Improvement of the upstream project valuation in consideration of abandonment expenditure uncertainties

Abstract

This study intends to propose parameter adjustment for economic evaluation in considering abandonment expenditures (ABEX) during front end loading (FEL) of discovered petroleum resources. In maturing a petroleum field development, abandonment and decommissioning of wells and facilities requires consideration during FEL. FEL, long adopted by prominent E&P players worldwide is used to support capital investment decision-making where value i.e. expected monetary wealth is measured and evaluated by Discounted Cash Flow (DCF) analysis. However, the DCF approach is outdated and flawed where it does not capture fluctuation well. At FEL, where uncertainties are high, primarily on abandonment and decommissioning environments of the far future, inputs into the DCF may pose significant impact on the project valuation. This study reviews ABEX of sub-commercial contingent resources or shelved projects and economic evaluation method used in the author’s organization and their parameters, identifying relevant and applicable adjustments that could be made associated to ABEX. Combining the revised ABEX with a modified economic model, a proposed set of categorical adjustments to is produced. The results show that the ABEX of the previously sub-commercial projects are optimized, streamlined and yield a more competitive number with revised semi-detailed estimates, allowing bigger gross revenue forecast throughout the production life. While discount rates are a business and organizational decision, a different escalation and inflation approach to ABEX elements result in a better far-sighted forecast, where uncertainties of abandonment activities can be zoomed into. Additionally, a standardized assumption for abandonment year before cessation of production is recommended to provide a more realistic evaluation of when ABEX is actually required to incur. These, in turn, improves the Net Present Value (NPV) of the projects tested as well as their viability and rank towards being sanctioned for development.