Advanced Petroleum Economics & Risk Analysis

Course overview This course covers some of the more advanced topics around oil and gas asset economics, valuation, fiscal design and risk. It covers three main areas: Cashflow and corporate valuation: After a brief refresher of cashflow fundamentals the topic is expanded to cover the importance of both cashflow and accounting- based metrics in order to value assets for acquisitions/divestments. To this end the accounting fundamentals around P&L account, balance sheets and earnings are discussed, particularly where they interact with economics. Petroleum fiscal design: After a refresher of the fundamentals of tax/royalty, production sharing contracts and risk service contracts, we aim to provide the delegate with an in-depth understanding of the fiscal levers particularly those that are biddable or negotiated. The last day workshop is a team based exercise: A “negotiation scenario” is played out where the team has to select a suitable set of fiscal terms for the production sharing contract and argue its case. Risking techniques: The more advanced risking topics are discussed around sensitivity analysis, decision trees and Monte Carlo simulation. Delegates will be provided with electronic copies of all workshop solutions and examples. They will all have a comprehensive hard copy course manual. Who should attend? This three-day practical course is intended as a follow-on to the four day ‘An Introduction to Petroleum Economics & Risk Analysis’. Ideally delegates should have attended this course or have experience in cashflow (DCF) analysis and risking techniques. It is suitable for delegates of all technical and commercial disciplines from oil and gas companies, governments, banks, legal and accounting organisations. Delegates will be expected to have a working knowledge of Microsoft Excel™ and should bring a laptop to the course with Microsoft Office or similar software.
Day 1 The Fundamentals of Cashflow Analysis and Valuation Discounted cash flow refresher Cashflow equations The time value of money, compounding & discounting The cost of capital and the hurdle discount rate Real vs. nominal cashflows Point forward/ life cycle economics Key economic metrics (NPV, IRR, DPIR, payback) When to use discounted/ undiscounted metrics/ what they mean Valuing an asset, making development & investment decisions Delegate Q&A’s Global fiscal structures The tax & royalty fiscal system Production sharing contracts Risk service contracts Global case studies across all three systems Delegate PSC modelling exercise Sliding scale fiscal systems Different methods (production, R-factors, rate of return, hybrids) Step vs incremental methods Understanding the issues around each method Selecting an appropriate sliding scale to influence activity Progressive vs regressive systems Selecting an appropriate scale for ‘self-adjusting mechanism’ Day 2 Valuation Techniques Economics vs. financial analysis Financial statements: P/L and balance sheet Financial metrics: (EBITDA, earnings, debt ratios) P&L: description of line items Balance sheet: description of line items Successful efforts vs full cost accounting Impairment test: the link between finance and reserves reporting Conflicts arising between accounting accruals based and economics cash based approaches Corporate valuation Cost of capital CAPM, dividend valuation models Betas: leveraged and equity Adjustment of discount rate for risk: arguments for and against Optimisation of capital structure Real option methodology Valuation methods DCF: finding an appropriate strike price Earnings multiples Enterprise value (EV) Adjusted present value (APV) Acquisition drivers Financing your project Corporate finance outline Project finance Reserves based lending Tax implications Hedging Case studies Workshop example Day 3 Risking techniques Brief overview of sensitivity analysis Tornado diagrams, decision trees and cumulative probability plots Case study: economic evaluation of a multi formation (stacked) reservoir Probability distributions Monte Carlo analysis: method, advantages, limitations, correlation (The Monte Carlo method will be demonstrated using Crystal Ball™) Fiscal system design workshop A team exercise to set the terms in a production sharing contract. Terms will have to meet corporate hurdles and need to be attractive to the host government. This will be based on a Microsoft Excel model. Delegates will be provided with sets of input assumptions and economic scenarios on which to calculate suitable economic metrics and carry out appropriate sensitivity analysis. Based on their analysis, the teams will recommend a set of fiscal terms and argue their case. Course summary and close After the course delegates will be sent fully functioning electronic copies of the fiscal model solutions as well as all excel based examples studied during the course.