PROJECT ANALYSIS OF AN OIL FIELD WITH ONE

WELLHEAD-PLATFORM AT COMPANY X IN THE EXPLORATION

AND APPRAISAL STAGE

FINAL PROJECT

By

Mutya Wijayanti

19007070

Undergraduate Program

School of Business and Management

Institut Teknologi Bandung

VALIDATION PAGE

PROJECT ANALYSIS OF AN OIL FIELD WITH ONE

WELLHEAD-PLATFORM AT COMPANY X IN THE EXPLORATION

AND APPRAISAL STAGE

By

Mutya Wijayanti

ID No: 19007070

A Final Project in Partial Fulfillment of the Requirement for

the Degree of Bachelor of Management

Undergraduate Program of Management Study

School of Business and Management

Institut Teknologi Bandung

July 22, 2010

Validated By

Dra. Isrochmani Murtaqi, MAcc

NIP: 888049103

  i

ABSTRACT

The oil and gas industry is divided into two activities, which are upstream activity and downstream activity. Upstream activity is engaged in exploration and production activities of petroleum, while downstream activity is engaged in processing, transportation, storage, and marketing of petroleum product. X Company is one of the multinational companies that has its business activity in upstream sector. It has the worldwide operation in several countries, including Indonesia. There are some projects that have not been producing oil in Indonesia. From many existing projects, it is important to know which project that should be chosen in order to reduce a big loss of developing uneconomical project. Therefore, project analysis becomes the important thing to know whether a project is feasible or not.

The main objective of this final project is to conduct the economical feasibility analysis of one of the X Company’s project that still in the exploration and appraisal stage. The project refers to the Shark field with one wellhead-platform (WHP) and one FPSO in Dolphin block. The project is analyzed by using capital budgeting decision method and sensitivity analysis. The capital budgeting decision method that is used as the theoretical foundation including Net Present Value (NPV) method, Internal Rate of Return (IRR) method, and Profitability Index Ratio (PIR). Meanwhile, Tornado and Spider chart are used as sensitivity analysis tools to know how some components can change the project’s value.

According to data calculation and analysis, there are two steps in conducting a project analysis that will determine whether a project is economically to be developed or not. The first step is making financial projection model, then followed by conducting sensitivity analysis. There are several steps to do in the making of financial projection model, which are make the assumptions by following the Production Sharing Contract (PSC) terms, make input data sheet, make calculation or process sheet, and make the output or result sheet.

Based on the calculation result, the project of Shark Field with 1 WHP in Dolphin Block is feasible to be developed. It is shown from the positive value of NPV as well as the higher IRR percentage compared to the discount rate. Even though the PIR shows a small figure, it does not mean that the project should be rejected. It is only a supporting factor in project analysis that determines the capital expenditures efficiency of a project. Meanwhile, Tornado and Spider chart shows that reserve size and oil price are the most sensitive components based on their long bar. Therefore, they become the important components that should be considered because of their ability to change the project’s value.

Since the project is feasible to be developed according to its NPV and IRR calculation but has the small figure of PIR, the recommendation is focused on how to increase the PIR value. The company is better to attempt to obtain new data by conducting more extensive exploration and appraisal drilling, and also using its data acquisition from those drillings. By knowing more information about the reservoir and subsurface that will be drilled, it is expected to be able to reduce the high uncertainty in the reservoir and subsurface when the drilling process begin. Regarding its sensitivity result, the X Company should sharpen and strengthen its drilling process and it is better to be supported by process of preparation, data acquisition, as well as good planning. These recommendations are expected to improve the company’s performance so that it will maintain the sustainability of the company’s life.

Keywords: economical feasibility analysis, NPV, IRR, PIR, sensitivity analysis

  ii

ABSTRAK

Aktifitas industri minyak dan gas terbagi menjadi dua kategori, yaitu aktifitas hulu dan hilir. Aktifitas hulu berkaitan dengan aktifitas eksplorasi dan produksi minyak, sementara aktifitas hilir berkaitan dengan proses, transportasi, penyimpanan, dan aktifitas marketing untuk produk minyak. Perusahaan X adalah salah satu multinasional perusahaan yang memiliki aktifitas bisnis di bidang hilir. Perusahaan ini beroperasi di beberapa Negara, termasuk Indonesia. Beberapa dari proyek mereka yang berada di Indonesia belum memproduksi minyak. Dari bebrapa proyek yang sedang diajalankan, sangatlah penting untuk mengetahui proyek mana yang harus dipilih untuk mengurangi kemungkinan mendapat kerugaian besar karena mengembangkan proyek yang tidak ekonomis. Oleh karena itu, analisis proyek menjadi suatu hal yang penting untuk mengetahui apakah suatu proyek menguntungkan atau tidak.

