Lectures by Richard A. Alexander Adapted from Tim D. Taylor, PhD PGE 365 Resource Economics & Valuation Unique No

Quiz #1 What is the current posted price of WTI sweet crude oil? (to get credit you must be within 5% of the actual $/Bbl)

How Much Oil is Left? 1919 – US Geological Survey estimates US will run out of oil in 9 years – Anglo-Persian Oil Co. (now BP) thought Saudi Arabia did not contain one drop – CIA estimates peak oil production in 1980s and “rapid exhaustion” thereafter – Oil wells are “drying up all over the world”, Jimmy Carter – US President – Oil prices collapse due to huge supply boom 2008 – Oil Prices soar due to Global Demand and Perceived Supply Limits 2010 – Estimates as high as 1.35 trillion barrels, but some argue that 900 billion barrels is more appropriate

How Much Oil is Left? Answer We Don’t Know! One reason we do not know is there are no global reporting standards. This course will cover US reporting standards and touch on some of the other international methods. Our task will be to forecast future production volumes of oil and natural gas and calculate a present value of the reserves. To do this we need data and/or engineering estimates. OH, and by the way, another reason is that: reserve estimates are inherently inaccurate. Before we explore this further, lets look at the global picture first:

Imagine it is January 2000 and you are asked to forecast the global economy over the next 6 years. Could you have predicted: - the stock market collapse? - the suicide attacks on the Twin Towers in New York? - Two protracted wars? - oil prices quadrupling? - global per capita GDP rising by 3.2%, fastest 6-yr growth in history? - Wall Street Financial / Housing / Auto Industry Crisis (Gross Domestic Product, GDP, is one of several measures of the size of a region’s economy. It is the market value of all final goods and services produced within a region in a given time period.) GDP = consumption + investment+ government spending + (exports – imports) There is a global economy as many countries have come to govern themselves by the basic rules of open trade and markets.

As of 2007, The emerging markets, China, India, Costa Rica, South Africa, etc., now make up more 30% of the global GDP and rising. More importantly, emerging markets account for 50% of the growth in global GDP. Volatility in oil price is the result of a actual (or perceived) changes in demand coupled with actual (or perceived) flat or slower growth in supply. Based on current reserve estimates, most of the future oil supply will come from only a handful of countries: - Saudi Arabia - Iran - Russia - Iraq - Venezuela

ExxonMobil is the largest of the major oil companies, but ranks 14 th in oil and gas reserves. All the ones above ExxonMobil in reserves are national oil companies. Now, the course ground rules….

Syllabus Quizzes10% Homework10% Test 120% Test 220% Term Project20% Final Exam20% Full Syllabus will be posted on Blackboard, when???? Office: CPE 5.174Office Phone:

Course Outline – cont’d Basic Economic Principles 1.Introduction and Motivation 2.Simple interest/Compound interest 3.Present value/Future Value 4.Opportunity Cost, Discounting, and Choosing a Discount Rate 5.Loan amortization Estimating Original Oil/Gas-In-Place 1.Volumetrics 2.Material Balance 3.Analogy Decline Curve Analysis 1.Exponential decline 2.Hyperbolic decline 3.Harmonic decline 4.Reserve Categories 5.Ownership Issues and Agreements Forecasting 1.Capital costs 2.Operating expenses 3.G&A 4.Tangibles and Intangibles Measures of Profitability 1.Payout (PO) 2.Return on Investment (ROI) 3.Net Present Value (NPV) 4.Rate of Return (ROR) Investment Analysis 1.Rate Acceleration Projects 2.Equipment Replacement 3.Other Examples… 4.Capital Budgeting Decision Analysis Risk and Risk Preferences Expected Monetary Value Concept (EMV) Probability Introduction to Monte Carlo Analysis Risked Discounted Return on Investment (DROI) Decision Trees Value of Information

Course Outline – cont’d Forecasting 1.Capital costs 2.Operating expenses 3.G&A 4.Tangibles and Intangibles Measures of Profitability 1.Payout (PO) 2.Return on Investment (ROI) 3.Net Present Value (NPV) 4.Rate of Return (ROR) 5.Unit Cost ($/Bbl) Investment Analysis 1.Rate Acceleration Projects 2.Equipment Replacement 3.Other Examples… 4.Capital Budgeting Decision Analysis Risk and Risk Preferences Expected Monetary Value Concept (EMV) Probability Introduction to Monte Carlo Analysis Risked Discounted Return on Investment (DROI) Decision Trees Value of Information

Course Outline – cont’d Decision Analysis 1.Risk and Risk Preferences 2.Expected Monetary Value Concept (EMV) 3.Probability 4.Introduction to Monte Carlo Analysis 5.Risked Discounted Return on Investment (DROI) 6.Decision Trees 7.Value of Information

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