Petroleum Project Economics, Risk & Decision Analysis

Petroleum Project Economics, Risk & Decision Analysis

Monday 25 Oct 2021

  • Duration: One Week
  • City: Madrid 
  • Fees: Classroom: 4700 GBP / Online: 2350 GBP



This course covers the setup of economic analysis cases, including the estimation of recoverable reserves, production profiles, commodity prices, and project costs – CAPEX, OPEX, taxes, royalties, transportation, depreciation, before-tax (BTAX) cash-flow, after-tax (ATAX) cash-flow, international fiscal regimes (production sharing agreement and concessionary system). The course starts from the basic required parameters of inflation, interest, and the time value of money. These concepts are then transformed into profitability indicators. Last but not the least, the profitability indicators are then used to make investment decisions. The emphasis of the course is to bridge the gap between theoretical concepts and their practical limitations. The participants will be able to appreciate the amount of information that they never thought of. In addition to this, the emphasis is also on the use of Excel’s financial functions.

Course Objectives:

On completion of this course you will be able to fully understand the Investment Evaluation:

  • Learn how to reduce exposure and mitigate risks in projects and handling uncertainty
  • Clarify concepts such as: time value of money, cash-flow models, capital budgeting, IRR, NPV, income producing investments.
  • Maximize the return on investments by good decision making processes based on the commercial viability of projects
  • Improve your decision process, investment and opportunity analysis
  • Practice the hands on experience in building your own economic evaluation models and solving case study based examples

Who should attend…?

  • Planning managers • Oil & gas engineers • Project managers • Analysts • Commercial managers • Economists • Government officials • Geologists • Business advisors • Asset managers • E&P managers • Product managers

Course Outlines:

Day 1:


  • Why economic evaluation
  • Objective of the course
  • Typical oil & gas company objectives
  • Typical oil & gas company activities
  • Capital expenditure plans
  • Basic process of economic evaluation


  • Inflation defined
  • Types of inflation
  • Consumer price index
  • Risk Factors (Simple Illustration)


  • Simple interest
  • Compound interest formula
  • Nominal & effective interest rate

The Time Value of Money

  • Equivalence
  • Interest tables
  • Future value of present sum
  • Present value of future sum
  • Future value of ordinary annuity and annuity due
  • Present value of ordinary annuity and annuity due
  • Project financing
  • Loan amortization schedule

Spreadsheet Applications

  • Excel’s financial functions for equivalence
  • Excel’s financial functions for loan amortization

Problems & Solutions

Day 2:

Before-Tax (BTAX) Cash-Flow

  • Cash-flow (CF) defined
  • Gross revenue (GR)
  • Basic data requirement
  • Forecasting product stream
  • Dependence of Capital

Expenditure (CAPEX)

  • Economies of scale
  • CAPEX during production
  • Breakdown of Operating

Expenditure (OPEX)

  • Develop rules of thumb for OPEX
  • Gas processing flow diagram
  • Typical oil production facilities
  • Sample before-tax cash-flow
  • Schematic of typical cash-flow

Cost Estimation

  • Project cost management
  • Various types of costs
  • Cost estimation tools and techniques
  • Level of cost estimates
  • Dependence of cost estimates
  • Criticality of cost estimates.

After-Tax (ATAX) Cash-Flow

  • ATAX cash-flow additional variables
  • Depreciation methods
  • Sample After-Tax Cash-Flow

Weighted Average Cost of Capital

  • Capital Asset Pricing model (CAPM)
  • Cost of equity and cost of debt
  • Weighted average cost of capital
  • Sample WACC calculations

Problems and Solutions

Day 3:

Relationship between cash-flow and WACC

Profitability indicators

  • Typical profitability indicators
  • Cumulative net cash-flow (discounted & undiscounted)
  • Discounted payback period
  • Internal rate of return (IRR)
  • Net present value (NPV)
  • Profitability index (PI)
  • Long-run marginal cost (LRMC)
  • Maximum sustainable risk

 Netback Value & Indexed Pricing

  • Netback value (NBV)
  • Base year and ROR approach
  • LRMC approach
  • Indexed netback pricing

Funds Flow and Discounting Frequency

  • Funds flow and discounting
  • NPV dependence on CF assumptions
  • Discounting methods

International Petroleum Agreements

  • The need for collaboration
  • International agreements
  • Parties to agreement
  • Typical contract terms
  • Contractual arrangements
  • Comparison of Fiscal Systems
  • Sliding scale tranches
  • Concessionary system’s cash-flow
  • Joint venture & risk service contracts

Day 4:

Investment Selection Decision-Making

  • Investment types
  • Types of investment decisions
  • Investment selection decision-making
  • Revenue producing investments
  • Inherent problems with IRR
  • Multiple rates of return
  • Ranking projects – non-mutually exclusive investments
  • Service producing investments (equal lives)
  • Service producing investments (unequal lives)
  • Lease versus buy decision
  • Nominal and real cash-flow

Basic Probability Concepts

  • Probability definitions
  • Widely used probability distributions
  • Discrete probability distributions
  • Discrete probability distributions
  • Continuous probability distributions

Day 5:

Expected Value Concepts

  • Expected value of random variables
  • Probability table
  • Expected monetary value (EMV)
  • Sensitivity analysis
  • Correct interpretation of expected value
  • Dice rolling experiment Schematic of typical cash-flow

Decision Trees

  • Terminology used in decision trees
  • Solving a decision tree

Simulation in Decision Analysis

  • Applications in simulation
  • Simulation in decision-making
  • Obtaining random observation from PDF.

Management Presentation

  • Assumptions
  • Profitability indicators
  • Sensitivity diagrams
  • Waterfall chart
  • Multiple variable cross plot
  • Feasible profitability region
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