Abstract
The main aim of this paper was to examine specific approaches to determining the discount rate for comprehensive computation of investment projects efficiency in the oil and gas industry. The objective of the study was to develop a scientific approach for determining the discount rate for integrated oil and gas projects. The authors analyze dynamic methods for determining the efficiency of investment projects in the oil and gas industry and conclude that they are advisable for oil and gas projects due to the high capital intensity of the projects and their long payback period. Regarding the need to implement dynamic indicators of efficiency, the authors set the task of deter-mining the proper discount rate as a factor having a significant impact on effectiveness evaluation. The discount rate is proposed to be evaluated by solving the equation and finding the break-even point where the NPV (net present value) of the integrated project will be equal to 0 (taking into account the revenue of the subprojects included in the complex). The practical implementation of methodological approaches to assessing the discount rate for integrated projects is relevant due to the execution of large, systemically important and integrated projects. As a result of the study, the authors put forward a methodological algorithm for determining the discount rate of an integrated project which assumes an assessment of cash flows for the subprojects included in the complex; determination of the target rate of return for subprojects; and calculation of prices for products at which a complex project become break-even. The practical implementation of methodological approaches to assessing the discount rate for integrated projects is relevant due to the execution of large systemically important integrated projects.
Highlights
Investment projects’ effectiveness is evaluated based on two sets of indicators, namely simple and dynamic indicators.Simple indicators are commonly used for evaluation, but unlike dynamic indicators they do not take into account the change in the value of money over time.Dynamic indicators are characterized by reducing the value of future flows to the current time period, for which the determination of the discount rate is of key importance
The aim of this paper is to examine specific approaches to determining the discount rate for comprehensive computation of investment projects effectiveness in the oil and gas industry
Consider a natural gas project whose cash flow is defined by the following parameters: K p (t)—the amount of capital costs per year t; E p (t)—the amount of operating costs, including depreciation payments, per year t; Np (t)—the amount of tax payments, per year t; A p (t)—the amount of depreciation payments, per year t; Vp (t)—volume of gas production, per year t; r p = 15%—target internal rate of return (IRR) rate for a mining project
Summary
Investment projects’ effectiveness is evaluated based on two sets of indicators, namely simple and dynamic indicators.Simple indicators are commonly used for evaluation, but unlike dynamic indicators they do not take into account the change in the value of money over time.Dynamic indicators (discounted payback period, net present value) are characterized by reducing the value of future flows to the current time period, for which the determination of the discount rate is of key importance. Investment projects’ effectiveness is evaluated based on two sets of indicators, namely simple and dynamic indicators. Simple indicators are commonly used for evaluation, but unlike dynamic indicators they do not take into account the change in the value of money over time. Dynamic indicators (discounted payback period, net present value) are characterized by reducing the value of future flows to the current time period, for which the determination of the discount rate is of key importance. The basic approach to effectiveness assessment is based on the determining the discounted net cash flow. It consists in discounting all future cash flows (both in- and out-flow) resulting from the project with a given discount rate and summing them together [1,2].
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