Project Management in the Oil and Gas Industry

Net cash flow “NCF”
OPEX = Operating cost
CAPEX = Capital cost
TAXE = Taxes & royalities pays
OTHERS
CAPEX
TAXES
OPEX
Revenue
R
n
R
2
R
1
Figure 2.1 Net cash flow diagram.

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42 Project Management in the Oil and Gas Industry
research outside the country is helpful in the case of predicting whether to 
export the product.
In the oil and gas business, there are specialist teams in the main office 
of each international company that provide advice on calculations for each 
country. In addition to that, any country that has this development also has 
a team to perform this calculation, as the revenue, in this case, will be the 
volume of barrels of oil that can be produced every day which depends on 
the reservoir, where uncertainty lies in predicting its volume. However, the 
oil price will be defined on the head quarter as it needs a strategic expected 
plan for future prices.
For example, a reservoir for oil and gas can be predicted, but it constrains 
operational capabilities and managing the reserve to maintain the pressure 
inside the reservoir is limited by the production. Figure 2.2 shows that pro-
duction will increase in the early few years, after that it will be stable for a 
few years, and then it will decline until reaching the uneconomic limit of 
the well, which should be defined. As this limit, the expenses will be higher 
than the gain, so the well will be shut off.
As shown in Figure 2.1, the revenue is a positive to the cash flow, but 
every year it will be an expense due to operation, maintenance to the equip-
ment, and other expenses. Therefore, it will be a negative cash flow to the 
project. The operation and maintenance cost is called OPEX. In addition to 
the operation cost, there will be taxes that will be paid to the government, 
which will usually be a percentage from the production. 
Any equipment has a lifetime. From an engineering point of view, the 
equipment and building lifetime is defined as being usable until it fails or is 
functionally not usable. But, there is also a financial lifetime from a finan-
cial point of view. All equipment has a value when it is new, but with time 
its value reduces, and when you need to sell, it will have another price. This 
price is called the book value. Each year there will be a depreciating cost