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140 Oil and Gas Property Evaluation 3-56 What is the maximum amount that we can bid for an offshore lease if we have a 30% investment opportunity rate (and assume we can predict exactly what will happen)? Assume annual compounding. The timing of the investments and the production schedule are contained in the following tables. Do your analysis BFIT. End of 15 years: Salvage Value = abandonment costs The present value of the production, discounted at 10%, at the beginning of year 5 (end of year 4) is $88 MM. PRODUCTION SCHEDULE Annual Year 5 6 Time 0 = BID End of 1 year: Drill exploratory well at cost of $2 MM. End of 1.5 years: Drill delineation well at a cost of $1.5 MM. End of 2 years: Drill delineation well at a cost of $1.5 MM. End of 2.5 years: Begin platform construction at a cost of $10 MM. End of 3 years: Continue platform construction at a cost of $10 MM. End of 3.5 years: Install pipeline - cost = $2 MM. End of 4 years: Set platform - cost = $1 MM. End of 4.5 years: Drill and complete wells = $20 MM. Commence production. See production schedule. Assume end of period discounting for annual cash flow from production 7 noo 8 9 e Production NCF (Bbl) (M$) 1,300,000 32,500 1,300,000 32,500 1,100,000 27,500 667,000 16,675 404,000 10,100 245,000 6,125 150,000 3,750 90,000 2,250 50,000 1,250 33,000 825 20,000 500 10 11 12 13 14 15 140 Oil and Gas Property Evaluation 3-56 What is the maximum amount that we can bid for an offshore lease if we have a 30% investment opportunity rate (and assume we can predict exactly what will happen)? Assume annual compounding. The timing of the investments and the production schedule are contained in the following tables. Do your analysis BFIT. End of 15 years: Salvage Value = abandonment costs The present value of the production, discounted at 10%, at the beginning of year 5 (end of year 4) is $88 MM. PRODUCTION SCHEDULE Annual Year 5 6 Time 0 = BID End of 1 year: Drill exploratory well at cost of $2 MM. End of 1.5 years: Drill delineation well at a cost of $1.5 MM. End of 2 years: Drill delineation well at a cost of $1.5 MM. End of 2.5 years: Begin platform construction at a cost of $10 MM. End of 3 years: Continue platform construction at a cost of $10 MM. End of 3.5 years: Install pipeline - cost = $2 MM. End of 4 years: Set platform - cost = $1 MM. End of 4.5 years: Drill and complete wells = $20 MM. Commence production. See production schedule. Assume end of period discounting for annual cash flow from production 7 noo 8 9 e Production NCF (Bbl) (M$) 1,300,000 32,500 1,300,000 32,500 1,100,000 27,500 667,000 16,675 404,000 10,100 245,000 6,125 150,000 3,750 90,000 2,250 50,000 1,250 33,000 825 20,000 500 10 11 12 13 14 15