Investment analysis of unconventional hydrocarbon resources under uncertainty

Abstract

Investment models for decision making on unconventional hydrocarbon resource development in Europe must be based on realistic estimates of well productivity, gas price projections and reliable data concerning the costs of the project. In this analysis we assess the economic feasibility of three different investments projects in coal bed methane production located in three European regions: Cheshire and Midland Valley in the United Kingdom and Lorraine in France. We combine the traditional framework of the investment analysis — and compute the Net Present Value (NPV), the Internal Rate of Return (IRR) and the breakeven point — with the probabilistic analysis of uncertain parameters that affect the business case of the investments. Our results show major differences in the profitability of the considered projects, mainly due to differences in initial capital expenditure (CAPEX). The sensitivity analysis allows ranking these uncertain parameters by their respective importance in the variation of the profitability: CAPEX/well; discount rate; gas prices in years 5–8 and 4, 9–10 of the project; corporate tax; and finally the gas prices in years 11–13 of the investment.