Tujuan utama dari tugas akhir ini adalah menganalisis kelayakan ekonomi dari salah satu proyek yang dimiliki perusahaan X yang masih berada di tahap explorasi dan penaksiran. Proyek yang akan dianalisis adalah ladang Shark dengan satu kepala sumur di blok Dolphin. Proyek ini akan dianalisis dengan menggunakan metode keputusan penganggaran modal dan analisis sensitifitas. Metode keputusan penganggaran model yang akan digunakan sebagai landasan teori termasuk metode nilai bersih sekarang, metode laju pengembalian, dan indeks rasio probabilitas. Sementara itu, grafik Tornado dan Spider digunakan sebagai alat untuk mengukur sensitifitas dengan tujuan mengetahui bagaimana beberapa komponen dapat merubah nilai dari suatu proyek.

Berdasarkan perhitungan dan analisis data, terdapat dua langkah yang harus dikerjakan dalam menganalisis proyek yang akan menentukan apakah suatu proyek itu ekonomis untuk dikembangkan atau tidak. Langkah pertama adalah membuat model proyeksi keuangan, kemudian diikuti dengan melakukan analisis sensitifitas. Terdapat beberapa cara yang harus dilakukan untuk membuat model proyeksi keuangan, yaitu membuat asumsi dengan mengikuti ketentuan kontrak bagi hasil, membuat lembar input data, membuat lembar perhitungan atau proses, dan membuat lembar hasil. Berdasarkan hasil perhitungan, proyek ladang Shark dengan satu kepala sumur di blok Dolphin layak untuk dikembangkan. Hal ini terlihat dari positifnya nilai nilai bersih sekarang dan nilai laju pengembalian yang lebih tinggi dari tingkat pengembalian yang diinginkan. Walaupun indeks rasio probabilitas menunjukan angka yang kecil, itu tidak berarti bahwa proyek ini harus di tolak. Rasio ini hanya sebagai faktor pendukung dalam analisis proyek yang menentukan efisiensi pengeluaran modal suatu proyek. Sementara itu, grafik Tornado dan Spider menunjukkan bahwa ukuran cadangan dan harga minyak merupakan komponen yang paling sensitif. Oleh karena itu, ukuran cadangan dan harga minyak adalah komponen penting yang harus di pertimbangkan karena kemampuan mereka untuk mengubah nilai proyek tersebut.

Selama proyek tersebut layak untuk dikembangkan berdasarkan nilai bersih sekarang dan laju pengembalian namun memiliki angka yang kecil untuk indeks rasio probabilitas, saran yang diberikan difokuskan kepada bagaimana car meningkatkan nilai dari indeks rasio probabilitas. Perusahaan X lebih baik mencoba untuk mendapatkan data-data baru dengan memperluas pengeboran eksplorasi dan penaksiran, serta menggunakan akuisisi data dari pengebeoran-pengeboran tersebut. Dengan mengetahui informasi yang lebih banyak mengenai reservoar dan permukaan yang akan dibor, diharapkan hal ini dapat mengurangi tingkat ketidakpastian di reservoar dan permukaan ketika pengeboran dimulai. Mengenai hasil sensitivitas, perusahaan X harus mempertajam dan memperkuat proses pengeborannya yang didukung dengan proses persiapan yang baik, akuisisi data, serta planning yang baik. Saran-saran ini diharapkan dapat meningkatkan performa dari perusahaan sehingga dapat menjaga kelangsungan hidup dari perusahaan.

Kata kunci: analisis kelayakan ekonomi, nilai bersih sekarang, laju pengembalian, indeks rasio probabilitas, analisis sensitifitas

  iii

FOREWORDS

First of all, I would like to thank Allah SWT because of his blessing so that this final

project can be finished on time. This project is made as the requirement for graduation in

the last year study at SBM ITB.

I realize that this final project cannot be finished on time and smooth without any help

from several people, who are getting involved directly or not. For this reason, I would like

to give my gratitude to:

1. Ibu Isrochmani Murtaqi, as my academic counselor, who always gives me

assistances, advises, and supports during the making process of this final project.

2. Pak Martinus, as my field mentor in X Company, who is able to give me the time,

supports, and new knowledge so that could help me to learn the oil and gas

industry.

3. Pak Deddy P. Koesrindartoto, as my academic examiner, who gives me some good

feedbacks in order to improve the quality of this final project.

