Economic and Risk Analysis to Deep Water Operations

Abstract

The exploration and production (E&P) operations of oil and gas project in deep waters, is associated with risks. These risks affects return on investment if they are not identified and analyzed to reduce their impact on the project. This study seek to apply Discounted Cash Flow (DCF) analysis, Monte Carlo Simulation and Sensitivity analysis, to an existing field in the Niger Delta region in Nigeria, to ascertain the viability of deepwater project when it is affected by government fiscal terms and technical terms. Economic and risk models were developed to determine profitability indicators and risk associated with the project. Risk simulator software was used to carry out Monte Carlo simulation and the sensitivity analysis. Results obtained showed that the project was economically viable with a Net Present Value (NPV) of $1,621.8 million and Internal Rate of Return (IRR) of 34%. The Monte Carlo Simulation and the sensitivity analysis showed that the Contractor’s NPV and percentage take were most sensitive to tax (under the fiscal terms) with an range of $639.27 million for a variation of by +/- 10% and crude price (under the technical term). The model developed can easily be applied in investment selections and decision makers should make decision based on the outcome of both economic model (cash flow analysis) and the risk model (Monte Carlo Simulation).