The Projection

Overall project profitability. The economics of the overall project should be evaluated at different stages during the. design to access whether the project is viable and whether major changes are needed. 

There can be an element of maintenance costs that is fixed and an element which is variable. Fixed maintenance costs cover routine maintenance such as regular maintenance on safety valves which must be carried out irrespective of the rate of production. There also can be an element of maintenance costs which is variable. This arises from the fact that certain items of equipment can need more maintenance as the production rate increases. Also, royalties which cover the cost of purchasing another company s process technology may have different bases. Royalties may be a variable cost, since they can sometimes be paid in proportion to the rate of production. Alternatively, the royalty might be a single-sum payment at the beginning of the project. In this case, the single-sum payment will become part of the project s capital investment. As such, it will be included in the annual capital repayment, and this becomes part of the fixed cost. 

As the design progresses, more information is accumulated. The best methods of assessing the profitability of alternatives are based on projections of the cash flows during the project life. ... 

Figure A.2 shows the cash-flow pattern for a typical project. The cash flow is a cumulative cash flow. Consider curve 1 in Fig. A.2. From the start of the project at A, cash is spent without any...

Ultimately, the process might be permanently shut down or given a major revamp. This marks the end of the project, H. If the process is shut down, working capital is recovered, and there may be salvage value, which would create a final cash inflow at the end of the project. 

Payback time. Payback time is the time that elapses from the start of the project. A, to the break-even point, F. The shorter the payback time, the more attractive is the project. 

The sum of the annual discounted cash flows over n years SAdcf is known as the net present value (NPV) of the project ... 

The higher the value of the DCFRR for a project, the more attractive it is. The minimum acceptable value of the DCFRR is the market interest rate. If the DCFRR is lower than market interest rate, it would be better to put money in the bank. For a DCFRR value greater than this, the project will show a profit for a lesser value, it will show a loss. 

Predicting future cash flows for a project is extremely difficult with many uncertainties, including the project life. However, providing that consistent assumptions are made, projections of cash flows can be used to choose between competing projects. 

These respective choices are dictated by our current knowledge, the state of the art in research and the projection of specifications in the future. 

The field development plan s prime purpose is to serve as a conceptual project specification for subsurface and surface facilities, and the operational and maintenance philosophy required to support a proposal for the required investments. It should give management and shareholders confidence that all aspects of the project have been... 

The planning details will also allow the engineer to estimate the costs, which in combination with other data will allow an evaluation of the profitability of the project. 

Project description includes a clarification of the purpose and rationale of the project. 

Decision-making on the project involves a consideration by the relevant authority of the EIS (including consultation responses) together with any material considerations. 

Monitoring is normally adopted as a mechanism to check that any conditions imposed on the project are being enforced or to check the quality of the affected environment. 

If no appraisal was performed, and the development was started based, say, on the medium case STOMP of 48 MMstb, then the actual STOMP would not be found until the facilities were built and the early development wells were drilled. If it turned out that the STOMP was only 20 MMstb, then the project would lose 40 million, because the facilities were oversized. If the STOMP is actually 48 MMstb, then the NPV is assumed to be the same as for the medium case after appraisal. If the STOMP was actually 100 MMstb, then the NPV of + 40 million is lower than for the case after appraisal (+ 66 million) since the facilities are too small to handle the extra production potential. 

For example a process flow scheme for crude oil stabilisation might contain details of equipment, lines, valves, controls and mass and heat balance information where appropriate. This would be the typical level of detail used in the project definition and preliminary design phase described in Section 12.0. 

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. 

The production operations and maintenance group will develop a set of operating and maintenance objectives for the project. This will be a guideline when specifying the mode of operation and maintenance of the equipment items and systems, and will incorporate elements of... 

The cost of implementing CAO depends of course on the system installed, but for a new field development is likely to be in the order of 1 -5% of the project capital expenditure, plus 1-5% of the annual operating expenditure. 

