases the Net Present Value and a decrease in the same does the vice versa. It shows therefore that, oil prices have a direct relationship with the Net Present Value. The graph above shows how reduction in the oil prices results to reduced net present values, leading to negative percentage increases, while the increases in the oil prices leads to a corresponding increase in the Net Present Value, hence positive percentage increases. Sensitivity of CAPEX vs. Net Present Value CAPEX Factor CAPEX Change NPV %NPV -20% 24000000 35,500,000 19.12752 -15% 25500000 34,000,000 14.09396 -10% 27000000 32,500,000 9.060403 -5% 28500000 31,000,000 4.026846 0% 30,000,000 29,800,000 0 5% 31500000 28,000,000 93.95973 10% 33000000 26,500,000 -11.0738 15% 34500000 25,000,000 -16.1074 20% 36000000 23,500,000 -21.1409 From the table and the graph above on NPV sensitivity with CAPEX, it is very clear that an increase in the CAPEX decreases the value of the Net Present Value. This is a fact since the CAPEX constitutes the initial capital cost that was used to initiate the project and make it operational. It therefore implies that, for any present value to be accounted for, and then the initial capital has to be recovered first. This meant therefore that the CAPEX value must be used to reduce the cash net annual revenue so that the resulting net revenue will be reduced and without the CAPEX. It therefore means also that, the net cash flow will be reduced and this will be used to calculate the Net Present Value. This then explains why the higher the CAPEX, the smaller the Net Present Value. The graph therefore shows how the Net Present Value reduces steadily as the CAPEX increases, then it shoots high up as the CAPEX reduces and then reduces again as the CAPEX again increases. On the probability of success, therefore, there is a high positivity on the evaluation of project that shows that the project has a lot of prospectus and can therefore be executed. The net present value is positive, to begin with, which shows that the project will be of economic benefits. The payback period is also very promising, showing that the project will have to operate for 5 years and 3 months to repay its initial cost (CAPEX), and then afterwards, the project can reap positive cash flows or net present values for the next 14 years and 9 months. Sensitivity Analysis Graph From the graph, one can easily know that when the NPV due to CAPEX is high, the factor is low indicating that the CAPEX is low. Therefore, when the CAPEX is bigger, the NPV due to CAPEX becomes smaller. The same applies, by on vice versa to the oil prices. When the oil price is increased, the NPV due to oil price increases and when the oil price is reduced, the NPV due to oil price also reduces. Environmental Issues Without no doubt, it is very clear that oil drilling and processing must be associated with several environmental issues that must be addressed adequately for the project to be considered environmental friendly, hence be allowed to take place. Some of such environmental issues that need to be addressed in this project include; 1. Noise pollution 2. Air pollution 3. Oil Spillage 4. Discharge of contaminated wastewater 5. Discharge of solid and other liquid wastes a part from water Noise Pollution There is a lot of noise that the operations in the oil production factories generate and transmit to the neighboring areas. If the factory is established around a place where other people live, this will cause destruction to the peaceful and quiet living in this community. The factory therefore becomes a nuisance to the community and can cause hearing problems and other problems and diseases related to noise to the community members. In as much as the project will be of economic benefits to the community through creation of employment opportunities, tax generation and improvement of livelihood through positive externalities from the project such as improvement of road conditions, the project is not warranted to cause impaired hearing ability, problems of peaceful sleeping and noisy environment, to the community. The company therefore will put in place noise impact reduction measures in order to reduce the impact of noise produced from the factory before relaying it to the external environment. The seismic operations of the company that escalates the sound vibration and propagation which might cause harm to wildlife and humans will be ensured to be controlled in order to reduce this impact. In order to achieve this, the project will include the following steps in its survey to help control the noisy situations and events; i. There will be reduced simulation operations on the areas with closely spaced survey lines. ii. The project will adopt the lowest possible viable power level vibrator iii. The operations that involve seismic activities will be minimized as much as possible in populated areas. iv. The project will also consider the selection of hole-depth and charge size in order to control and reduce noise levels. Air pollution As oil generation and processing is a cumbersome and complex process, a lot of equipment used in the process is those that escalate the production of, of produce emissions. Some of such equipment includes the use of pumps, combustion tubes, heat generators, compressors, combustion sources from the power reciprocating equipment (turbines and boilers), emissions caused by venting of hydrocarbons, flaring as well as fugitive emissions. Such emissions pollute the air and make it unsuitable for living organisms inhibiting the environment to live and breathe fresh air. Taking in contaminated air full of these emissions may