M81 contract

Odinga Oilfield Business Case[TYPE THE

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TABLE OF CONTENT Page

1.0 Executive summary.............................................................2 2.0 Drilling and Appraisal History..................................................................2 2.1 Case study: Agbami oil field.....................................................................2 2.2 Definition of Fiscal terms........................................................................ 3 2.3 The Value of Exploration......................................................................... 4

3.0 Contract Administration and Project Management................ 4 3.1 Contract..................................................................................................4 3.2 Project contractors.....................................................................................5 3.3 (EIA) Environmental Impact Assessment..................................................5

3.4. Project Plan............................................................................................6 3.4.1 Upstream.............................................................................................................................6.

3.4.2 Downstream.........................................................................................................................6

4.0 Exploration plan....................................................................6.

5.0 Development plan................................................................7.

6.0 ExplorationCost ...................................................................7

7.0 Production and Operating Cost.............................................9 7.1 Payback period.........................................................................................10

8.0 Cash flow analysis................................................................10.

9.0 EXPECTED VALUE AND ROYALTY………………… 11. 9.1 Internal Rate of Return. (IRR) and Profitability Index (PI)................ 12.

10.0 Transportation...................................................................... 12.

11.0 Uncertainties......................................................................13

12.0 Recommendations.............................................................13 References...................................................................................14

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1.0 Executive summary Establishment of oil wells in the offshore area of the coast of West Africa. The Odinga oilfield is a 6000 squarekilometresquare oil field, 50 kilometres into the sea. The task required is to develop wells and produce oil including the total process of taking it down to the final consumer.The project is a profitable one because the quality of oil is good and the estimated quantity is high too. The operation will be managed by G and G oil services from the beginning of the operation. Risk analysis will be conducted at the beginning of the operation and a good safety culture will be maintained through the operation. The semi-submersible rig will be employed for the job. Experienced and highly skilled personnel are meant to be on board. The rig starts operation immediately it is mounted on site. Appraisal wells will be drilled In the first year of the operation 3 wells are targeted to be drilled, 3 wells in the second year and 3 wells in the third year. Two injection wells are drilled for the operation to enhance recovery.

2.0Drilling and Appraisal History

2.1 Case study: Agbami oil field Agbami oil field lies on the deep sea of the Nigerian off shore. The oil from these zones is 35-45 degrees API gravity. It is very low in sulphur content. The appraisal well that was drilled in Agbami had the depth of 15,693ft. The well came across 534 ft of pay in 5 different oil-bearing zones. One of these flowed at a maximum rate of 10,000bpd with a well-head pressure of 2,2000lb per square inch(psi). Achievement of a higher flow rate was hindered by surface equipment limitation. In the reservoir is light sweet crude and very low level of contaminants like vanadium, iron and nickel. The total reserve in Agbami is estimated at a billion oil-equivalent barrels. The field was developed with a subsea production works hand in hand with a Floating Production System and Off-loading (FPSO). Agbami came on stream in July 2008 and reached its height of production in August 2009 with a flow rate of 250,000bpd. Drilling oil commenced on the well in May 2010 and will go on till 2014. A ten-well development programme will boost the crude oil production capacity to compensate for the field’s run-down. The Pacific Bora, a Pacific Drilling rig started operation on the field in August 2011 on a 3 years contract.Agbami is likely to be significance to less complex refiners, particularly those with no vacuum residuum conversion, limited hydrotreating/ sulphur recovery and slim cracking capacity(Offshore technologies.com-News,n.d)

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http://www.famfa.com/brochure.pdf Fig 1.Map of Abami Oilfield. 2.2 Definition of Fiscal terms

Signature Bonus: This is the sum the contractor gives for the period of the contract negotiation stage. It has on the other hand anticipated a sum of $ 50,000,000 payable at commencement of the project.

Royalty: This is 15% of the gross revenue that is derived every year of production from the Odinga oil field. This would assure the Angolan government a 15% cut of the total oil produced every accounting period.

