Cashflow

The plateau production rates for cases A and B differ significantly from that in case C, which has a lower but longer plateau. The advantage of profile C is that it requires smaller facilities and probably less wells to produce the same UR. This advantage in reduced costs must be considered using economic criteria against the delayed production of oil (which is bad for the cashflow). One additional advantage of profile C is that the... 

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). 

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. 

The project cashflow forms the basis of the economic evaluation methods which will be described. From the cashflow a number of economic indicators can be derived and used to judge the attractiveness of the project. Some of the techniques to be introduced allow the economic performance of proposed projects to be tested against investment criteria and also to be compared with alternative investments. 

The construction of a project cashflow requires information from a number of different sources. The principal inputs are typically -... 

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... 

It should be noted that a capital allowance Is not a cashflow item, but is only calculated to enable the taxable income to be determined. The treatment of capital allowance for this purpose is a petroleum economics approach, which may differ from the accountant s view of depreciation when calculating net book values and profit. 

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. 

From the cash flow and cumulative cashflow some basic economic indicators can be determined. The cashflow determines the economic lifetime of the field. When the cashflow turns permanently negative due to decreasing revenues (e.g. revenues are... 

The most negative point on the cumulative cashflow indicates the maximum cash exposure of the project. If the project were to be abandoned at this point, this is the greatest amount of money the investor stands to lose, before taking account of specific contractual circumstances (such as penalties from customers, partner claims, contractors claims). 

The cumulative cash surplus accrues to the investor at the end of the economic lifetime of the project, and may be termed the field life net cashflow. 

Caution is required in the use of the simple cashflow indicators, since they fail to take account of changing general price levels or the cost of capital (discussed in Section 13.4). It is always recommended that the definition of the indicators is quoted for clarity of understanding. 

Figures 13.12 and 13.13 show the indicators on the cashflow and cumulative cashflow diagrams.

The project cashflow discussed so far follows a pattern typical of E P projects a number of years of expenditure (giving rise to cash deficits) at the beginning of the project, followed by a series of cash surpluses. The annual cashflows need to be evaluated to incorporate the timing of the cash flows, to account for the effect of the time value of monef. The technique which allows the values of sums of money spent at different times to be consistently compared is called discounting. 

If the reference date is set at the beginning of the year (e.g. 1.1.98) then full year discount factors imply that t is a whole number and that cashflows occur in lump sums at the end of each year. If the cashflow occurs uniformly throughout the year and the reference date is the beginning of the year then mid-year discount factors are more appropriate, in which case the discounting equation would be ... 

The cashflow discussed in Section 13.2 did not take account of the time value of money, and was therefore an undiscounted cashflow. The discounting technique discussed can now be applied to this cashflow to determine the present value of each annual cashflow at a specified reference date. 

The following example generates the discounted cashflow (DCF) of a project using 20% mid-year discount factors. 

Year Cash Surplus ( m) Discount Factor (mid year) Discounted Cashflow ( m)... 

As the discount rate increases then the NPV is reduced. The following diagram shows the cashflow from the previous example (assuming an oil price of 20/bbl and ignoring the effect of inflation) at four different mid-year discount rates (10%, 20%, 25%, 30%). 

In Section 13.2, a number of economic indicators were derived from the annual cash flow the most useful being the economic life of the project, determined when the annual cashflow becomes permanently negative. 

The cumulative cashflow was used to derive ultimate cash surplus - the final value of the cumulative cashflow maximum exposure - the maximum value of the cash deficit payout time - the time until cumulative cashflow becomes positive. 

The shortcoming of the maximum exposure and payout time is that they say nothing about what happens after the cashflow becomes positive (i.e. the investment is recouped). Neither do they give information about the return on the investment in terms of a ratio, which is useful in comparing projects. 

This may be more useful if the cashflow items are discounted e.g. 10% NPV... 

As discussed in Section 13.2, the technical, fiscal and economic data gathered to construct a project cashflow carry uncertainty. An economic base case is constructed using, for example, the most likely values of production profile and the 50/50 cost estimates, along with the best estimate of future oil prices and the anticipated production agreement and fiscal system. 

De-bottlenecking is particularly important when the producing field is on plateau production, because it provides a means of earlier recovery (acceleration) of hydrocarbons, which improves the project cashflow and NPV. 

The field may enter into an economic decline when either income is falling (production decline) or costs are rising, and in many cases both are happening. Whilst there may be scope for further investment in a field in economic decline, it should not tie up funds that can be used more effectively in new projects. A mature development must continue to generate a positive cashflow and compete with other projects for funds. The options that are discussed in this section give some idea of the alternatives that may be available to manage the inevitable process of economic decline, and to extend reservoir and facility life. 

The economic lifetime was introduced in Section 13.3, and was defined as the point at which the annual cashflow turned permanently negative. This is the time at which income from production no longer exceeds the costs of production, and marks the point when decommissioning should occur, since it does not make economic sense to continue to run a loss-making venture. Technically, the production of hydrocarbons could continue beyond this point but only by accepting financial losses. There are two ways to defer decommissioning ... 

It is not normally possible to make a comprehensive assessment of profitabihty with a single number. The shape of the cumulative-cashflow and cumulative-discounted-cash-flow curves both before and after the breakeven point is an impoiTant factor. 

NET INCREMENTAL CASHFLOW POWER RECOVERY ALTERNATES ASSUMES CONSTANT ELECTRIC RATES OVER LIFE OF PROJECT... 

Discounted cashflow (DCF). This method recognizes that 1,000 income in five years time is worth less than 1,000 receivable this year. The use of DCF in appraising two or more competing projects offers two methods of assessment the net present value (NPV) or DCF rate of return. 

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