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Unformatted text preview: using probability distributions. Then by randomly sampling within the
distributions, many, perhaps thousands, of times, it is possible to build up successive
scenarios, which allow the analyst to assess the effect of risk and uncertainty on the
projected results. The output of a risk analysis is not a single value, but a probability
distribution of all expected returns. The prospective investor is then provided with a
complete risk-return profile of the project showing all the possible outcomes that
could result from the decision to stake money on this investment. 98 It is perhaps easiest to see how Monte Carlo simulation works by using an example of
a hypothetical field. The main data is given in table 5.2. The decision facing the
decision-makers is whether to develop the field. Performing a simple deterministic
calculation, with a discount rate of 10%, gives an NPV of $125 million and the
decision to go ahead on development should be straightforward.
But a probabilistic assessment of the same field gives the decision-maker a broader
picture to consider. Assume the probabilistic assessment uses the figures in table 5.2
as the “most likely” inputs (those falling at the mid-point of the range) but also
suggests the ranges of possible values for inputs in table 5.3.
• Reserves of 150 million barrels of oil (MB0)
Production has a plateau (assumed to be reached immediately) of 12% per annum
of total reserves (i.e. 12% of 150 MBO=18MBO/yr) for 5 years, then declining at
20% per year thereafter, until all 150MBO have been produced.
5 production wells are needed, at a cost of $15m per well over two years
Platform/pipeline costs are $765m over three years
Abandonment expenditure is $375 million after last production
Operating expenditure is $75million per year
Corporation tax is 30%
Inflation is 3.5% throughout the period
Discount rate is 10%
Oil price assumed to be $18 per barrel rising at the rate of inflation Table 5.2: Hypothetical field data • Drilling, capital and operating expenditures are assumed to be “normal”
distributions with a standard deviation (SD) of 10% of the mean (SD is a measure of
the range of uncertainty)
• Abandonment expenditure is “normal”, with SD=20% of the mean
• Production volumes are “normal”, but with a positive correlation to operating
• Oil price is “lognormal”, with SD=10% of the mean, in the first year of production
(2004), rising by 2% per year, reaching 34% by the last year of production. This
gives a roughly constant low oil price at about $10/barrel, with the high price rising
from $23 to $37.5/barrel through field life.
Table 5.3: Hypothetical field data for Monte Carlo simulation Ten thousand Monte Carlo trials give the results shown in table 5.4. The mean, or
average, or expected value is $124 million (that is, a statistically significant number of
identical opportunities would, on average, be worth $124 million, in NPV terms.). 99 Percentile
422 Table 5.4:...
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This document was uploaded on 03/30/2014.
- Summer '14
- The Land