Capex

The type and number of wells required for development will influence the surface facilities design and have a significant impact on the cost of development. Typically the drilling expenditure for a project is between 20 and 40% of the total capex. A reasonable estimate of the number of wells required is therefore important. 

Over the lifetime of the field, the total undiscounted operating expenditure (opex) is likely to exceed the capital expenditure (capex). It is therefore important to control and reduce opex at the project design stage as well as during the production period. 

Standardisation of equipment items is an area for potential cost savings, both in terms of capital expenditure (capex) and operating expenditure (opex), and is a decision which should be taken In consultation with the production operations department at the FDP stage. Standardisation can be applied to equipment items ranging from drilling platforms to valves. The benefits of standardisation are ... 

Increasingly, maintenance engineers think in terms of the performance and maintenance of equipment over the whole life of the field. This is often at the centre of the decision on capex-opex trade-offs for example spending higher capex on a more reliable piece of equipment in anticipation of less maintenance costs later in the life of the equipment. 

When estimating the operating and maintenance costs for various options, it is recommended that the actual activities which are anticipated are specified and costed. This will run into the detail of frequency and duration of maintenance activities such as inspection, overhaul, painting. This technique allows a much more realistic estimate of opex to be made, rather than relying on the traditional method of estimating opex based on a percentage of capex. The benefits of this activity based costing are further discussed in Section 13.0 and 14.0. 

Keywords economic model, shareholder s profit, project cashflow, gross revenue, discounted cashflow, opex, capex, technical cost, tax, royalty, oil price, marker crude, capital allowance, discount rate, profitability indicators, net present value, rate of return, screening, ranking, expected monetary value, exploration decision making. 

Within the project box, the cashflow oi the project (or other investment opportunity) is the forecast of the funds absorbed and the money generated during the project lifetime. Take, for example, the development of an oil field as the investment opportunity. Initially the cashflow will be dominated by the capital expenditure (capex) required to design, construct and commission the hardware for the project (e.g. platform, pipeline, wells, compression facilities). 

Once production commences (possibly 3-8 years after the first capex) gross revenues are received from the sale of the hydrocarbons. These revenues are used to recover the capital expenditure (capex) of the project, to pay for the operating expenditure (opex) of the project (e.g. manpower, maintenance, equipment running costs, support costs), and to provide the host government take which may in the simplest case be in the form of taxes and royalty. 

From the oil company s point of view, the balance of the money absorbed by the project (capex, opex) and the money generated (the oil company s after-tax share of the profit) yields the project cashflow. 

For any one case, say the base case, the project cashflow is constructed by calculating on an annual basis the revenue items (the payments received by the project) and then subtracting the expenditure items (the payments made by the project capex, opex and host government take). For each year the balance is the annual cash surplus (or cash deficit). Flence, on an annual basis... 

The treatment of expenditures will be specified by the fiscal system set by the host government. A typical case would be to define expenditure on items whose useful life exceeds one year as capital expenditure (capex), such as costs of platforms, pipelines, wells. Items whose useful life is less than one year (e.g. chemicals, services, maintenance, overheads, insurance costs) would then be classed as operating expenditure (opex). 

Fixed opex is proportional to the capital cost of the items to be operated and is therefore based on a percentage of the cumulative capex. Variable opex is proportional to the throughput and is therefore related to the production rate (oil or gross liquids). Hence,... 

The sum of opex and capex is sometimes termed the technical castor total cost. 

Fiscal allowances for investment in capital items (i.e. capex) are made through capital allowances. The method of calculating the capital allowance is set by the fiscal legislation of the host government, but three common methods are discussed below. 

This is the simplest of the methods. In which an allowance for the capital asset is claimed over a number of years in equal amounts per year, e.g. 20% of the initial capex per year for 5 years. 

YEAR CAPEX Unrecovered assets at year end Capital allowance... 

Assume that the only previous capex had been 120 m, spent in the previous year, with 25% straight line capital allowance, thus capital allowance in this year = 0.25 x 120 m + 0.25 X 80 m = 50 m. 

The project cashflow s constructed by performing the calculation for every year of the project life. Atypical project cashflow is shown in Figure 13.9, along with a cumulative cashflow showing how cumulative revenue is typically split between the capex, opex, the host government (through tax and royalty) and the investor (say the oil company). The cumulative amount of money accruing to the company at the endof the project is the cumulative cash surplus or field life net cash flow. 

Typically, the contractor carries the cost of exploration, appraisal and development, later claiming these costs form a tranche of the produced oil or gas ( cost oil ). If the cost oil allowance is insufficient to cover the annual costs (capex and opex), excess costs are usually deferred to the following year. After the deduction of royalty (if applicable) the remaining volume of production (called profit oil ) is then split between the contractor and the host government. The contractor will usually pay tax on the contractor s share of the profit oil. In diagrammatic form the split of production for a typical PSC is shown in Figure 13.11. 

So far, the economics of developing discovered fields has been discussed, and the sensitivity analysis introduced was concerned with variations in parameters such as reserves, capex, opex, oil price, and project timing. In these cases the risk of there being no hydrocarbon reserves was not mentioned, since it was assumed that a discovery had been made, and that there was at least some minimum amount of recoverable reserves (called proven reserves). This section will briefly consider how exploration prospects are economically evaluated. 

In Section 13.2, it was suggested that opex is estimated at the development planning stage based upon a percentage of cumulafive capex (fixed opex) plus a cosf per barrel of hydrocarbon production (variable opex). This method has been widely applied, with the percentages and cost per barrel values based on previous experience in the area. One obvious flaw in this method is that as oil production declines, so does the estimate of opex, which is nof the common experience as equipment ages it requires more maintenance and breaks down more frequently. 

Raballo, S. and LLera, J. (2004). Large scale wind hydrogen production in Argentine Patagonia. International Conference for Renewable Energies, 1-4 June 2004, Bonn, Germany. Buenos Aires C.A.P.S.A. - Capex S.A. Group. 

Raleigh P (2003) Dow/BASF plan PO unit hydrogen peroxide process offers low CapEx, no by-products. Urethanes Technology, London Herold RJ (1976) US Patent 3941849, 2 Mar 1976... 

Involves a detail review of planning, design, procurement, fabrication, and installation functions to achieve the best overall project safety performance, lowest CAPEX, and the shortest reasonable schedule... 

Brand Name(s) Capex, Derma-Smoothe/FS, FS Shampoo, Synalar Combinations... 

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