A suitable maintenance strategy should be developed for equipment by considering the criticality and failure mode, and then applying a mixture of the forms of maintenance described above. In particular, the long-term cost of maintenance of an item of equipment should be estimated over the whole life of the project and combined with its capital cost to select both the type of equipment and form of maintenance which gives the best full lifecycle cost on a discounted basis), while of course meeting the technical, safety and environmental specifications. 

In the feasibility phase the project is tested as a concept. Is it technically feasible and is it economically viable There may be a number of ways to perform a particular task (such as develop an oil field) and these have to be judged against economic criteria, availability of resources, and risk. At this stage estimates of cost and income (production) profiles will carry a considerable uncertainty range, but are used to filter out unrealistic options. Several options may remain under consideration at the end of a feasibility study. 

In the definition phase options are narrowed down and a preferred solution is proposed. The project becomes better defined in terms of what should be built and how it should be operated, and an assessment of how the project may be affected by changes beyond the control of the company (for example the oil price) should be made. Normally a clear statement should be prepared, describing why the option is preferred and what project specifications must be met, to be used as a basis for further work. 

Although a single project manager may direct activities throughout a project life, he or she will normally be supported by a project team whose oomposition should reflect the type of project and the experience levels of both company and contractor personnel. The make up and size of the team may change over the life of a project to match the prevailing activity levels in each particular section of the project. 

The bar chart indicates that activity B can be performed at any time within days 2, 3 and 4, without delaying the project. It also shows that the resource loading can be smoothed out if activity B is performed in either day 3 or 4, such that the maximum loading in any period does not exceed 4 units. Resource units may be, for example, man hours or machine hours . 

By plotting the cumulative resource weighting against time, the planned progress of the project can be illustrated, as shown in Figure 12.8. This type of plot Is often referred to as an S -Curve, as projects often need time to gain momentum and slow down towards completion (unlike the example shown). 

Plots such as this can be used to compare actual to planned progress. If progress Is delayed at any point, but the completion date cannot be slipped, the plot can be used to determine how many extra resource units have to be employed to complete the project on time. 

At each phase of a project cost information is required to enable decisions to be taken. In the conceptual phase these estimates may be very approximate (e.g. + 35% accuracy), reflecting the degree of uncertainty regarding both reservoir development and surface options. As the project becomes better defined the accuracy of estimates should improve. 

The choice of contract type will depend upon the type of work, and the level of control which the oil company wishes to maintain. There is a current trend for the oil company to consider the contractor as a partner in the project (partnering arrangements), and to work closely with the contractor at all stages of the project development. The objective of this closer involvement of the contractor is to provide a common incentive for the contractor and the oil company to improve quality, efficiency, safety, and most importantly to reduce cost. This type of contract usually contains a significant element of sharing risk and reward of the project. 

From an overall economic viewpoint, any investment proposal may be considered as an activity which initially absorbs funds and later generates money. The funds may be raised from loan capital or from shareholders capital, and the net (after tax and costs) money generated may be used to repay interest on loans and loan capital, with the balance being due to the shareholders. The shareholders profit can either be paid out as dividends, or reinvested in the company to fund the existing venture or new ventures. The following diagram indicates the overall flow of funds for a proposed project. The detailed cash movements are contained within the box labelled the project . 

From this overview it is apparent that the project must generate sufficient return on the funds absorbed to at least pay the interest on loans and pay the dividend expected by the shareholders. Any remaining cash generated can be reinvested in the same or alternative projects. The minimum return expected from the investment in a project will be further discussed in Section 13.4. 

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. 

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 uncertainty may be addressed by constructing a base case which represents the most probable outcome, and then performing sensitivities around this case to determine which of the inputs the project is most vulnerable to. The most influential parameters may then be studied more carefully. Typical sensitivities are considered in Section 13.7, Sensitivity Analysis . 

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... 

---