Cost Recovery Limit: The contractor would be responsible for the first cost of exploration, development and production if the field is a success. Hence, the contractor will be expected to recover these costs (CAPEX and OPEX) from amount in barrels of oil produced in the early years of the project. Dialogue involving the contractor and Onyx LTD, considering active percentages and what is available in the industry, aims at a recovery limit of 40 percent cap. This however is typically between 40 and 60% (Ernst & Young, 2011; Mazeel, 2010). This is subtracted as barrel equivalent.

Amortisation: Cost incurred before and during production are capitalised and recognised over a four-year period (25%) from the first year of production. Nonetheless, it is in the interest of both parties that all cost incurred are realised on time (Ernst & Young, 2011; Mazeel, 2010).

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Profi Oil: The usual practice in most Nigerian offshore Production Sharing contracts, for production inside 50 to 100 mmbbl is a profit sharing of 80/20 government to contractor percentage this would as well be in barrels equivalence.

Taxation: From practice today in the oil and gas industry in Nigerian and according to the Nigerian PSC model, 1989 , the taxation is 50% and thus the government would be tax the contractor 50% of its share of profit oil (Ernst & Young, 2011; Mazeel, 2010)..

Uplifts:The factor of inflation will be considered on all capital costs and is usually between 30 and 40 percent (Ernst & Young, 2011). Thus, an uplift of 30 percent will be negotiated between the contractor and government

2.3The Value of Exploration

With an estimate of 200,00 barrels of oil per day peak production by and capital

investments projected at $3.5 to $4 billion, Agbami is clearly a world class and high

impact project.

Production will flow from the dry tree unit to the FPSO for processing. It is expected

that a total of 37 wells will be necessary to fully exploit the field.

The first wells drilled at Agbami cost from $60 to $90 million -- but, those costs are

coming down considerably as ChevronTexaco and its partners' geoscientists learn

more about the pressure regimes in the reservoirs and the best drilling practices.

Development wells will be likelyprice about one-third of those original

wells(Explorer, 2002)

3.0 Contract Administration and Project Management. 3.1 Contract The possible duration of contract in Nigeria is 4 Years and 2 Year extension. Production is 25 years and 5 years extension. Exploration contract in Nigeria, the first three years is $24 million, $30 million for the next $3 years, 60 million $10 additional years and $176 MM over 10 years. Royalty for up to 200 m depth is 16.667%, 200-500m is 12%, 500-800 is 4% and more than 1000 is 0%. Bonus is $2 million at 10,000 bopd and 2 million at 50,000 bopd. Cost recovery limit under old contracts was 40% Profit Oil Split in favour of government is 55/45 for up to 100,000 bopd, 60/40 for 100,001 to 200,000 bopd and 62/38 for over 200,000 bopd. Taxation is 50%. Others account for 50% investment credit. Contracts in Agbami consisted of OPL (oil prospecting

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license) 216. Partners NNPC, Star Deep, and Famfa won the initial contract and later brought in Petrobras for its proficiency and skill in deep water. The tenure was as follows: NNPC--Nigerian National Petroleum Corporation (50 percent); Star Deep (32 percent); Famfa (10 percent) and Petrobras (8 percent).30 In 2004, the OPL 216 was unitized with OPL 217 owing to the arrangements and reserves divided among them. The partners and ownership structure afterwardsamended to the following: ChevronTexaco--68.15% (operator); Statoil 18.85% interest, Petrobras 13%.31 The firms were targeting first production in the field to occur by 2007.32. In 2005, the companies requested bids for the building of an FPSO. Daewoo won the bid for $1.1 billion and the ship arrived in 2007. For the time being, in 2007 Petrobraswitnessed its maximumincome ever, by a profit of greater than $13 billion USD. The company was having amassiveexpansionall over the globe;hitherto it had used upalmost $500 million in Nigeria’s Agbami field and, from June 2008, had nonetheless earned its first dollar of income. 3.2 Project contractors

Contracts Contractor Description of

Contract

Drilling Rig Seaman Drillers

Tim Developers

Drilling of 4

appraisal wells

and 8 exploration

wells using the

semi-submersible

rig.

