Economics

#Overview

Economics turns a production profile into a cash flow and the metrics you screen a development on: NPV at several discount rates, IRR, payback, profitability index, government take, unit technical cost and break-even prices. It handles three fiscal families: a royalty/tax concession, a production sharing contract (PSC), and the Nigeria Petroleum Industry Act 2021 terms. Use it after you have a forecast from Decline & RTA, Material balance or Integrated forecast, or paste a profile from a spreadsheet.

Every input and every default the engine applies is written to the Assumptions log, so a reviewer can see exactly what produced a number.

#Inputs

Volumes are per period (one period is one year unless you change Period length). Money is one currency, US$ by default.

#Methods

#Cash flow and metrics

Revenue is volume times deck price less the differential. Pre-take cash flow is revenue less opex, capex and carbon cost; net cash flow is what is left for the contractor after royalty, taxes, profit-oil sharing and bonuses, times the working interest.

• NPV at each discount rate with the chosen convention.
• IRR: the first NPV zero-crossing. It reads "undefined" when the cash flow never changes sign.
• Payback and discounted payback in years.
• Profitability index: PV of net cash flow before capex divided by PV of capex.
• Unit technical cost: PV(capex + opex) / PV(boe), discounted and undiscounted, in $/boe.
• Government take: undiscounted and discounted share of the pre-take cash flow.
• Maximum exposure: the most negative cumulative cash flow.
• Economic limit: on by default in the app. The profile is cut where cumulative net operating cash flow (revenue less royalty, opex and carbon cost) peaks, per SPE-PRMS 2018 section 3.1.2. Abandonment scheduled later moves into the limit period.
• Decommissioning fund (optional): abandonment capex is paid by units of production over the producing periods instead of as one lump, and is deductible or recoverable as paid.

#Fiscal regimes

• Royalty / tax: royalty on liquids and gas, optional severance tax on revenue net of royalty, income tax, loss carry-forward (on by default; off means losses are relieved at once, as in a consolidated group).
• PSC: royalty, cost-recovery ceiling on gross or net-of-royalty revenue, optional capital uplift, and a profit split that is fixed, R-factor, daily-rate tranches (incremental or whole-rate) or cumulative-production tiers. Contractor tax on profit oil or contractor income, optionally paid by the national oil company, plus signature and production bonuses. Apply PIA 2021 PSC minimum terms sets a 70 % cost limit on gross revenue and the minimum government profit-oil scale of the Seventh Schedule para 14(4): 5 % to 50 MMbbl, 10 % to 100, 15 % to 350, 25 % to 750, 35 % to 1,500 and 45 % above.
• Nigeria PIA 2021: see the next section.

#Risk

• Tornado: NPV change for each variable (oil price, gas price, capex, opex, production, carbon price) at low and high multipliers on the base case. Default ranges: prices 0.7 to 1.3, capex and opex 0.8 to 1.3, production 0.8 to 1.2, carbon price 0.5 to 2.
• Monte Carlo: each variable gets a multiplier distribution: lognormal (by P90 and P10), triangular, uniform or normal. You set trials, seed and sampling (random or Latin hypercube). Results show NPV percentiles and the probability of a negative NPV, with a note on why the base case and the P50 differ.
• Break-even oil and gas price: the deck price at which NPV at the first discount rate is zero, solved by Brent's method.

#Nigeria PIA 2021

Choose Nigeria PIA 2021 under Fiscal regime, then set Terrain (onshore, shallow water to 200 m, deep offshore over 200 m, frontier basin), Licence (mining lease PML or prospecting licence PPL) and Lease (granted after the Act, or converted). Section numbers refer to the gazetted Petroleum Industry Act 2021 (Act No. 6).

#Royalty

The bopd used for the production tranches is the period-average rate: oil per period / (365.25 x period length). The price used is the deck price less the oil differential.

#Hydrocarbon tax

Hydrocarbon tax (HT) applies only onshore and in shallow water, and only to crude.

#Capital allowances

Each capex item gets 20/20/20/20/19 % over five years from the later of its spend period and first production, with the 1 % retention written off in the last period. Exploration and abandonment capex, and items set to expensed, are deducted in full when spent. Tick Use each capex item's own depreciation instead of the Fifth Schedule allowances to use the depreciation methods on the capex table instead (Fifth Schedule para 17).

#CIT, levies and contributions

You can edit all four rates on the Fiscal terms tab. Through the API (econ.cashFlow with fiscal.kind: "nigeria-pia") you can also override royaltyRate, gasRoyaltyRate, hydrocarbonTaxRate and cprLimit.

Government receipts are royalty + HT + CIT + education levy + NDDC levy + host-community contribution + gas flare penalty. With Nigeria 2018 rates on the Carbon tab, the flare penalty is US$2.00/Mscf flared when the period-average oil rate is 10,000 bopd or more and US$0.50/Mscf below (Flare Gas (Prevention of Waste and Pollution) Regulations 2018). It is never deductible or recoverable.

#Simplifications

The engine states these as warnings on every PIA run:

• Monthly royalty tranches use the period-average daily rate.
• The NDDC levy is approximated as 3 % of opex + capex.
• HT and CIT are computed on this field alone (ring-fenced). Multi-field consolidation is not modelled.
• NGLs are treated as gas for royalty and kept out of HT.
• With no start year, the price royalty uses the 2020 levels without the 2 % yearly rise.

Saved cases that used the older "Nigeria (illustrative)" regime open as PIA cases.

#Workflow

1. Open Economics. With no case yet, paste a profile (Paste a production profile), or click From decline forecast. Material balance and Integrated forecast send their forecasts here with Send to Economics.
2. On Profile, check the totals and set Period length, Start year, Working interest and Gas per boe. Pasting again replaces the profile; a project snapshot is taken first.
3. On Prices & costs, set the oil and gas decks, differentials, opex and the capex table. Choose whether to truncate at the economic limit and whether to pay abandonment into a decommissioning fund.
4. On Fiscal terms, choose the regime and its terms. The per-year fiscal table at the bottom shows revenue, royalty, each tax, government take and net cash flow.
5. On Results, read NPV, IRR, payback and break-even prices, add discount rates, and switch the discounting convention, money basis and currency.
6. On Tornado & Monte Carlo, set the ranges and distributions and run.
7. On Carbon, set flare, vent and fuel gas, composition, GWP table, carbon price and the flare penalty.
8. On Assumptions log, review every input and default.

#Interpreting results

The four tiles at the top show NPV at the first discount rate, IRR, payback (with discounted payback) and government take (with profitability index and maximum exposure). A negative NPV at a high government take usually points at the fiscal terms, not the reservoir: look at the fiscal table to see which line takes the cash.

For PIA cases, compare the HT line with the cost-price ratio warning. If costs above the 65 % cap are still unrelieved at the end of the profile, the engine reports the amount in $MM; that cash is lost to the contractor.

Monte Carlo P50 and the base-case NPV differ when input distributions are skewed or the cash flow responds non-linearly (for example, tax losses). The note under the Monte Carlo results explains which applies.

#Common pitfalls

#Exports

• Export cash flow CSV on Results: one row per period with year, oil and gas revenue, opex, capex, depreciation, carbon cost, royalty, each named tax, cost oil and profit oil (PSC), bonuses, government, net, cumulative and discounted cash flow.
• Export on Assumptions log: a plain-text file of every input and default.
• From scripts and the REST API, econ.cashFlow returns the full result as JSON.

#Related

• Decline & RTA
• Material balance
• Integrated forecast
• Reserves
• Scripting SDK
• Units