Capital Rationing by Metrics - Implications for IOR/EOR-projects

Abstract

Summary (1) Overview The recent fall in the oil price has given rise to a renewed focus on other parameters for project selection that the net present value (NPV). A regime with capital constraints is introduced, implemented by key metrics like the Internal Rate of Return (IRR), the Net Present Value Index (NPVI) and the Break Even Price (BEP). The paper describes metrics used by the oil companies to ration capital, and analyse implications for IOR/EOR projects. (2)Method We examine the different investment metrics of a portfolio of oil projects and check how they affect ranking of projects. Particular attention is paid to IOR/EOR-projects. After the increased volatility of the oil price, more emphasis has been placed on the breakeven price. We analyse how IOR/EOR-projects are affected in their ranking - towards other types of projects - of this decision criteria. We also address how the current Norwegian petroleum tax system affects the possibility to sanction marginal IOR/EOR-projects. (3)Results The project metrics analysis shows that the overall grouping of the projects is the same with the three metrics for capital rationing. The highest ranked projects are the same for the l3 first projects with individual order ranking the same. This is also the same for the 6 worst projects. Projects 14 to 21 are the same for the three metric rankings but their individual ranking differ somewhat. The company focus on robustness related to oil price gives particular attention to break-even price and cost optimisation. Capital rationing may severely affect marginal IOR/EOR-project, but the choice of rationing metric is not significant. The Norwegian petroleum tax system is not well designed to secure implementation of marginal IOR/EOR-projects.