Project Management in the Oil and Gas Industry

2.1 Introduction
Assessing and managing investments in a new project involves the complex 
interaction of many variables.
This chapter explains all the variables that affect an economic study. Any 
big organization will have projects to perform, so to make decisions for the 
best project requires using economic tools and taking the risk assessment 
for each project into consideration.
Uncertainty is a parameter that affects an economic study, so the study 
needs to calculate the risk assessment of a project by using the Monte-Carlo 
simulation technique with the decision tree method. This method is most 
traditional in oil and gas projects and general industrial projects.
The major risks in any project will be the following:
• Economic risk and value
• Technical 
risk
• Political 
risk
2
Project Economic Analysis

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40 Project Management in the Oil and Gas Industry
Economic risk is affected by the market prediction, change of currency, 
inflation rate, oil price, and others. The technical risk is affected by the 
engineering study applying new technology, as it is possible to drill for 
wells and the wells be dry. Political risk depends on the country, as some 
countries have political stability and in other countries the political issues 
are unstable.
2.2 Project Cash Flow
Net cash flow is the key to all investment decisions, as it converts all 
elements of the project to the cost, and from that, one can compare 
different projects depending on the economic study.
The net cash flow (NCF) is used for the following reasons:
1. To measure the return of the project and liquidity over the 
work of the project 
2. To calculate economic return by the net present value NPV 
3. To calculate the risk assessment of the project 
4. To reduce taxes on the life of the project 
Net cash flow each year is calculated as the revenue from the project 
after subtracting the expense cost every year:
• Net cash flow = revenue – (operating cost + additional 
indirect expenses + taxes + investment + depreciation) 
Revenue is the owner’s income from the project every year depending 
on the volume of production that the project produces multiplied by the 
price for this product.
Operating cost consists of the direct cost, the cost of the materials used 
in the product, the indirect cost, the salary for the management level, com-
puters, furniture, and others.
Taxes are a very critical item as they are the most time-consuming in 
developing NCF estimates. There are different types of taxes – production 
taxes, sales taxes, property taxes, state or region income taxes, and incor-
porate income taxes. So, these types of taxes and their value depend on the 
location of the project and the laws that govern it in the country that the 
project is located.
There is more than one way to compare different projects. A good rule 
of thumb is that any investment project should be profit-based. Therefore, 

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Project Economic Analysis 41
the owner is normally involved in the feasibility study phase, making a 
comparison between more than one project in order to determine the 
revenue that suits the required interest rate that it deems appropriate to 
the company goal. There are different economic calculation methods that 
assist in decision-making and they are illustrated in this chapter.
Making a comparison is very important in feasibility studies for any 
project. It is important that in any of these methods you should identify 
the net cash flow.
Figure 2.1 shows the net cash flow diagram. For the beginning of the 
project, a lot of money will be spent to build the infrastructure or purchase 
machines and other necessary equipment required to deliver the required 
product. The value of these assets is called a capital cost (CAPEX) and it is 
usually spent only during the beginning of a project.
Assume that a project will start after one year. In this year you sold 
your product, so knowing the price and the number of products you will 
sell enables you to define the revenue in the first year and repeat it in the 
second year, third year, and for the lifetime of the project.
The number of products for every year can be known, but with uncer-
tainty. Also, when you define the price of the product, this number is not 
easy to obtain as it varies from year to year and the uncertainty increases 
with time. Determining the value of a price requires a specialized consul-
tant office for types of project investments, such as building hotels, which is 
different than a factory of kids’ games, or rather, a steel factory. Therefore, 
strong market research is necessary for knowing the competitors in the 
market and the increase in the population of the country and a market 
R = Revenue