Spreadsheet Modeling and Simulation Analysis of Production Sharing Contract Terms and Instruments in Nigeria

Abstract

Abstract This paper evaluates the economics of petroleum exploration and production (E&P) projects within the context of the expected economic value of a portfolio of blocks/fields owned and developed under the existing petroleum production sharing contracts (PSC), the jettisioned Inter Agency Team (IAT) memorandum on PIB 2008, and the Petroleum Industry Bill (PIB) 2012. The study incorporates important key variables in the determination of the expected or realized economic values from E&P projects including but not limited to location, technical cost & price, and field size. The model framework adopted for this paper is the Discounted Cash Flow (DCF) Model. The model framework is estimated by coding each segment of the DCF model equations in Microsoft Excel Spreadsheet to calculate deterministic economic and sytem performance measures, Government Take (GT), Discounted Government Take (DGT), and Front-end Loading Index (FLI). Two popular economic measures, the net present value (NPV) and internal rate of return (IRR), are derived and adopted to evaluate investment performance; and to account for uncertainties inherent in the data assumptions. A spreadsheet simulation tool is applied to quantify the impact of selected variables on relevant performance indicators using Monte Carlo simulation approach. Sensitivity analysis of decision variables and stochastic variables in the model is applied. The paper reports the P50 value of selected economic and system performance indicators. Simulation results show that for a viable deepwater project the unit technical cost (UTC) has to be within global average range of $27 and $35 per bbl; and contractor domiciling much of its cost at home. This enables the contractor to have a better IRR and helps to impact positively on local content. The result from this study shows that the PIB is less regressive than the earlier PSCs keeping in perspective our study assumptions.