Re-entry of BF-

X1 and drilling of

2 vertical wells up

to 24000 meters

TD using the

Energy Searcher

Drill ship

Shuttle Vessel

Service

Oge Marine Logistics-

transportation of

goods and

equipments to

and fro the rig.

Fig 2.

3.3 (EIA) Environmental Impact Assessment.

The assessment conducted on the environment showed that the oil has a negative

impact on the environment in the case of spill. Aquatic life is at the risk. Safety

environmental management is a region of consideration and this requires both the

industry and state environmental policies to be a part of the safety awareness.

Inherent safety of work place and the employees should also be taken into serious

account. Pollution should be duly eliminated in the activities of the project. All our

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activities are up to ISO 29001standard and also a fully registered ISO company.

Preparedness for emergency is in place to reduce the risks of accidents and disasters

3.4. Project Plan 3.4.1 Upstream 1. Exploration- Geologists and scientists search for hydrocarbon deposits using

solicited technologies to determine the extent of deposits in the underground. 2. Extraction- Wells are drilled and usable oil is extracted.

3.4.2 Downstream

3. Refining- the extracted oil is refined in large industrial processing plants into

useful petroleum products such as gasoline, diesel, heating oil, kerosene, asphalt base

and liquefied petroleum gas.

4. Transportation- the petroleum products are transported through trucks, pipelines

and oil tankers to consumers.

4.0 Exploration plan. 7 wells are drilled in the first 3 years and two dry wells were gotten. The remaining wells now are 5. Exploration continues afterwards as the already explored wells are already in production. Fig 3.CAPEX

-

200,000,000

400,000,000

600,000,000

800,000,000

1,000,000,000

1,200,000,000

1 2 3

Series1

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The above diagram shows the model of the capital expenditure at the exploration stage. It can be seen that after a year, expenses takes a dramatic fall. In the next four years the structure would look like the diagram below.

Fig 4. Exploration Cost. (CAPEX) 5.0 Developmentplan The first production year has 14 wells, producing at 4000bopd/well. Yr 2 has two extra wells producing at 450bopd per well. By the third year one more well would be ready making the wells 17 in number and they would be producing at 5800bopd per well. The production of the oil by the producing wells is at the rate of 6500bopd. The well depletion rate is estimated at 5% after 11 year of production. The peak production is upheld at 7years. 6.0 ExplorationCost Exploration starts with Geological and Geophysics (G&G). It will take a total of 972.94 million dollars to complete exploration in the location. 2-

-

200,000,000

400,000,000

600,000,000

800,000,000

1,000,000,000

1,200,000,000

1 2 3 4 5 6 7

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D and 3-D seismic will be employed for this project. For 2 D seismic the sum of $2.92million is required and for a 3-D, $33.80 million. An estimated capital of $16.4 million dollars goes in for G&G. In the year 1 the G &G takes$2 million dollar, $2.5 million dollars for year 2 and 3 each, $2.7 million for year 4, $2.8 and $2.9million for year 5 and 6 respectively. 3 million dollars goes for Grav& Mag. The incorporated office cost, G & A budgets for 25.8 million dollars which splits out in the 6 years with 0.4, 3.9, 4.1, 4.3, 4.3, 4.3, and $4.5 million dollars on sequence for each year for the 6 years. For signature bonus, 50 million dollars will be paid to the host country for the right to develop the oil block commercially before work begins on the field. An application fee of $0.02 million goes out to the application fee. The cost of drilling a well

is $120 million and there are 7 wells to be drilled. This will amount to

$840 million. It will take an estimate of a million pound for Data

processing. A summarised table of the exploration cost can be viewed

below.

Fig 5.

