Risk Analysis and Real Options in Upstream Projects The Gulf of Mexico Case

Transcription

1 Risk Analysis and Real Options in Upstream Projects The Gulf of Mexico Case RAFAEL HARTKE, MSc, ERP FINANCIAL PLANNING AND RISK MANAGEMENT PETROBRAS SEPTEMBER,

2 DISCLAIMER FORWARD-LOOKING STATEMENTS: DISCLAIMER The presentation may contain forward-looking statements about future events within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are not based on historical facts and are not assurances of future results. Such forward-looking statements merely reflect the Company s current views and estimates of future economic circumstances, industry conditions, company performance and financial results. Such terms as "anticipate", "believe", "expect", "forecast", "intend", "plan", "project", "seek", "should", along with similar or analogous expressions, are used to identify such forward-looking statements. Readers are cautioned that these statements are only projections and may differ materially from actual future results or events. Readers are referred to the documents filed by the Company with the SEC, specifically the Company s most recent Annual Report on Form 20-F, which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements, including, among other things, risks relating to general economic and business conditions, including crude oil and other commodity prices, refining margins and prevailing exchange rates, uncertainties inherent in making estimates of our oil and gas reserves including recently discovered oil and gas reserves, international and Brazilian political, economic and social developments, receipt of governmental approvals and licenses and our ability to obtain financing. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or future events or for any other reason. Figures for 2010 on are estimates or targets. All forward-looking statements are expressly qualified in their entirety by this cautionary statement, and you should not place reliance on any forward-looking statement contained in this presentation. NON-SEC COMPLIANT OIL AND GAS RESERVES: CAUTIONARY STATEMENT FOR US INVESTORS We present certain data in this presentation, such as oil and gas resources, that we are not permitted to present in documents filed with the United States Securities and Exchange Commission (SEC) under new Subpart 1200 to Regulation S-K because such terms do not qualify as proved, probable or possible reserves under Rule 4-10(a) of Regulation S-X. 2

3 SCHEDULE Motivation and Objective An Overview of PETROBRAS Upstream Business Segment Risk Analysis in Upstream Projects at PAI Real Options in Upstream Projects The US Gulf of Mexico Case Conclusion and Final Remarks 3

4 MOTIVATION AND OBJECTIVE Motivation: All investment projects at PETROBRAS must undergo economic risk analysis There is a standard model for economic risk analysis of upstream projects at PETROBRAS AMERICA INC. Since in the US a continuously producing lease does not expire, upstream projects in the US Gulf of Mexico have natural expansion options! But our risk analysis model does not evaluate real options! 4

5 MOTIVATION AND OBJECTIVE Objective: Briefly present PETROBRAS Examine the risk analysis model used for upstream projects at PAI Develop a Real Option model for the expansion or phasing of projects Present a solution integrating the standard risk analysis model and the Real Option model (using RISKOptimizer) Present an example using the real option model in an upstream project on the US Gulf of Mexico 5

6 An Overview of PETROBRAS 6

7 A WORLD-CLASS INTEGRATED ENERGY COMPANY Oil & Gas Production (mm boe/d) , Proven Reserves SEC (bln boe) ,8 14,2 12,7 10,7 10,6 8,3 6,8 5,4 XOM BP RDS CVX BR TOT COP ENI BG Oil Gas XOM BP RDS BR TOT CVX COP ENI STL Oil Gas 6, Refining Capacity (mm boe/d) Market Cap (US$ bn) - June 15th, , ,7 2,7 2,6 2,3 2, ,7 0,3 XOM RDS* BP COP TOT BR CVX* ENI * STL* XOM RDS PBR CVX BP TOT COP ENI STL Source: Evaluate Energy (barrels per calendar day, considering company % shareholding and including JVs) and Bloomberg. Notes: Peer companies selected above have a majority of capital traded in the public market,

