Chapter Four 41 Pentland Field 42 Riccarton Field 43 Lobster Field
Chapter Seven 71 Juniper Field
Attempt these problems, once you have completed the relevant chapters. The greatest benefit is achieved by preparing your own answers, before referring to the solutions. Tutorial Time Value [Compounding, Discounting & Inflation] Questions [tvq]
1. £100 is invested for 10 years.
Compute terminal value for the following interest schemes:-
a) Simple interest @ 5% per year
b) Compound interest @ 5% per year c) Compound interest @ 0.5% per month d) Compound interest @ 7% nominal annual interest and daily compounding
2. Calculate effective annual interest for the following cases:-
a) Simple interest @ 5% per year
b) Compound interest @ 5% per year c) Compound interest @ 1.57% per month [Visa] d) Mortgage @ 6.99% nominal annual interest and monthly compounding e) National Savings Capital Bond with increasing interest as follows:-
Year 1 5.15% Year 2 6.10% Year 3 7.60% Year 4 9.00% Year 5 11.00%
3. You have access to investment interest of 5% per annum.
a) Which of the following would you prefer:-
£500 to be paid now?
£1000 to be paid in ten years? £2000 to be paid in twenty years?
b) Do you have sufficient information to make this decision?
4. What would you be prepared to pay for an annuity of £1000 per year to be paid for ten years, starting one year from now?
State any necessary assumptions.
5. £30 million will be borrowed in 3 instalments of £10 million each, on 1st June 2004, 2005 and 2006. Repayment will to be made in 4 equal instalments on 1st June, 2008, 2009, 2010 and 2011.
If interest is charged at a constant, effective annual rate of 14%,
compute the amount of the four equal repayments.
6. Calculate a set of Discount Factors suitable for use with a cash flow model with annual periods, mid-year aggregation and an origin at the start of the first year.
Use an annual discount rate of 10%.
7. UK Retail Price statistics are presented in Appendix 1.7
a) What was the purchasing power of the £2000 in relation to the £1970 ? b) What was the average [compounded] rate of inflation in the UK from 1970 to 2000?
8. Oil Price statistics are presented in Appendix 1.7.
The price of Brent crude averaged $14.38 in 1986
Calculate the equivalent price in terms of $2002.
9. Interest of 12% is offered at a time when inflation is running at 5%
a) What real rate of interest is offered?
b) At this rate, how long would it take for an investment to double its purchasing power?
10. The attached Table tvq (1) includes cost information for the Brae project. It is in money of the day terms.
(a) Derive project Capex in terms of £1992
(b) Convert the cumulative (total) Capex to £2000 terms Table tvq (1):- Brae Capex
Year Retail Price Retail Price Convert Capex Capex
% Change Index to £1992 mod' £1992'
1978 52.80
1979 13.45 59.90 7
1980 18.03 70.70 120
1981 11.88 79.10 269
1982 8.60 85.90 271
1983 4.54 89.80 191
1984 5.01 94.30 118
1985 6.04 100.00 318
1986 3.40 103.40 319
1987 4.16 107.70 270
1988 4.92 113.00 252
1989 7.79 65
1990 9.44 65
1991 5.85 130
1992 3.76 140
1993 1.57 60
Σ 2595 Tutorial Pentland Field [Project Cash Flow & Measures of Value] Questions [pfq]
1. Introduction Pentland is a medium size prospect, with recoverable reserves of:- 400 million barrels of oil (36º API) 200 * 109 standard cubic feet [scf] of gas
A conceptual design has been prepared, based on a template and a steel jacket, with pipelines of 30 miles and 50 miles required to export liquid and gaseous products to the nearest facilities offshore.
It is estimated that this development will cost about £750 million, with an annual operating expenditure of £45 million (both in 2004 terms). In addition, export tariffs of £0.60 per barrel and £0.40 per 103 scf (both 2004 terms) are expected. Provided that the economic climate does not cause a delay to the investment decision, fabrication could begin in 2005, with production expected in 2009.
2. Economic Assumptions Management is pessimistic about the oil market and has requested a conservative analysis. The following are to be assumed:-
Oil Price (2004):- $14 per barrel [Constant in “money of the day” terms] Gas Price (2004) $2.50 per 103 scf [Constant in “money of the day” terms] Exchange Rate $1.65 / £ [Constant] Inflation Rate 3 % per annum [Constant]
3. Project Capex (£2004 Millions)
Year Exp.&App Dev. Wells Platform + Export Abandon.
Assume that data and questions relate to mid 2004.
Part One
1. Construct Cash Flow matrix in Pounds of the day
2. Calculate Net Cash Flow
3. Convert to 2004 Pounds
Part Two
4. Plot cumulative Cash Flow against Time
5. Estimate or calculate the following simple Measures of Value:-
Payback Terminal Cash Surplus Maximum Capital Outlay Profit to Investment Ratio
6. Compute Net Present Value with Discount Rate of
12 percent and using mid 2004 as the time origin
7. Is this a worthwhile investment ?
Part Three
8. Construct the NPV Profile and use it to estimate a value for the Internal Rate of Return (IRR)
9. As a check, compute the NPV for i = IRR (estimated) and compare with zero.
10. Normalise the NCF and investigate the impact of this on IRR. Tutorial Riccarton Industrial Power plc [Annual Capital Charge] Questions [rpq]
Riccarton Industrial Power (RIP) is considering whether to invest in a gas-fired power station to supply electricity to the new commercial developments on the west side of Edinburgh. There has been a lot of argument in the media about the relative merits of producing electricity from natural gas and from other sources of energy, and RIP has commissioned a study to investigate the cost of electricity generated from gas.