$Million

16.40

3.00

25.80

50.00

0.02

840.00

2.92

33.80

1.00

972.94

2 D Seismic

3 D Seismic

Data Processing

ITEM

TOTAL EXPLORATION COST

G&G

Grav & Mag

G & A (Inc Office cost)

Signature Bonus

Application fee

7 Wells @ $120m/well

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7.0 Production and Operating Cost. The entire project involves construction of 22 wells in 20 years. The cost of developing one well is 120 million dollars. Removing the 7 wells developed at the exploration stage, we would have 15 wells at the production stage. These wells were developed when the other 7 had started producing. Among the wells are 3 injection wells. 2 wells are assumed to be dry wells. For the first 3 years of exploration, there will be no funds towards production. Production will kick-off in the 4th year. The oil production has its peak period at the year 15, after which it starts to deplete.

Fig 6.Oil production.

OPEX, the operation expenditure, comes in full action in year 8. The OPEX was at 120997500 for 7 years and increased dramatically on the 8th year to 153263500 and had a steady fall to 112931000 in year 20. The illustration below shows the distribution of OPEX through the years.

0

5000000

10000000

15000000

20000000

25000000

30000000

35000000

40000000

45000000

1 3 5 7 9 11 13 15 17 19 21

YEARLY OUTPUT

YEARLY OUTPUT

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Fig 7.

7.1 Payback period:

With the use of the discounted cash inflows from the project, the payback period of the project is in 4 years. This is feasible considering that any delay in year or one year 6month, the project discounted cash inflows will be able to pay back its capital cost for it cost before the end of its life time.

8.0 Cash flow analysis The daily production is the chief determinant of the yearly production of the wells. The gross revenue is the Yearly output Oil price. For the first year of production the oil price is estimated at 80 dollars per barrel and the yearly production is $20,440,000.00. This will give gross revenue of $1,635,200,000.00. The gross revenue will make a steady increase till year 14, when it will start to decline. At the 14th year it makes its highest peak of $4,136,575,000.00. By year 20, it will fall to $3,670,257,500. There are of course challenges that would be faced. These would include the investment of huge sums of more though it is targeted to yield income in the coming years. The time value of money varies with time. On the agreement of interest rates, the future may change and bring about a factor like inflation which will definitely affect the profit income. Delay is another factor which will wear down the real value of the money invested. The company’s take of profit in the first 4 years of production is 40 percent. This changes from the 5th year of production to 30%.

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The Cost Oil= Gross revenue 50% .

Fig 8.Cost Oil.

The Discounted cashflows (DCF) = The Net cash flow Discount Factor. The

discount cash factor used is at 12%. The DCF of the first year was 1. The second to

the 4th

year was negative. The DCF from the fifth year changed to positive with the

value of 623,519,497.08. it had its highest peak at year 6. From the 7th

year, it had a

sudden fall which declined dramatically through the remaining years. This is

illustrated in the chat bellow.

Fig 9.Discounted cash flow. (DCF)

9.0 EXPECTED VALUE AND ROYALTY Expected value (EV) is given as;

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

(2,000,000,000.00)

(1,500,000,000.00)

(1,000,000,000.00)

(500,000,000.00)

-

500,000,000.00

1,000,000,000.00

1,500,000,000.00

1 3 5 7 9 11 13 15 17 19 Series1

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EV= (Reward x SP) – Risk x (1-SP)

Where Reward is the Expected proved oil reserve

SP = probability of success

Risk capital is the Exploration Capex

Reward (Discounted NPV based on proven reserve) is 978,264,389.86

Probability of success = 72% after exploration

Risk Capital (Capex) = 972.94million

Probability of failure = (1-SP) = 28%

Oil price = $80/barrel

API of oil is 320

Expected Value (EV) = (978,264,389.86x72%)-[972.94million x (1-72%)]

= 704350360.70-272423200

= 431927160.7

Acreage 6000square meter

Well spacing = 270 acres

Total number of wells to be drilled = 22

Well distribution = 15 producers, 3 water injectors, 2 gas injectors and 2 wildcat

7 wells during exploration

15 wells during development and production, with 9 wells within the first three years.