8 PETROBRAS CURRENT INTERNATIONAL PRESENCE 8

9 US GULF OF MEXICO PROJECTS CASCADE CHINOOK DEVELOPMENT First Oil = 2011 Gas Export Pipeline Shuttle Tanker FSHR FPSO Cascade and Chinook are operated by PETROBRAS AMERICA INC., on water depth of 8,200 ft. Control Umbilical Power Umbilical Flow line Chinook Technologies new to US GoM, including FPSO, disconnectable turret buoy and transportation via shuttle tanker. Manifold Cascade Tree First FPSO* in the US GoM, already approved by US regulators (*) FPSO = Floating, Production, Storage and Offloading facility. PETROBRAS has an extensive experience in the use of FPSO with fifteen units currently under operation offshore Brazil. Source: PETOBRAS AMERICA INC. 9

10 PETROBRAS Greatest challenges ahead: Major international energy company Very ambitious investment plan, of US$ 225 Bi in 5 years Many large upstream projects coming up in the next few years New exploratory frontier the Pre-Salt Deep and ultra-deep waters, new technologies, partnerships, optionalities, multi-fields,... PAI s Gulf of Mexico projects under development: Cascade-Chinook, St. Malo, Stones, Hadrian South, among others 10

11 Risk Analysis in Upstream Projects at PAI 11

12 ECONOMIC RISK ANALYSIS MODEL FOR UPSTREAM PROJECTS AT PAI Model features: Standard model for Risk Analysis of upstream projects at PAI 100% in-house model 100% in Excel Risk Analysis with Monte Carlo Open, flexible, easy to use and auditable Calculates all taxes, depreciation, NPV, percentiles, %NPV > 0 12

13 RISK ANALYSIS MODEL INPUTS Model inputs: Probabilistic Productions: Oil and Gas Project Startup Date CAPEX: Exploration, Appraisal, Development, Abandonment OPEX: Lifting Costs, Workover, Transport Fee Price Models: WTI Prices, Oil Spreads 13

14 RISK ANALYSIS MODEL RISK FACTORS Oil Production Gas Production NPV Distribution WTI Price CAPEX: Exploration CAPEX: Appraisal CAPEX: Development CAPEX: Abandonment Total CAPEX OPEX: Transport OPEX: Workover OPEX: Lifting Total OPEX 14

15 Real Options in Upstream Projects 15

16 MANAGERIAL FLEXIBILITIES AS REAL OPTIONS IN UPSTREAM PROJECTS Upstream projects typically have many managerial flexibilities: Waiting for the (irreversible) decision to invest in the project Early Options Investing in more information Phasing the project Investing in additional production/injection wells Later Options Temporary shut down the production Abandonment of the project Expansion (lifetime) of the project 16

17 ABANDONMENT OF THE PROJECT AS A REAL OPTION Every production project has an Abandonment Phase, according to the production equipment designed lifetime Yet, adverse economic conditions might destroy all value of a fully developed project. In some scenarios, lifting costs might even top Oil prices! If taking into account all risks and flexibilities the expected value of continuing production is negative, the company may decide to abandon the project earlier than originally intended To continue producing up to the Abandonment Phase is an option, not an obligation! Abandonment Real Option 17

18 ABANDONMENT OF THE PROJECT AS A REAL OPTION Oil Production vs Abandonment Year NPV Distribution WTI Price vs Abandonment Year 18

19 EXPANSION OF THE PROJECT LIFETIME AS A REAL OPTION According to the US laws and regulations, continuously producing leases do not expire. If successful production is established in a lease, the lessee company can keep production indefinitely. Therefore, upstream projects in the US Gulf of Mexico have natural expansion options! But the production equipment have a limited lifetime Additional CAPEX is necessary to continue production past the equipment designed lifetime To continue producing a lease past the initial lifetime is an option, not an obligation! Expansion Real Option 19

20 EXPANSION OF THE PROJECT LIFETIME AS A REAL OPTION Oil Production vs Expansion NPV Distribution WTI Price vs Expansion 20

