NAME: JIMOH-KESHINRO, OLALEKAN.

REG: 40263 GROUP 1. PETROLEUM ECONOMICS TAKE HOME EXAM. AUST2012.

Solution 4

7758φ (1 − Swi) AH
STOIIP = ……………………………………… (1)
Boi

Ultimate Recovery = STOIIP *RF …………………………………….. (2)

Using equation 1 and 2, STOIIP and Ultimate Recovery were calculated using Excel. See results below

Table 1

Pay Thickness(H) (ft) 150

Average water saturation (Swi) 0.175
Formation volume factor (Boi) (RB/STB) 1.25 STOIIP(MMSTB) 55.3

Drainage Area (A) (Acre) 320 Ultimate Recovery 19.4

(MMSTB)
Recovery factor 0.35
Porosity (φ) 0.225

To demonstrate the sensitivity of STOIIP to Porosity, assuming the porosity changes progressively by 2%
from the given porosity value of 22.5% and other parameters remain constant. This sensitivity analysis
of STOIIP to porosity was carried out using Excel. See results below

Porosity (φ) (%)

STOIIP ( MMSTB)
22.5 5529.9
24.5 6021.4
26.5 6513.0
28.5 7004.5
30.5 7496.1
32.5 7987.6
34.5 8479.2
NAME: JIMOH-KESHINRO, OLALEKAN.
REG: 40263 GROUP 1. PETROLEUM ECONOMICS TAKE HOME EXAM. AUST2012.

Sensitivity of STOIP to Porosity

9000.0

8000.0
y = 245.77x
R² = 1
7000.0

6000.0

5000.0

STOIP(MMSTB)
4000.0

3000.0

2000.0

1000.0

0.0
0 5 10 15 20 25 30 35 40
Porosity (%)

Figure 1: Responsiveness of STOIIP to Porosity

From the graph of STOIIP versus porosity, regression analysis is unity ((R2=1) which means that the data
of the plot were best fitted by linear direct relationship. Based on the graph, the STOIIP respond directly
to porosity if other parameters remain constant. That is,

STOIIP α porosity
STOIIP = Constant (K) * Porosity ………………………………………….. (3)
NAME: JIMOH-KESHINRO, OLALEKAN.
REG: 40263 GROUP 1. PETROLEUM ECONOMICS TAKE HOME EXAM. AUST2012.

Exponential Decline is given by

q = qi ……….…………………………………….. (4)

= dt = Np …………………………………………….. (5)

From equation 5,

qi - q
Np = ………………………………………………… (6)
a

d = 1− ∆
…………………………………………………… (7)

 qi 
ln 
t=
q …………………………………………………….. (8)
a

Coding equation 6, 7 and 8 in excel the following results were obtained

Table 3

Recoverable Reserves (RR) (MMSTB) 19.35

Cummulative Production before decline (50% of RR) (MMSTB) 9.68
Recoverable Reserves before decline (MMSTB) 9.68
Plateau Rate (STB/D) 100000
Rate at economic limit (STB/D) 1000
Exponential Decline Rate (a) (per year) 3.7717
Effective decline rate (d) (per month) 0.2697
Time to reach the economic limit (Year) 1.221
Recovered reserves at economic limit (MMSTB) 9.58
Remaining reserves at economic limit (MMSTB) 0.10

See details of calculations in spreadsheet label 4

NAME: JIMOH-KESHINRO, OLALEKAN.
REG: 40263 GROUP 1. PETROLEUM ECONOMICS TAKE HOME EXAM. AUST2012.

SOLUTION 2

a(i)

Price elasticity of demand is a measure of the responsiveness of demand to change in price.

Mathematically,

%
Ed = …………………………….. (1)
%

Where Ed is the coefficient of price elasticity of demand

Q is the quantity demand

P is the price

Price elasticity of demand is categorize as either own or cross price elasticity. In order to address the
problem of non-symmetry in calculating Ed , methods such as point elasticity and arc elasticity are used
to compute price elasticity of demand.

Point elasticity method Arc elasticity method

( )∆
Ed = Ed =
( )∆

If Ed = 0, demand is perfectly inelastic, Ed <1, demand is inelastic, Ed>1 demand is elastic and Ed =1,
demand is unit elastic.

(ii)

Price

Price

Quantity demand Quantity demand

Inelastic demand curve (Ed<1) Elastic demand curve (Ed>1)

Figure 2: Inelastic and Elastic demand curve.

NAME: JIMOH-KESHINRO, OLALEKAN.
REG: 40263 GROUP 1. PETROLEUM ECONOMICS TAKE HOME EXAM. AUST2012.

Inelastic demand implies that demand responds less proportionately to a change in Price.

Elastic demand implies that demand responds more than proportionately to a change in price.

The demand curve of petroleum is downward sloping because the demand for petroleum is inelastic.
This is because there is no close substitute for petroleum.

b(ii)

TR =PQ ……………………………………1
d (TR ) dp
= P+Q …………………………………...2
dQ dQ

− PdQ
Ed = ……………………………………3
QdP

dP − P
= ……………………………………4
dQ EdQ

Substituting equation 4 into equation 2

d (TR )  1 
= P1 −  . …………………………………..5
dQ  Ed 
dTR
But = MR
dQ

 1 
MR = P1 − 
 Ed 

From equation ()
d (TR )  1 
If =0 P1 −  = 0 and Ed=1 TR is maximum at this point.
dQ  Ed 

Both TR and P must decrease. Therefore, P1 −  > 0

d (TR ) 1
If >0
dQ  Ed 

 1 
1 −  > 0 then Ed >1.
 Ed 

Both TR and P must increase. Therefore, P1 −  < 0

d (TR ) 1
If <0
dQ  Ed 

 1 
1 −  < 0 then Ed <1.
 Ed 
NAME: JIMOH-KESHINRO, OLALEKAN.
REG: 40263 GROUP 1. PETROLEUM ECONOMICS TAKE HOME EXAM. AUST2012.
Price

Ed>1

Ed=1

Ed<1

Quantity
Total Revenue

Quantity

Figure 3: Total Revenue behavior with price elasticity of demand and quantity
demand

c(i)
NAME: JIMOH-KESHINRO, OLALEKAN.
REG: 40263 GROUP 1. PETROLEUM ECONOMICS TAKE HOME EXAM. AUST2012.