4. My family, especially for my Dad, Mom, and my sister, Mbak Wulan, who always

give me a big support, wishes, and loves that become my spirit during the working

process.

5. The X Company’s staffs, who provide me the data, willingness to share their

knowledge with me, and also thanks for being good friends who always give me

the supports.

6. Nicky Azahari, who always give me support in every step I do. Thanks for being a

friend, brother, and the beloved one who always understand me when I was down

and tired during the working process.

7. My lovely best friends, Tiara Luciana Devi and Fiannita Arumsari, who always

give me support, help, and loves. Thanks for being great friends and I will not

forget about our togetherness in happiness and sorrow.

  iv

8. My dearest friends, Ignatia Siahaan and Ikromu Ibadillah, who always give me

support through cheering me up when I was in my hardest situation and always be

my good advisors.

9. My beloved friends, Citra, Gita, Ana, Mirna, Sally, Sekar, Dhea, Nurul, who

always give me your wishes and support. Thanks for being my best friends who

always understand me inside and out.

10. All the member of Apastia Co., especially for Discussion Group A-2 (Hasya, Alma,

Krisna, Alissa, and Fikar) and Apastian’s girls, who give many wonderful moments

and beautiful togetherness in Tutorial A for this recent three years.

11. All the students of SBM 2010, who always be my family and support each other

during my time in SBM ITB.

12. All the SBM ITB lectures and tutors, who had given me a lot of knowledge,

information, and education. Thanks for teaching me and providing your assistance

and time so that could help me understand the theories from lessons.

13. Ibu Ikum and other Administration Staffs, who always give me the up-date

information about the final project deadline and guidance during the working

process so that it could be finished on time and well organized.

14. All the people who cannot be mentioned one by one. Thanks for the support and

wishes. It means a lot to me.

The limitation of my abilities make this final project is still far from the perfection.

However, this final project is expected to be used as the reference for the company, my

self, and hopefully it will be useful for the readers.