Discussions have been held to agree the data on which the study is to be based. This information is included below as Table rpq (1). Furthermore, since it is reasonable to assume that income from the sale of electricity will be fairly constant in real terms, over the life of the project, it has been agreed that the Annual Capital Charge method can be used.
You are required to calculate the cost of generating electricity from gas and to present your results in pence per kWh. Assume that construction starts in January 2005. Note that the data is presented in terms of £2004 and your results should be in the same terms.
Table rpq (1):- Gas-Fired Power Station
Information and Cost Data (£2004)
Peak output, 750 megawatts (106 watts)
Energy conversion efficiency 50% Station availability 85% Station (productive) life 15 years Construction time 3 years Cost of construction £450 millions Operating cost £20 million per year Price of gas £0.15 per therm Discount Rate 12%
Notes:-
i 1 Kilowatt hour (kWh) of electricity is generated by running at an output of 1000 watts
(1kW) for one hour. ii Energy content of gas is often quoted in the UK in “therms” [British Thermal Units]. Assume 1 therm is equivalent to 29.3 kWh iii “Energy conversion efficiency” is the relationship between energy “out” as electricity and energy “in” as gas. iv “Station availability” is the proportion of peak output, which is generated on average throughout the year. v Assume construction cost is uniformly spread over construction time. vi Assume that operating cost starts with production of electricity. Tutorial Lobster Field [Acceleration Project] Questions [lfq]
The Lobster Field is a small, onshore reservoir. The Field is currently producing 11,800 barrels of oil per day. The Operator is considering whether to work-over the producing wells in order to improve the performance of the field. The major impact of the work would be to improve productivity in the short term, but at the expense of production in the longer term. Some improvement in overall recovery is also expected.
The work-overs would cost $10 million and could be completed during 2005. As a result of the accelerated production, the field lifeis expected to be reduced by one year, with a saving of $2 million in fixed Opex in that year. . Variable Opex, related to production amounts to about $1 per barrel. These costs are in $2004 terms.
The current planned and accelerated production profiles are presented in Table lfq (1) below.
You are required to advise the Operator whether to proceed with the planned investment .
Current policy of the Company is to assume an oil price of $20 dollars per barrel, constant in real terms over the life of the project. In this case, taxation and inflation effects are to be ignored. Tutorial Juniper Field [Decision Tree & Value of Information] Questions [jfq]
Tweedie Industrial Gas Ltd [TWIG] has completed its evaluation of the Juniper structure and is satisfied that reserves of oil are sufficient to justify the installation of a floating production facility costing £150 million. Furthermore, management is keen to proceed immediately in order to absorb available cash flow from the company’s Aspen Field, which has recently achieved peak production.
A further, adjacent structure, named the Rowan prospect, was discovered last year and has been the target for further seismic investigation. The Exploration Department is optimistic that commercial reserves will be demonstrated in the near future. Management accepts the current assessment that the probability of commercial reserves being identified in the Rowan structure is 40%; P [Rowan commercial] :- 0.40.
If this oil does exist, the floating facility currently planned for Juniper would be inadequate for both reservoirs and, consequently, a second floating facility would be required. Alternatively, TWIG could decide now to install a larger floater or a fixed steel jacket, with capacity for both reservoirs. This option is estimated to cost £225 million.
The semi-submersible rig, Arbor 1, has been leased to drill a single appraisal well on Rowan this year and these results will certainly provide a better indication of the economic potential of the structure. The reliability of this appraisal well is predicted by TWIG to be around 0.8, meaning that whatever the prognosis, there is an 80% probability that it is correct.
If the development decision is delayed until this appraisal result is available, the Juniper programme would slip by a year and TWIG would face a larger short-term tax liability, equivalent to an additional current payment of £25 million. One further well is planned for the Rowan structure next year, but management is not prepared to delay the Juniper decision beyond the result of the first appraisal well.
1. TWIG management has decided to proceed with the Juniper Field development no later
than the completion of the well currently being drilled by Arbor 1. There is, however a problem deciding whether to install a small floater or whether to use a larger facility.
Advise the management of TWIG as to the optimum strategy in order to minimise the expected cost of the Juniper / Rowan Field development.
Note that this requires the construction of a decision tree incorporating the logic of the problem, relevant cost information and probabilities. No revenue information is presented or required.
2. There is some disagreement within the company regarding the probability that Rowan is commercial and management would like advice on the sensitivity of its decision to variation in estimates of P [ Rowan commercial ].
Investigate the impact of changing this assumption in order to establish the range of values for which the determined optimum strategy remains optimum. 3. A second semi-submersible rig, Arbor 2, may be available now at a very high spot rate. The opportunity therefore exists to bring forward the well planned for next year and to have the information available in time to contribute to the Juniper decision.
If the two appraisal wells together on Rowan were considered to provide a reliable assessment, how much extra should TWIG be prepared to spend to have this well drilled now rather than next year?
Note that “reliable” in this context means that no matter what the result of the appraisal well, the interpretation provides an accurate assessment of the economic viability of the structure.