21 ABANDONMENT AND EXPANSION AS CONCURRENT REAL OPTIONS WTI Price vs Abandonment + Expansion NPV Distribution Calculating the Real Options Premium involves finding the optimal threshold curve for exercise that maximizes the expected NPV of the project! This is the optimal decision rule! 21

22 ABANDONMENT AND EXPANSION AS CONCURRENT REAL OPTIONS But how do we find the optimal threshold curve for exercise? How do we maximize the expected NPV of the project? 22

23 The Gulf of Mexico Case 23

24 THE GULF OF MEXICO CASE EXAMPLE PROJECT Original Project Specs: Oil project, peak production = bpd Production decline = 4% per year CAPEX (Initial) = US$ MM OPEX = US$ 100 MM per year fixed + US$ 5,00 per bbl variable Lifetime (Initial) = 20 years Discount Rate = 10% Risk-free Rate = 4% 24

25 THE GULF OF MEXICO CASE EXAMPLE PROJECT Risk Factors: Oil production = Triangular distribution, +/- 35% Production decline = Triangular distribution, +/- 15% CAPEX (Initial) = Triangular distribution, +/-25% OPEX = Triangular distribution, +/- 15% Price Model: Mean Reverting with Jumps Initial Price = US$ 100,00 per bbl Long Term Price = US$ 80,00 per bbl Price Volatility = 25% per year Half-life = 5 years Risk Premium = 6% 25

26 THE GULF OF MEXICO CASE MODELING THE REAL OPTIONS Real Options Modeled: Abandonment Option American Put Expiration = 20 years Strike (CAPEX) = US$ 250 MM Triangular distribution, +/- 25% Expansion (lifetime) Option European Call Expiration = 20 years Strike (CAPEX) = US$ MM Triangular distribution, +/- 25% Grants a new Abandonment Option 26

27 THE GULF OF MEXICO CASE MODELING THE REAL OPTIONS Determining the Abandonment and Expansion (lifetime) concurrent Real Options Premium involves finding the optimal threshold curve for exercise of the options that maximizes the expected NPV of the project! Which in practice means: Modeling the Real Options as decisions inside the model Abandonment = Kill all future cash flow! Expansion (lifetime) = Invest now and continue the cash flow The decisions must be consistent At the end of the primary lifetime of the project (first abandonment option expiration) the model must exercise either the Abandonment or the Expansion (lifetime) options 27

28 THE GULF OF MEXICO CASE MODELING THE REAL OPTIONS Which in practice means (continued): The discount factor of the project with Real Options is NOT the same of the project without options but under certain circumstances we CAN use the Risk-free rate as the discount factor! To use the Risk-free rate as the discount factor, we MUST model all market correlated risk factors in the Risk-Neutral measure Risk-Neutral Prices = Real Prices Risk Premium WTI Prices = Risk-Neutral WTI Prices Other Prices = Risk-Neutral Prices Risk factors not correlated with the market stay the same Production Curves = uncorrelated with the market CAPEX & OPEX = uncorrelated with the market 28

29 THE GULF OF MEXICO CASE MODELING THE REAL OPTIONS Market correlated WTI Price modeled as Risk-Neutral Oil Price [US$/bbl] Risk-free rate as the discount factor of the project with Real Options! Oil Price / Real P05 / Real P95 / Real P05 / Risk Neutral P95 / Risk Neutral Oil Price / Risk Neutral 29

30 THE GULF OF MEXICO CASE MODELING THE REAL OPTIONS Which in practice means (continued): Creating a threshold curve for exercise to control the decision Different threshold curves yield different NPV Using RISKOptimizer to find the parameters of the threshold curve This will be the optimal decision rule! The optimal threshold curve is the one that maximizes the expected NPV of the project! The Real Options Premium is the incremental NPV of the project created by this decision rule! 30