Bandung, 23 July 2010

  v

LIST OF CONTENTS

ABSTRACT ……………………………………………………………………………….. i

FOREWORD ..…………………………………………………………………………… iii

LIST OF CONTENTS ……………………………………………………………………. v

LIST OF IMAGES ……………………………………………………………...………. viii

LIST OF TABLES ……………………………………………………………………….. ix

LIST OF APPENDICES …………………………………………………………………. xi

CHAPTER I INTRODUCTION…………………………………………………………... 1

1.1 Background …………………………..……………………………………….. 1

1.2 Problem Identification …………………………………………………............ 2

1.3 Objectives ……………………………………………………………............... 3

1.4 Scope and Limitation …………………………………………………………. 4

1.5 Chapter Summary ……………………………………………………………. 4

CHAPTER II THEORETICAL FOUNDATION ………..………………………..……… 7

2.1 Non-Academic Theories ……………………………………………………… 7

2.1.1 Production Sharing Contract (PSC) ……………………………………….... 7

2.1.2 Project Life Cycle in the Oil and Gas Industry …………………………..... 10

2.2 Academic Theories …………………………………….…………………….. 11

2.2.1 Present Value Theory ……………………………………………………… 12

2.2.2 Net Present Value (NPV) Method …………………………………………. 13

2.2.3 Internal Rate of Return (IRR) ……………………………………………… 16

2.2.4 Depreciation ……………………………………………………………….. 17

  vi

2.2.5 Profitability Index Ratio …………………………………………………… 19

2.2.6 Sensitivity Analysis …………………………………………………........... 20

CHAPTER III METHODOLOGY ……………..…………………………………........... 21

3.1 Problem Identification ………………………………………………….......... 22

3.2 Theoretical Foundation ………………………………………………………. 22

3.3 Data Collection ………………………………………………………………. 22

3.3.1 Primary Data ………………………………………………………….......... 23

3.3.2 Secondary Data ……………………………………………………….......... 23

3.4 Data Analysis ………………………………………………………………... 23

3.5 Conclusion and Recommendation …………………………………………… 23

CHAPTER IV DATA COLLECTION AND ANALYSIS ……………………………… 25

4.1 The Assumptions …………………………………………………….………. 26

4.2 The Input Data …………………………………………………………….…. 30

4.2.1 Production Profile ……………………………………………….…………. 30

4.2.2 Oil price ……………………………………………………….…………… 31

4.2.3 Capital Expenditures ……………………………………………….……… 31

4.2.4 Operating Expenditures …………………………………………….……… 33

4.2.5 Abandonment Cost …………………………………………………............ 34

4.3 The Calculation Process ………………………………………………........... 34

4.3.1 Gross Revenue, FTP, and Revenues Available for Cost Recovery …........... 38

4.3.2 Cost Recovery ……………………………………………………………... 40

4.3.3 Equity to Be Split ………………………………………………………….. 42

4.3.4 Cash Flow …………………………………………………………………. 46

  vii

4.3.5 NPV Calculation …………………………………………………………… 47

4.3.6 IRR Calculation ……………………………………………………............. 50

4.3.7 PIR Calculation ……………………………………………………............. 51

4.4 The Output/Result …………………………………………………………… 52

4.5 Sensitivity Analysis ………………………………………………………….. 53

4.5.1 Tornado Chart ……………………………………………………………… 53

4.5.2 Spider Chart …………………………………………………………........... 56

CHAPTER V CONCLUSION AND RECOMMENDATION ………………….………. 59

5.1 Conclusion ……………………………..…………………………………….. 59

5.2 Recommendation …………………………………………………………….. 61

REFERENCES

APPENDICES

  viii

LIST OF IMAGES

Figure 1.1 Case Study Diagram …………………………………………………………... 4

Figure 2.1 PSC Cash Flow Outline ……………………………………………………….. 8

Figure 2.2 Oil and Gas Industry Project Life Cycle ……………………………………... 10

Figure 2.3 Present Value Diagram ………………………………………......................... 13

Figure 2.4 Net Present Value Diagram …………………………………………………. 14

Figure 2.5 Internal Rate of Return Diagram ………………………………...……........... 16

Figure 3.1 Methodology Flowchart ………………………………………………........... 21

Figure 4.1 Project Analysis Flowchart ……………………………………………........... 25

Figure 4.2 Historical Oil Price Movements …………………………………...………… 27

Figure 4.3 Dolphin Breakeven Plot for Shark Field (1 WHP) …………………...……… 53

Figure 4.4 Tornado Chart of Dolphin Block (Shark Field 1 WHP) ………………........... 56

Figure 4.5 Spider Chart of Dolphin Block (Shark Field 1 WHP) ……………………….. 57

  ix

LIST OF TABLES

Table 2.1 Group 1 ……………...…………………………………………....................... 18

Table 2.2 Group 2 ……………………………………………………………………….. 18

Table 4.1 Production Profile ……….……………………………………………………. 31

Table 4.2 Capital Expenditures (Capex) …………………………………………........... 32

Table 4.3 Operating Expenditures (Opex) ……………………………...............………. 33

Table 4.4 Production Profile Breakdown ……………………………………………….. 35

Table 4.5 Drilling Capex Breakdown ………………………………………...…............. 36

Table 4.6 Escalated Capex ……………………………………………………………… 37

Table 4.7 Abandonment Cost ………………………………………...……………….… 38

Table 4.8 Oil Sales ……………………………………………………………...………. 39

Table 4.9 Oil Revenue ………………………………..……………………………….… 39

Table 4.10 Escalated Capex and Opex ………………………………………….…….… 40

Table 4.11 Depreciation Factors …………………………………………………........... 41

Table 4.12 Depreciation Cost ………………………………….…………………........... 41

Table 4.13 Oil Cost Recovery Calculation ……………………………………………… 42

Table 4.14 Oil Profit …………………………………………………...............…........... 43

Table 4.15 DMO Calculation …………………………………………………………… 44

Table 4.16 Tax Calculation ………………………………………………………........... 45

Table 4.17 Contractor Net Cash Flow ……………………………………………........... 46

Table 4.18 Government Net Cash Flow ………………………………………………… 47

  x

Table 4.19 Contractor and Government Net Present Value with 10% Discount Rate …... 48

Table 4.20 Contractor and Government Net Present Value with 8% Discount Rate ……. 49

Table 4.21 Contractor and Government Net Present Value with 14% Discount Rate …... 50

Table 4.22 Contractor IRR ………………………………………………………………. 51

Table 4.21 PIR Calculation ………..………………………………..……………............ 52

  xi

LIST OF APPENDICES

APPENDIX A DOLPHIN PSC TERM

APPENDIX B DOLPHIN INPUT DATA SHEET

APPENDIX C DOLPHIN CALCULATION INPUT DATA SHEET 1

APPENDIX D DEPRECIATION CALCULATION

APPENDIX E TAX CALCULATION

APPENDIX F DOLPHIN CALCULATION SHEET 2

APPENDIX G NPV CALCULATION