Economic Evaluation
Start up Training for
Project Engineers
C. Sensitivities
E. Project Example
F. 2 E&P Exercises
G. Conclusion
27.5 27.7%
20.6 19.8%
13.7 12.0%
6.9
mn EURO
4.2%
0.0
-3.6%
-6.9
-13.7 -11.4%
-20.6 -19.3%
-27.5 -27.1%
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
Differentiation:
f Produced Volume
f Sold Volume
C. Sensitivities
E. Project Example
F. 2 E&P Exercises
G. Conclusion
f Economic Yardsticks
- Net Present Value (NPV)
- Expected Monetary Value (EMV)
- Internal Rate of Return (IRR)
- Payback Period
- Profitability Index
Discount rate
f General:
f NPV uses cash flows
f NPV uses the cash flow pattern of the entire project
f NPV discounts the periodically (yearly) cash flows properly (
discounted cash flows)
N
CF n
NPV = CF 0 + n
n =1 (1 + i )
where CF0 = Todays cash flow
CFn = Projects cash flow of period n
i = discount rate
n = Number of years elapsed
0 1.000 0 0 0 0
In this example, it is preferable to receive 10,000 in 2 years as this has a present value of 8,760 as opposed to the
present value of de 8,711 based on in six payments of 2,000 each.
16 |OMV Exploration & Production EC-E, December 30, 2011
10,000
8,711
9,000 Option B
8,000
7,000 6,651
6,000 5,285
NPV EUR
5,000 4,336
4,000 3,649
3,135
3,000
2,000
1,000
0
10% 20% 30% 40% 50% 60%
discount rate (i)
5.00
4.00 3.80
3.00
2.45
NPV mn EUR
1.00 0.63
0.00
0.00
-0.51
-1.00
-0.93
-1.28
-2.00 -1.58
18% 28% 38% 48% 58% 68% 78% 88% 98%
discount rate
3.4
3.1
3 2.8
2.5
2.1
1.1
1 0.8
0.5
0.3 0.2 0.3
0.3 0.2 0.2 0.2 0.1 0.1 0.2
0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.1
0.1 0.1 0.0
0.1 0.1 0.1 0.1 0.1 0.0
-0.1
-0.2 -0.1
0 -0.2
-0.3
-0.5 -0.5
-0.6
-0.7
-0.9 -0.9
-1.0
-1.2 -1.2
-1
-1.4
-1.5
-1.6
-1.8
-2.1
-2.2
-2
-2.4
-2.5
-2.4
-3
2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031
=
NPV
Example:
f Project CAPEX = 100 MM EUR spent over 1 year.
f Operational CF = 20 MM EUR per year over 10 years.
f Discount rate = 10%, CF basis at the end of the year.
f NPV = 20,81 MM EUR, Present Value (PV) of CAPEX = 90,9 MM EUR
f PI = 0,23 which means this project will generate 23 EURO cents per each 1
EURO invested, both being in terms of Present Value.
Internal rate of return (in %) of a Higher than hurdle rate project is Reinvestment premise (at IRR)
cash flow profile profitable (with some restrictions) Cannot always be calculated (certain cases
Indicates the discounting rate at Lower than hurdle rate project is not of inconclusive IRR or no IRR at all)
IRR which the cash flow profile has
an NPV of 0
profitable
For rankings: a project is preferred if the IRR
Not additive
Does not consider (total) investment volume
Is compared to a specific hurdle is higher than that of an alternative For project comparisons: prerequisite of
rate (%) investment identical life time of all alternatives
Number of periods (years) The shorter the pay back period the better Reinvestment premise (at discounting rate)
Pay needed to recover the invested A shorter payback period indicates a lower Ignores occurrences after breakeven point
capital
Back Useful for single investment of
risk exposure in time
Does not provide information about total
choice decisions profit of the investment project
Period
Ratio indicating how many The higher the PI the more attractive a Reinvestment premise (cf. NPV)
monetary units is earned per 1 project appears There is different ways of calculation
PI monetary unit of cash out (e.g.
CAPEX)
(depending on denominator)
Not additive
26 |OMV Exploration & Production
Useful for projectEC-E, December 30, 2011
rankings Does not consider (total) investment volume
Start up training for project engineers_07.ppt
Contents
C. Sensitivities
E. Project Example
F. 2 E&P Exercises
G. Conclusion
54 9
450
38 1 450
400 352
33 6
2 91
33 8 3 52
2 45 2 53
30 1
mn EURO
200
2 65 2 53
200 2 28 15
15 4
191 1 09
15 4 63
56
1 17
18
81
56 44 -28
0 -43
7
-43
-1 4 2
-1 42
-2 0 0 -2 4 0
-24 0
-339
-33 9
-4 0 0
5 0 .0 % 6 0 .0 % 7 0 .0 % 8 0 .0 % 9 0 .0 % 1 0 0 .0 % 110. 0% 1 2 0 .0 % 1 3 0 .0 % 1 4 0 .0 %
% of B as e Cas e
C. Sensitivities
E. Project Example
F. 2 E&P Exercises
G. Conclusion
f General
- Pre tax calculation (no royalties and taxes are considered)
- All volumes have to be inputted in mn boe
- All cash values have to be inputted in mn
C. Sensitivities
E. Project Example
F. 2 E&P Exercises
G. Conclusion
Team Exercises
f 2 E&P exercises
f Project input
f Making the right decisions
- Output of calculations and graphics
f Change Input variables (scenarios)
- New output of calculations and graphics
f Close loop Learning by doing