Background

Oil and gas development (as opposed to exploration) projects consist of wells and equipment plus on or more of the following: platform, pipeline and terminal.  Such projects   

• Are technically complex, particularly if the project is offshore
• Contain significant amounts of equipment and material which may need to be imported
• Produce oil and gas products which are sold on the open market
• Have a production profile which usually increases rapidly and then declines gradually as the reservoir is depleted
• Earn foreign exchange generated from  the sale of the product in international markets
• Are subject to complex taxation calculations (bonuses, royalties and production sharing in a concession)
• Have a high level of risk
• Have a high level of regulation
• Have a long time span before a return on investment is received
• Have higher rates of return than projects in other industries. Each development project has to cover the cost of unsuccessful exploration projects which might outnumber them by ten to one. The costs of these exploration programmes are sunk and are not included in the investment decision (though they may be included in taxation calculations).
• Production which usually increases rapidly then declines gradually as the reservoir A porous and permeable underground formation containing a natural accumulation of producible oil or gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs. is depleted..

How Promoter handles Upstream Oil and Gas Projects

Upstream In Promoter refers to projects for the exploration, development and production from oil and gas fields. The capital cost estimate may contain elements for a jacket (if the field is offshore), drilling of wells, equipment for treatment of the oil and gas, pipelines and terminal. Promoter carries out a simple capital cost estimate based on the main characteristics.

Typical Project Cash Flows

The revenues will typically be held at a plateau level for several years as determined by the capacity of the processing equipment and pipelines.  It may increase in the early years if the project is commissioned before all the wells are drilled.  this is often a decision favoured by financiers because the cost of many of the wells can be funded from the cash flows.  The operating costs will typically be much smaller than the revenues.  The installation must typically be decommissioned at the end of the field's economic life.