31 THE GULF OF MEXICO CASE MODELING THE REAL OPTIONS 160 Threshold curve for exercise of the Real Options Oil Price [US$/bbl] ,17 72, , , ,28 Using RISKOptimizer to find the parameters of the threshold curve! Abandon1 Abandon2 Expansion 0 Start Lifetime Expiry Strike Param1 0,00 17,27 60,17 Param2 29,91 72,20 Param3 0, ,

32 THE GULF OF MEXICO CASE DETERMINING THE REAL OPTIONS PREMIUM Finally, to determine the Real Options Premium we must: Run the Risk Analysis of the Original Project (no Real Options) Run the Risk Analysis of the Project with Real Options The Real Options Premium is the difference of the two Expected NPVs! Both Risk Analyses must be run in the Risk Neutral measure! The Real Options Premium ONLY exists if the decision rule is strictly followed! 32

33 THE GULF OF MEXICO CASE DETERMINING THE REAL OPTIONS PREMIUM Original Project - No Abandonment, No Expansion Full Project - Abandonment and Expansion Options The Real Options Premium is the difference of the two Expected NPVs! RO Premium = US$ 220 MM 33

34 THE GULF OF MEXICO CASE DETERMINING THE REAL OPTIONS PREMIUM Original Project vs Project with Real Options 34

35 Conclusion and Final Remarks 35

36 CONCLUSION THE IMPORTANCE OF REAL OPTIONS The future is uncertain so the presence managerial flexibilities creates value for the project. It is its ability to adapt the uncertainty! Although two similar projects might have roughly the same Expected NPV, they might differ greatly in terms of managerial flexibilities! Experienced decision makers tend to see/feel the value of these flexibilities But how to measure them? How to compare different project opportunities if one can t measure the value of these flexibilities? What is the fair value of these flexibilities? How much should the decision maker be willing to pay for each flexibility? 36

37 CONCLUSION THE IMPORTANCE OF REAL OPTIONS Modeling the project managerial flexibilities as Real Options allows us to: Measure the fair value of the project flexibilities, its Real Options! Study the impact of the uncertainties (modeled as risk factors) over the managerial decisions available along the lifetime of the project Design optimal strategies for the irreversible managerial decisions available to the project For example, the irreversible decisions of first investing, expanding or abandoning the project Compare different project opportunities, taking into account the uncertainty and managerial flexibilities of each project Objectively integrate managerial flexibility into the valuation process, in order to improve the decision process! 37

38 FINAL REMARKS Modeling these flexibilities as Real Options involves: Modeling the Real Options as decisions inside the model Finding the optimal threshold curve for exercise of the Real Options Take special care with: The decisions must be consistent Use the Risk-free rate as the discount factor Model all market correlated risk factors in the Risk-Neutral measure Risk-Neutral Prices = Real Prices Risk Premium 38

39 FINAL REMARKS Use RISKOptimizer to find the parameters of the optimal threshold curve for exercise of the Real Options: The optimal threshold curve is the one that maximizes the expected NPV of the project! Run the Risk Analysis of the Original Project (no Real Options) Run the Risk Analysis of the Project with Real Options The Real Options Premium is the difference of the two Expected NPVs! The Both Real Risk Options Analyses Premium must ONLY be run exists if the in decision the Risk rule Neutral is strictly measure! followed! 39

40 FINAL REMARKS BIBLIOGRAPHY AND REFERENCES Some good books on Stochastic Processes, Real Options : Investment Under Uncertainty, A. Dixit and R. Pindyck; An Introduction to the Mathematics of Financial Derivatives, S. Neftci; Decision Making Under Uncertainty with RISKOptimizer, W. Winston; The webpage of Marco Antonio Dias, PhD: Tutorials on Stochastic Processes, Real Options and Monte Carlo; FAQs (a must read!), many papers and models on Excel files; 40

41 For more information, please contact: Thank you all for your attention! Rafael Hartke Investor Relations: