# Wildcat Oil in Kasakstan Essay

1222 Words
May 21st, 2011
5 Pages

Wildcat Oil in Kasakstan Case Report

By

Varun Khurana

Engineering Economics

May 10, 2011

To: Wildcat Oil in Kasakstan

From: Varun Khurana

About: Cost Estimate of a facility to produce oil

Recommendations 1. Larger facility is a wise investment and therefore recommended

Discussion

Wildcat Oil has recently discovered a 500 million barrel crude oil reservoir in Kasakstan, and the firm needs a preliminary cost estimate for a feasibility study for a facility to produce the oil and for transporting this oil. Wildcat Oil has already paid the Kasakstan govt. $400M in up-front lease costs for this reservoir. Engineers predict recovery of about 300 million barrels with current technology, however the oil facilities and

By

Varun Khurana

Engineering Economics

May 10, 2011

To: Wildcat Oil in Kasakstan

From: Varun Khurana

About: Cost Estimate of a facility to produce oil

Recommendations 1. Larger facility is a wise investment and therefore recommended

Discussion

Wildcat Oil has recently discovered a 500 million barrel crude oil reservoir in Kasakstan, and the firm needs a preliminary cost estimate for a feasibility study for a facility to produce the oil and for transporting this oil. Wildcat Oil has already paid the Kasakstan govt. $400M in up-front lease costs for this reservoir. Engineers predict recovery of about 300 million barrels with current technology, however the oil facilities and

*…show more content…*
Cash Flow diagram over the 7 year period for 41,000 bbl/day

Total Net Revenue is same as before (i.e. when production is 36,000 bbl/day) = $1.2375B

Net Revenue per year = $1.2375B / 7 years = $177M

$177M

$177M

$177M

$177M

$177M

$177M

$177M

1 2 3 4 5 6 7

$284M

$260.4M

In the above cash flow diagram, $284M is the cost associated with producing 41000 bbl/day and $177M is the net revenue per year.

Again, $400M is ignored in the analysis since it represents the opportunity cost.

Lets now calculate the Present Worth of $1.2375B for when the production rate is 41000 bbl/day.

P = F(1 + i)-N where i is 15% as mentioned in the case suggestions and N is 7 as we found above, and F is $1.2375B

P = $1.2375B (1.15) -7

P = $1.2375B (0.376)

P = $465M

The Present Worth of this project at a production rate of 41000 bbl/day is $465M and the total profit for Wildcat Oil is expected to be $465M - $284M, which equals $181M.

Since increasing production level to 41000 bbl/day increases Net Revenue by $36.9M (i.e. $181M - $144.1M), the larget facility is indeed a wise investment and highly

Total Net Revenue is same as before (i.e. when production is 36,000 bbl/day) = $1.2375B

Net Revenue per year = $1.2375B / 7 years = $177M

$177M

$177M

$177M

$177M

$177M

$177M

$177M

1 2 3 4 5 6 7

$284M

$260.4M

In the above cash flow diagram, $284M is the cost associated with producing 41000 bbl/day and $177M is the net revenue per year.

Again, $400M is ignored in the analysis since it represents the opportunity cost.

Lets now calculate the Present Worth of $1.2375B for when the production rate is 41000 bbl/day.

P = F(1 + i)-N where i is 15% as mentioned in the case suggestions and N is 7 as we found above, and F is $1.2375B

P = $1.2375B (1.15) -7

P = $1.2375B (0.376)

P = $465M

The Present Worth of this project at a production rate of 41000 bbl/day is $465M and the total profit for Wildcat Oil is expected to be $465M - $284M, which equals $181M.

Since increasing production level to 41000 bbl/day increases Net Revenue by $36.9M (i.e. $181M - $144.1M), the larget facility is indeed a wise investment and highly