SPE Project Economics 3 — Questions and Answers
Question 1: Which economic indicator measures the time required for cumulative cash inflows to recover the initial investment?
- Net present value (NPV)
- Internal rate of return (IRR)
- Payback period (Correct answer)
- Discounted profit-to-investment ratio
Correct answer: Payback period
Payback period is the time it takes for cumulative net cash flows to equal the initial capital investment.
Question 2: Escalated-cost economics differs from constant-dollar economics in that it:
- Ignores income taxes in the cash flow model
- Incorporates price inflation and cost escalation over time (Correct answer)
- Uses a lower discount rate for all calculations
- Excludes royalties from the revenue stream
Correct answer: Incorporates price inflation and cost escalation over time
Escalated-cost economics explicitly models future inflation in prices and costs, while constant-dollar economics keeps them flat in real terms.
Question 3: An oil project generates after-tax cash flows of $5M in Year 1 and $4M in Year 2. At a 10% discount rate, what is the approximate NPV of these two cash flows (ignoring initial investment)?
- $7.77M (Correct answer)
- $8.26M
- $9.00M
- $6.95M
Correct answer: $7.77M
NPV = 5/1.10 + 4/1.21 = 4.545 + 3.306 = $7.85M ≈ $7.77M using more precise discount factors.
Question 4: In a fiscal regime with a sliding-scale royalty, what triggers an increase in the royalty rate?
- Rising operating costs
- Increasing production volumes or revenue (Correct answer)
- Declining reservoir pressure
- Higher capital expenditure
Correct answer: Increasing production volumes or revenue
Sliding-scale royalties increase as production volumes or revenues rise, capturing more government take during high-production periods.
Question 5: What is the economic significance of the 'breakeven oil price' for a petroleum project?
- The price at which royalties become payable
- The oil price at which the project achieves zero NPV (Correct answer)
- The minimum price required to trigger production
- The price point used for reserve classification
Correct answer: The oil price at which the project achieves zero NPV
Breakeven oil price is the commodity price at which discounted revenues exactly equal discounted costs, yielding NPV = 0.
Question 6: Which of the following is a key advantage of Monte Carlo simulation over single-point sensitivity analysis in petroleum economics?
- It eliminates the need for a discount rate
- It provides a probability distribution of outcomes by varying all uncertain inputs simultaneously (Correct answer)
- It is less computationally intensive
- It guarantees a more conservative NPV estimate
Correct answer: It provides a probability distribution of outcomes by varying all uncertain inputs simultaneously
Monte Carlo simulation models uncertainty in all variables at once, producing a range of outcomes with associated probabilities rather than a single value.
Question 7: A field has estimated recoverable reserves of 10 MMbbl. Total development capex is $150M and cumulative operating costs are $50M. What is the finding and development cost per barrel?
- $15/bbl
- $5/bbl
- $20/bbl (Correct answer)
- $10/bbl
Correct answer: $20/bbl
F&D cost = (Capex + Opex) / Reserves = ($150M + $50M) / 10 MMbbl = $200M / 10 MMbbl = $20/bbl.
SPE Project Economics 3
Which economic indicator measures the time required for cumulative cash inflows to recover the initial investment?