Description

OIL PRODUCTION FEASIBILITY

Determining profitability of an oil field

An oil company has agreed on a 20 year contract to lease a field with undeveloped reserves to exploit. Here, we build a profitability case to determine NPV as a profitability measure for this business opportunity.  A number of simplifying assumptions have been made, since the emphasis is on explaining a series of @RISK’s tools and distributions especially designed to handle the typical risks and variables of the industry.  Assumptions are provided on geologic reserves estimations, number of wells to drill, declination rates, drilling and operating expenditures, royalties and other expenses and financial assumptions.

We first define the profitability model assuming stochastic variability; in other words, we build a NPV model where the key variables have been defined as @RISK distribution functions.  Thus, when we later run a Monte Carlo simulation for the model, we will be able to observe upon NPV and other key output variables, the effect produced by all the input variables or “moving parts” of the model. Analysis and interpretation of the results comes after the simulation is performed and various types of analytical charts are developed. For example, we determine and analyze the production curve along time and the key variables that impact the most the profitability of this business venture.