NPV and scenario analysis: deep-water natural gas development This case requires preparation of a DCF analysis, given a successful development natural gas well (deepwater, offshore). Data are drawn from a U.S. Department of Energy source and additional assumptions are listed below. Three scenarios include Pessimistic, Most Likely and Optimistic, but not all data values differ across scenarios. Adapted from:www.eia.doe.gov/pub/

oil_gasatural_gas/analysis_publicationsatural_gas_1998_issues_trends/pdf/Appc.pdf

● Development period: assume that production wells are drilled evenly over a two year period, after the development well.
● Royalty rate: the royalty rate is somewhat controllable by lobbying efforts. Currently US offshore drilling is subject to no federal or state royalties. This is controversial and may change.
● Water saturation point: assume that further natural gas is not recoverable after water saturation point reached.
● Termination cost: assume that termination activities occur after last year of production ● Income tax rate: assume that the project is part of continuing business.
Required:
1. Model the natural gas output and net cash flows.
2. Compute the NPVs for each scenario

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Project well case Input Development ell Production ells Development period Success rate Royalty rate Initial ell flo rate Flo rate initial period Flo rate lon term decline Pessimistic Most Likaty Optimistic 80 10 2 2 ell, assumed to be successful Notes ells, drill half each year for t o years after development years accommodate this in hard codin, because of complexity of production ells drilled iven successful development ell of revenues 6.000 00 thousand cu ft per ell per year 2 2 4,000 00 5,000 00 21 -600 -500 -400 ater saturation point 78 75 7500 70.00 utput sales price 600 peratin costs 150 1.50 Initial capital investment 380 00 380 00 Drillin costs 12.00 12 00 ermination cost 180 1.80 150 380 00 1200 180 Income tax rate 35 35 35 Discount rate Probability 15 20 60 20 years accommodate this in hard codin, because of complexity per annum no relative to initial rate per thousand cuft per thousand cuft million per pro ect, depreciate stral ht line over life of pro ect million per ell, depreciate stral ht line over life of ells million per ell, cash flo and expense 1 year after life of ells of operatin Income per annum