OPEC is not solely a cartel. A cartel is a formal pact among few numbers of large firms which are
involved in homogeneous products. OPEC is an intergovernmental organization of few countries
producing and exporting petroleum. The members of OPEC are not all the petroleum producing and
exporting countries but virtually all members of OPEC are major producer and exporter of petroleum.
This makes OPEC a formal organization. The internal structure of OPEC fitted best under oligopoly.
Oligopoly market structure uses Dominant leadership, Barometric leadership and Collusion (cartel)
mechanism to determine price or supply. OPEC controls the output production of petroleum of its
members, there by having power to influence the market price of petroleum through supply control.
This can be done using any of the mechanism of oligopoly mentioned above. For an organization to be a
cartel it must be established formally or informally, have members who produce homogeneous product.
OPEC meets these conditions therefore, OPEC could be a cartel.

c(ii)

It may not be necessarily correct to hold OPEC solely responsible for the rapid rise in oil prices in 2008
because OPEC is not the only major determinant of oil price. There are other major determinants of oil
price which collectively have 56% of the world’s oil production and OPEC has 44% of the world’s oil
production as reported in 2010. These other major determinants of oil price are:

1. Crude oil producing and consuming nation members of Organization for Economic Cooperation
and Development (OECD)
2. Government in producer and consumer countries
3. Oil multinational companies
4. The brokers in the spot market for oil
5. Supply and demand for oil.

Each of these major determinants of oil price can influence the price of oil. OPEC is not solely
responsible to influence oil price.

d(i)

Monopoly oil and gas industry is type of oil and gas industry structures where there is only one firm in
the oil and gas industry. This firm solely determines the price of oil through the government by payment
of subsidy. For example Nigeria and Libya etc.

Competitive oil and gas industry is an industry structure in which very large numbers of firms operating
in the oil and gas industry. Every firm in this structure is a price taker. The oil price is determined by
market forces of demand and supply of oil and gas. For example Ghana and Benin Republic etc.
NAME: JIMOH-KESHINRO, OLALEKAN.
REG: 40263 GROUP 1. PETROLEUM ECONOMICS TAKE HOME EXAM. AUST2012.

Conditions Monopoly oil and gas industry Competitive oil and gas industry
Number of firms One many
Barrier to entry or
exit Yes No
Concentration Ratio Very high Very low
Market Price power Price maker Price taker

d(ii)

Conditions Oil and gas industry Electric power industry

Exhaustible Yes No
Taxes Highly taxed Less taxed
Risk and uncertainties Very high moderates
Complexity of Operation Complex Less complex
Profitability Highly profitable Profitable

Petroleum is an exhaustible resources so a barrel of petroleum produced today is not available for
production in the future.

Dynamic optimality condition is optimum conditions which spread production of the commodity over
time. That is if the allocated production for a particular time is exhausted, then no production for that
time anymore. But static optimality conditions are time independent. Production is not limited by time.

Conditions Dynamic optimality conditions Static optimality conditions

Time dependent Yes No
Output limitation per time Yes No
Opportunity cost consideration Yes No
Nature of Products Exhaustible Inexhaustible
NAME: JIMOH-KESHINRO, OLALEKAN.
REG: 40263 GROUP 1. PETROLEUM ECONOMICS TAKE HOME EXAM. AUST2012.

SOLUTION 3

Table 2

Economic
Indicators Option A Option B
r* 15.00% 15.00%
NPV 519,321 1,325,470
IRR 177.71% 268.35%
PVR 1.154 2.95
PI 2.154 3.95
GRR 1.247 1.27

Net Present Value NPV

The net present values of both options are positive. This means that both options will increase the
worth of the company. But option B has greater NPV than option A, therefore option B should be
preferred to option A. NPVB>NPVA.

Internal Rate of Return IRR

The IRR of both options are greater than the company’s IRR so both options can be considered. But
Option B has higher IRR than option A which means the option B will generate more return from
investment than option A. So option B should be preferred to option A. IRRB>IRRA.

Profitability Index PI

The profitability index of option B is higher than that of option A. This means that option B will generate
profit faster and greater than option A. since PIB>PIA option B should be preferred to option A.

Since the options are mutually exclusive, based on the results of the economic indicators for both
options, option B has higher value of all the economic indicators used for the analysis than option A.
Therefore option B should be selected.
NAME: JIMOH-KESHINRO, OLALEKAN.
REG: 40263 GROUP 1. PETROLEUM ECONOMICS TAKE HOME EXAM. AUST2012.

1800000

1600000

1400000

1200000

1000000
NPV ($)
NPV (A)
800000
NPV (B)

600000

400000

200000

0
0 10 20 30 40 50 60 70
Rate of return (%)

Figure 4: NPV for option A and option B

See details of the analysis in spreadsheet label 3.