Decision making to book oil reserves for different Brazilian fiscal agreements using dependence structure

Abstract

The evaluation of capital and operational expenditures for deepwater oil and gas projects is a critical issue, given the uncertainty to estimate a project's net present value (NPV). To obtain the dependence structure between these variables, the copula methodology was adopted in order to avoid linear-dependence assumptions and inadequate estimation. This methodology was applied to Brazilian upstream deepwater projects, considering concession and production sharing contract (PSC) agreements. The findings indicate that oil price is the main impacting variable for the economic results. The best results for the concession and PSC agreements are the 500 million barrel and the 5000 million barrels cases, respectively. For 500 million barrels in concession contract the results were 93.0% of positive NPV for high oil prices (US$120/bbl) and 35% of positive NPV for low oil prices (US$68/bbl). For 5000 million barrel cases in PSC the results were 88% of positive NPV for high oil prices and 23% for low oil prices. It seems that the smaller fields take benefit compared to the bigger ones; because the windfall profit rent from concession agreements and profit oil from PSC agreements have less impact on cash flows. The remaining cases with uneconomic results impede booking oil reserves. The upstream deepwater projects are long-term developments and therefore there is a lag between oil prices and capex between the final investment decision and the first oil. On top of that, learning curves and contracts renegotiation must be taken into account for more comprehensive future analyses.