cause several respiratory problems to individuals working in or staying around the company, including blocking of the respiratory organs such as lungs, leading to death. This project will therefore put in place every effort that would ensure that there is efficient use of energy and the use of well designed facilities that would ensure minimal use of energy in order to control the emissions by recycling the emissions to produce more energy. The project will also ensure that air quality impacts are estimated using atmospheric dispersion models as well as baseline quality assessments so as to form potential ground level ambient for air concentrations. Added with careful considerations to air transmission that the management of this project will put into much consideration during the procurement and selection of equipment to be used for the project, all equipment to be used must be those that have special considerations to air emissions very carefully. Evidence of air pollution due to oil production Oil Spillage Oil spillages normally occur due to equipment leakages that may be caused by human and animal interferences as well as accidents. Such leakages may occur during oil transportation or storage. This phenomenon is always very dangerous as oil is a highly flammable substance and also has a sticky characteristic which may cause death to birds and other wildlife. However, the project planning will ensure that such leakages are managed in accordance with the guidelines under the General EHS that manages release, control and planning of oil operations. The project management will also involve in oil spill risk assessment in order to look for ways to control such spillages. There will be thorough selection of proper equipment that will be used to in oil transportation and storage in order to reduce such spillages. The project will also take into consideration the secondary control measures in order to control any spillages and leakages whenever they shall occur. This will be a proper move to control any accidental leakages that may occur in suspected areas. As corrosion of materials is also responsible for creation of damages along the pipelines and tanks, measures will be put in place to control possible corrosion so that any possible leakages that may result are controlled. This will be done by covering the equipment with materials that are anti-corrosion such as aluminum. The tanks and pipelines will be equipped shutdown valves that will be used in tolerating early isolation or shutdown in the possible events of spillages. Last but not least, the company will adequately train its personnel on oil spillages and possible leaks to help in dealing with the situations as they shall occur. Evidence of oil spillage and its wrath Discharge of Wastewater Water will be required during drilling operation in order to maintain the reservoir pressure during oil production process. This kind of water is known as production water as it is still in use for drilling. However, when brought to the land surface for disposal, this water becomes very contaminated with oil discharges and therefore proper disposal management should be put in place to ensure that this water is well treated before further disposal. Before this water is let out to be disposed, proper treatment and management will be done in order not to cause any environmental issues to the nearby community or anyone who would become a victim of using this water. The water that will be used in cooling and heating system will also be conserved using the EHS guidelines. The hydrostatic testing water will also be well managed in order to reduce pollution instances. This will be done through reducing the possible time for the water to stay in the systems, reducing the chemical concentration in the water and also ensuring that water that has been used is used several tests before disposal. There will also be a safe removal plan for the already polluted test water. The project will also ensure that they provide a safe and very good way of disposing the waste water through drainages. All waters such including sewage water, firewater, and the wash water, should undergo proper water treatment plan, differently, before their final disposal into the drainage system. Discharge of Other Solid and Liquid Wastes The project will take into consideration, a treatment plant where all the waste materials will be directed to for further sorting, treatment, recycling and safe disposal. In this place, liquid material will be separated from the solid material and other sorting done such as plastic and metals separated in order to have a proper treatment and recycling program before disposal. The waste management plant will be strategically placed in order to link the wells so that possible pollution and environmental disorders may be avoided as the materials are transported to the management plant for further treatment, recycling and safe disposal. It is also a common knowledge that well-bore cleaning is done using various chemicals containing acids, glycols, methanol, and weighted brine among many others. These chemicals have hazardous effects on environment if not well managed. The project therefore plans to select and used other materials that may be of less hazardous effect to the environment in order to reduce their effects and help in maintaining a safer environment. The management would also use the risk management techniques and chemical hazard assessment techniques in order to examine the chemicals and their impacts so that proper management and treatment criterion may be followed to reduce any possible effect on the environment. Read More