Advanced Project Techniques

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Project Economics

 

Introduction

The present climate in the energy markets has brought about great volatility which is only likely to increase in the future. By traditional measures virtually all oil and gas projects are "viable" but there are only finite resources and finance available to develop them. The dilemma facing all project Owners and Developers is to decide which projects they should go for. A key tool in deciding which projects to select is Project Economics.

What is Project Economics?

"Economics is the science that studies the allocation of scarce resources among competing ends" (M.A. Mian 2002).

Project economics involves an analysis of the financial outcome of a project using the Owner's own criteria, metrics and financial policies. In the past the criteria were often very simple, such as payback period and return on investment (ROI). If probabilities were considered they were included as point estimates (e.g. P50 and P90 estimates). Whilst they are still useful indicators they would be considered too crude for investment decisions in the modern era.

These days the economic assessment of projects would account for some or all of the following parameters:

  • time value of money
  • risk and uncertainty (which are actually different concepts and may be modelled separately)
  • corporate attitude to risk (utility theory)
  • management of project portfolios

Many of the modelling techniques used are the same as quantitative risk analysis (QRA) and decision support which are covered in detail elsewhere in this website.

What are oilfield economics?

Oilfield economics are closely related to project economics - they use identical techniques but with different inputs and emphases. A particularly important input is the fiscal regime for the country in which the oilfield is located.

An example of a simple economics model has been posted on the Vanguard portal - this is hypothetical but shows some of the main characteristics. Go to the link and click on "View" at the top right of the page. The clarity of a tree based interface compared to a spreadsheet (where the formulae are buried in cells) is obvious.

How can project economics help?

Most project Owners are expert at the assessment of projects and this is indeed their core competence. It is also considered to be a commercially very sensitive area and outsiders are normally kept at a distance from the key decisions.

Contractors are, however, much less accustomed to project economics and often need to understand the project Owners' decision processes, particularly when promoting new technology or new business models. In these cases the Contractor needs to present a sound business case presented in a manner which is immediately familiar to the Owner's upper management. The business case must answer all of the questions which are likely to be asked when the project is put forward to the Owner's board for sanction.

What role can Advanced Project Techniques play?

Apt Projects has senior level Client-side and Contractor-side experience of major projects. We are specialists in financial modelling and project economics, have a strong technical background, and have a history of working with new technologies and business models.

We are able to bring a real advantage in project development, presenting the techno-economic case in the way most likely to attract the project Owner's interest and approval.

Case Study

Systems headache

Project Economics in Reservoir Monitoring

Life of Field Seismic (LoFS) systems are a technique used to improve oil recovery rates and factors through improved reservoir surveillance, enabling better reservoir management to be effected. The first such commercial installation was installed in 2003 (on the Norwegian Valhall field) and proved to be exceptionally successful. Since that time the same operator performed a second installation on a different field, and there have been number of trials and R&D projects, but little commercial realisation. So why has there been so little interest?

The technology was proven on the first installation and has been exceptionally reliable and the quality of reservoir data without peer, so the concerns haven't been for technical reasons. Advanced Project Techniques became involved in this area in 2007 and quickly identified that greater emphasis needed to be placed on the business case, and in particular on the project economics. The presentation of the system switched from being technology-based to business-based. New business models were developed to included owned (CAPEX) systems, leased systems (OPEX) and various hybrids. The models were fully probabilistic, modelling variables such as the expected increase in recoverable reserves and the failure rate of seabed sensors as being stochastic.

The LoFS technique now has a second lease of life. A contract for a major new LoFS system (twice the size of the original installation on Valhall) was placed by another operator in 3Q 2008, and a number of other systems are following in rapid succession. The creative use of project economics to support the business case played a major part in this success.

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