27 see rbacon and stordo crude oil price

Info icon This preview shows pages 28–30. Sign up to view the full content.

27. See R.Bacon and S.Tordo, Crude oil price differentials, October 2005. 28. It is important to underscore that the project’s stage of development impacts the accuracy of the estimates and the uncertainty associated with the economic outcome of the field. On average, initial cost and production estimates may be over or under estimated by 25–50 percent compared with actual num- bers; conceptual development plan estimates are normally more accurate (plus or minus 15–25 percent— Minerals Management Service, March 2004). 29. The NPV is the present value of expected future cash flow of a project. The discount rate should be a function of the riskiness of the estimated cash flows. In reality, companies often use a “hurdle rate” which represents the minimum return that the particular company is willing to accept in order for it to invest in the project. Each company has a unique risk-reward profile, hence uses a specific discount rate. The choice of what discount factor to use is an important decision for companies evaluating projects since selecting a high rate may result in “missing” good investment opportunities, while selecting a low rate may expose the firm to unprofitable or risky investments (see Allen and Seba 1993; Deluca 2003; Ehrhardt 1994). 30. The IRR measures the relative attractiveness of a project. In general terms, projects that present higher IRR should be preferred. Due to its limitations the IRR is normally used in conjunction with other profitability indices. For an in depth discussion of the IRR and of other commonly used financial mea- sures of profitability see Brealey and Myers (1991). 31. The PR is calculated as the ratio between the NPV of the sum of project’s cash flow and total capital invested in the project to the NPV of the total capital invested in the project. It measures the profitability per dollar invested and is used by companies to compare projects around the world. 32. For an extensive description of project evaluation and project financing techniques, see inter alia, Brealey and Myers (1991), Dougherty (1985), Ehrhardt (1994), Finnerty (1996), Mian (2002), and Woods (1993).
Image of page 28

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

One indicator frequently referred to in sector literature is the division of profits between companies and government (the “take”). The take is a fiscal statistic as opposed to an economic measure. Because the take does not provide a direct indication of the econo- mic performance of a field, it generally matters more to the host government than to the oil companies. The take is often a negotiated quantity that depends upon the strength, knowledge, experience, and bargaining position of the oil company and host government, the percep- tion of the risk associated with the field development at the time the contract was written, and the availability of opportunities worldwide.
Image of page 29
Image of page 30
This is the end of the preview. Sign up to access the rest of the document.
  • Winter '14
  • Bijay K Behra
  • host government, fiscal systems, world bank working

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern