Risk Evaluation & Sensitivity Analysis of the Exploration & Production Sharing Agreement

Abstract

Abstract This paper has been intended at risk evaluation and to investigate the importance of the Exploration and Production Sharing Agreement (EPSA) model (equity split share, A factors, and production indices B) in terms of different capital budgeting techniques such as Net Present Value (NPV) and Internal Rate of Return (IRR). The present study has applied deterministic research approach along with stochastic research approach using Monte Carlo Simulation procedure. This technique has been adopted to determine the probable range of NPV and IRR values that are based on stochastic variable of financial terms of the EPSA model applied. The simulation output of the economic model of field development by water injection revealed that the NPV and IRR are both significantly fragile terms in case of production share. Different levels of sensitivities have been observed for factors (A) and production indices (B) in terms of NPV and IRR at fixed or variable production share. The analysis exposed that in terms of NPV and IRR, the production index B1 and B3 is relatively more sensitive than other measures. Similarly the outcomes show that in terms of NPV and IRR the production index of B4 and factor A (4) are relatively less affected than other terms. The Crystal Ball's OptQuest's was used to mitigate the financial risk by optimizing the SP's profitability indicators. The project profitability indicators NPV and IRR of the international oil company, designated the second party (SP), were optimized and improved from 16.86% to 20.00% and NPV from $175.03 million to $273.32 million, respectively.