Petrobras Uses @RISK
for E&P Analysis
Recently the company implemented a corporate-wide protocol for evaluating the economic risks associated with potential investments. Key risks of interest to Petrobras include those associated with: the production of oil and natural gas; the demand for derivatives; the prices of various commodities; the start dates for various operations; and changes in company capital (CAPEX) and operating (OPEX) expenditures. In performing analysis of these risks, Petrobras looks to several key indicators: expected NPV; the standard deviation of NPV to get a sense of the risk associated with the reward; the probability of a negative NPV, or of losing money; and the 95% Value at Risk (VAR) of the NPV, which is the minimum amount that Petrobras stands a 5% chance of losing.
Petrobras’s Progride System
The system is capable of handling complexities such as multiple dependent projects (i.e. a base project plus complementary projects) within the same geographic site or “concession.” A concession represents the right for Petrobras to drill in a specific area, and typically carries with it obligations of rent, tax, and royalty payments. Proglide can also manage anticipated future production projects as well as projects that reduce operating expenses (i.e. have “negative” future operating expense).
Conventional Progride Analysis
From such an analysis, Progride returns the NPV, IRR, and project return time; the best date for project abandonment; and the financial exposure to the company. However these results are based on best-guess point values in the input data that are assumed to be 100% certain. Thus risk is not taken into account.
Risk Analysis in Progride
From this risk analysis, Progride provides the expected NPV of the project along with a histogram and measures of dispersion, or risk, around the expected NPV. It also estimates the probability of a negative NPV, or of losing money on the project.
Limitations of Progride
To illustrate the effect of these limitations, consider an integrated development project with production from two concessions, or specific sites. Petrobras invests in a single shared production oil flow unit to handle both concessions – a shared CAPEX. However, the company must treat each concession individually for Brazil’s National Petroleum Agency (ANP) for purposes such as area rent, royalties, and R&D. See Figure 1.
In such a situation, risk analysis must be done on the integrated project as a whole. There are risk factors shared by both of the concessions, such as prices and CAPEX. And, there are independent risk factors, such as production and project start dates. However, some costs should be treated individually for each concession, like area rent, royalties, and R&D. Certain types of depreciation (on wells, for instance) should also be calculated for each concession as well. Multiple-concession projects are fairly common, yet Progride cannot analyze them without running for thousands of hours – an impractical, and potentially inaccurate, prospect.
The @RISK-Progride Solution
For the multiple concession project described above, the company sets up three separate Progride analyses – one for concession A, one for concession B, and one for the integrated project A+B. Then, analysts model probabilistic scenarios in @RISK for both the shared risk factors (prices, CAPEX deviations, e.g.) and the independent risks (production and start dates of operation, e.g.) for each concession. A conventional Progride analysis is performed for each concession individually, using the probabilistic scenarios generated by @RISK as input data. This analysis is performed while running @RISK by calling a macro that runs Progride during the @RISK simulation. The results of these two conventional concession analyses form the probabilistic scenario for each (e.g. production, revenue, CAPEX, OPEX, fiscal costs, and depreciation). See Figures 2 and 3.
These individual concession results are then summed together to determine the probabilistic scenarios for the integrated project as a whole (A+B). Next, a conventional Progride analysis is performed on the integrated project in @RISK using the combined probabilistic scenarios as entry data. Desired risk indicators for the entire project are then calculated from the analysis results. See Figure 4.
Easy as 3-2-1
The @RISK-Progride process can be summed up in 3 stages, 2 functions, and 1 macro.
The 3 stages of the process are:
The two primary functions used to accomplish the integration between @RISK and Progride are:
Finally, there is only one macro needed in the process. @RISK is set to run this Excel macro after each iteration recalculation during a simulation. The macro simply runs Progride and contains the code: SendKeys "%PX", True
Benefits of the @RISK-Progride Solution