Peak Daily production capacity is 110500bpd

Yr 1 production 14 wells @ 4000bopd/well

Yr 2 Production 16 wells @4500bopd/well

Yr 3 Production 17 wells @5800bopd/well

Yr 4 Production 17 wells @ 6300bopd/well

Yr 5 Production 17 wells @ 6500bopd/well

Well depletion rate @ 5% after yr 11 production

Peak production maintained for 7yrs

9.1 Internal Rate of Return. (IRR) and Profitability Index (PI)

Price of oil( $) Contractor's

NPV10

(US$mm)

Estimate of

contractor's IRR

(%)

PI (%)

High 1,467,221,523.78

17

188

Base 978,264,389.86

15

161

Low

506,979,537.36

13

131

Fig 10.

10.0 Transportation

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Oil and Gas transportation in the coast of West Africa. The onshore and offshore exploration and production of oil and gas in the region is provided by the availability of facility through logistics and transportation. In a number of cases, the company in view may need the offshore support/servicing company to design and construct a support vessel or make available a vessel that is already in use. A vessel that has a particular specification, that would be equal to the requirement of the exploration and production project. The vessels are of different sizes and dimensions and power (Ndoms,n.d)

The oil and gas produced are transported by tankers to destination refineries. LNG

and pipe line systems are also transportation systems in the area.

11.0 Uncertainties

High Impact and low probability- Fire explosion, tax, Well Blow Out, and

Interest rates. High Impact and High Probability–Oil Price, Political Instability, Tidal

waves, construction delay and capex

Low Impact and Low Probability -Regulations

High Probability and Low Impact-Opex and Inflation

12.0 Recommendations

With the IRR and NPV, it is clearly seen that the investment into the

Odinga oilfield is a profitable on. Regardless of the fact that certain

uncertainties may abide which can cause disaster.

I highly recommend that the company should embark on the exploration

and production business in the oilfield. The venture as can be seen from

the distribution curves, is a good business for the company.

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References Centre For Energy Economics (CEE) (n.d.) Deepwater Development in Angola.

Bureau of Economic Geology. Texas

Energy Information Administration (2011) Country Analysis Briefs [online] available

from www.eia.doe.gov [20 April 2012]

Ernst and Young (2011) Global Oil and Gas Tax Guide [online] available from

www.ey.com/oilandgas [21 April 2012]

Girassol, a pioneering development in Angola’s deep offshore[online]. available

from http://www.total.com/en/our- energies/oil/exploration-and-

production/projects-and- achievements/girassol- 940855.html [20

April 2012]

Mazeel,, M. (201 mhju 0) Petroleum Fiscal Systems and Contracts.

[20 April 2012]

g/explorer/2002/02feb/agbami.cfm[18 April 2012] Mbendi Information Services (2012) Oil and Gas Industry Regulation in Angola –

Summary[online] . available from

www.mbendi.com/indy/oilg/govo/af/an/p0005.htm [20April 2012]

Ndoms E., Logistics and Transportation in Oil and Gas Exploration in Nigeria .Technology&Serviceshttp://www.touchbriefings.com/pdf/1736/Echo_Ventu res_tech.pdf Offshore technologies.com-News, views and contacts from the global Offshore industry- Agbami Oilfield, Nigeria[online] Available from http://www.offshore-technology.com/projects/agbami/[19 April 2012] SHIRLEY K, 2002Explorer, A Primer for Global SuccessScience, Alliance Yields Agbami., [online] Available from http://www.aapg.or Total (2012) Oil:

[20 April 2012]

g/explorer/2002/02feb/agbami.cfm[18 April 2012]

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AJAGU RICHMOND 4039138 M81GED- PETROLEUM CONTRACTS AND ECONOMICS