Master's Degree in Oil and Gas Economics and Management

Project Evaluation, Analysis and Management

Individual Assessment

The company Chovia e Encontrava, Lda, an entity with tax headquarters in the United Arab

Emirates $($UAE$)$ and a delegation in Mozambique, which holds the Oil and Natural Gas

Exploration Concession $($EPCC$)$ in the vicinity of the Pande and Temane production fields,

whose research has confirmed the existence of approximately $10$TCF of natural gas $($GIIP$){?}^{[1]}$

intends to reduce its stake by selling up to $40\%$ of its share to international counterparts.

Initial analyses show that the daily production capacity per borehole could amount to $1,040,000$

$N{m}^{3[2]}$ and around $309m^3$ of condensate, in the best$-$case scenario, being $20\%$ lower in the

most likely case and $40\%$ lower in the worst$-$case scenario. The cost per borehole amounts to

USD$11\mathrm{.}5$ million and the company expects to drill $10$ exploration boreholes in the first $5$ years of

the concession $(2$ boreholes in the second year; $3$ boreholes in the third year; $3$ boreholes in the

fourth year; $2$ boreholes in the fifth year$).$ Of the exploration holes, $2$ will be used as

development holes ${?}^{[3]}$ which will add to the $15$ development holes which will also be production

holes.

The concession was signed on December $31,2017$ and so far around USD$150$ million of

investment has been made. The concession entry costs total around USD$50$ million.

Should the project be sanctioned $($FID$),$ it will require an investment in infrastructure of around

USD$700$ million$4($in addition to other costs totaling around USD$150$ million, except for

production boreholes$),$ which will last $3$ years from the approval of the development plan

scheduled for $2$ years after the declaration of commerciality $($the project expects to make the

declaration of commerciality $7$ years after the start of the concession$).$ By then, research costs

will have totaled around USD$250$ million.

$(1)$ For simplified purposes, consider a recovery factor of $60\%.$

$(2)$ Heat capacity $40\mathrm{.}87M\frac{J}{N}M3.$

$[3]$ The cost per borehole will increase by $20\%$ compared to operating costs.

${?}^{14}20\%$ in the first year; $60\%$ in the second year and the remainder in the final year,

The company expects hydrocarbon production ${?}^{[5]}$ to last around $25$ years. In the first $4$ years it

will grow exponentially by $15\%$ and then stabilize for $10$ years before declining exponentially at

a rate of $5\%$ until it reaches the useful life of the concession.

Production costs will be $30\%$ of the annual production volume.

In addition, the company plans to develop the project using a capital structure of $70\%$ debt

capital and $30\%$ equity capital. With regard to borrowed capital, the finance department,

according to initial contacts it has had with the financial sector, believes that the project should

ensure compliance with a minimum principal and interest coverage ratio of $1\mathrm{.}2x,$ which should

cover around three installments, and a reserve ratio for infrastructure maintenance equivalent to

$20\%$ of the annual fixed asset balance. The same sector also considers it possible to finance

the project for $10$ years with a $4-$year grace period and interest capitalized at a rate of $5\%$ per

year.

The marketing department estimates that the price ${?}^{[6]}$ should follow an S curve with a lower ${?}^{[7]}$

Kink Point equal to $40US\frac{D}{b}bl$ and a slope of $16\%$ and the cost of processing and distribution

equal to $0\mathrm{.}06$ USD$/$GJ$.$

The Question

In the light of the knowledge obtained during the module and taking into account the

Mozambican tax system and legal infrastructure, draw up a project report showing the gains for

each of the parties involved in the operation. To calculate Ke $,$ consider the South African capital

market as a proxy for market risk $().$

Additionally, present the value$/$cost of the farm out taking into account the data presented.