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
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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

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