Project Capital Rationing using Discounted Cash Flow Method, Sensitivity Analysis and Monte Carlo Simulation: Case Study Tambura Oil Development

Abstract

This paper will analyze capital rationing on Tambura Insert PCP, which is currently in preparation. To prolong field production time, the company needs to find a most profitable method to produce oil in gas field which currently has no artificial list infrastructure installed. One of possible options is using Progressive Cavity Pump or PCP in the well to lift oil from down hole to surface. PCP is driven by a surface motor installed at the wellhead, above the x-mas tree. Electrical power is required to run the motor. With no electricity source available, three strategy options must be chosen to commence the project. First is the “cable laying” option which has high capital upfront with very low operating costs. Second is “in situ genset installation” option which has lower capital with higher operating costs. And third is “rental basis” option which has very low upfront capital but much higher operating cost. A business situation analysis situation is first conducted to determine why this project is needed. It consisted of internal analysis using a resource-based view framework, external analysis using PESTEL and Porter Five Forces, and PSC context. The method used to evaluate the project is quantitative by calculating project economic and financial parameters using discounted cashflow analysis to compare which options are most profitable. The second consideration is sensitivity analysis to determine what parameter most affects each option. And the third consideration is risks analysis using Monte Carlo simulation to define which option has the most robust parameters. Discounted cash flow analysis shows Net Present Value of Tambura insert PCP Project valuation is positive at range 1.32-1.44 Million USD, which indicates as base case all options are feasible economically. Scenario analysis shows the lowest project net present value or NPV is negative as low as 1.09 MUSD, and the maximum NPV is 2.62 million USD. The sensitivity analysis of several parameters shows that this project is very sensitive to changes in oil price and oil production volume. And finally, Monte Carlo simulation shows that probability of failure or having negative NPV is ranging from 10% to 30%, which means the project has different risks based on options. In conclusion, comparing parameters from all the analysis, it is recommended to commence the project with Option-3, the rental basis option. Although not the highest, Option-3 provided the second best NPV with a very small difference with the first. It gives the best result for other economic and financial parameters. And in terms of risk, it has the lowest risks among other options. Despite the risk that already low, there still some mitigations that need to be implemented to further reduce potential risk, such as conducting a more thorough valuation analysis, reduce technical uncertainty from reserves and reservoir properties, and accuracy of oil production rate. The company also needs to conduct more research is required to forecast the future price fluctuations, considering the oil price is one of the highest risk parameters and the most sensitive aspect in this project.