Preliminary evaluation on a petroleum exploration project in Uzbekistan

TRNG I HC M TP.HCM UNIVERSITÉ LIBRE DE BRUXELLES HO CHI MINH CITY OPEN UNIVERSITY SOLVAY BRUSSELS SCHOOL MBAVB3 Dang Hong Nhat PRELIMINARY EVALUATION ON A PETROLEUM EXPLORATION PROJECT IN UZBEKISTAN MASTER PROJECT MASTER IN BUSINESS ADMINISTRATION (PART-TIME) Tutor’s Name: Dr. Nguyen Kim Thu Student’s Name: Dang Hong Nhat Ho Chi Minh City (2011) i Acknowledgement First, I would like to express my deep gratitude to Dr. NGUYEN KIM THU, who is my advisor for this research paper, for her kindness and willingness as well as valuable comments and advice that have enabled this accomplishment. Second, I would like to send my thanks to all of our professors who have delivered priceless theoretical and practical lessons which pave the foundation for my final thesis. Third, tremendous gratitude is extended to my colleagues who provided me internal data of limited publicity, without which the study shall never be realized and fulfilled. Last, without the love and sacrifice of my family (my husband who is also this MBAVB3 classmate and my little daughter), I could not have completed this thesis or the whole course. ii Statement of Original Authorship I certify that the substance of this thesis has not been already submitted for any degree and is not currently being submitted for any other degree. I also certify that to the best of my knowledge any assistance received in preparing this thesis, and all sources used, have been acknowledged and referenced in this thesis. Signed:____________________________ Date:__________________ Hong Nhat iii Contents Acknowledgement i Statement of Original Authorship ii Contents iii Abstract iv Chapter 1. Introduction 1 1.1. Rationale of the research study 1 1.2. Problem statement 1 1.3. Research methodology 1 1.4. Limitation of the research 2 Chapter 2. Strategy towards Oversea Investment 3 2.1. About PVEP 3 2.2. Strategy for investment overseas 7 2.3. Planning for 2011-2015 Period 9 2.3.1. Exploration 9 2.3.2. Field Development and Production 11 2.4. Planning for period 2016-2025 12 2.4.1. Exploration 12 2.4.2. Production 14 Chapter 3. Project Introduction 16 3.1. About Uzbekistan 16 3.2. Project approach 18 Chapter 4. Economics Evaluation Model 19 4.1. Methodology 19 4.2. Input data 19 4.3. Economic Evaluation 24 4.4. Sensitivity analysis 26 4.5. Potential Risks 27 Chapter 5. Conclusion and Recommendation 28 5.1. Strategic review 28 5.2. Conclusion & Recommendation 29 References 31 iv Abstract PetroVietnam Exploration Production Corporation (PVEP) is the main force of the Vietnam Oil and Gas Group (PETROVIETNAM or “PVN”) in the upstream sector – the Group’s core businesses. It is set forth in the Corporation’s development Strategies to 2015 and orientation to 2025 that investment abroad shall be reinforced to achieve the objective of reserves and to ensure sustainable development and increased oil and gas production. The year 2010 witnessed a breakthrough with several remarkable events: putting into production the D30 field, block SK305 in Malaysia, PVEP’s second producing project internationally; signing the Contract for Incorporation and Administration of the Mixed company PetroMacareo, block Junin 2, Venezuela - the biggest venture ever in terms of investment value that PetroVietnam/PVEP have carried out abroad. So far, PVEP has been investing in 56 projects, one third of which is located overseas as highlighted in the following map: v Such study on a potential project in Uzbekistan has been in line with the Corporation’s strategy towards expansion into the world’s oil and gas reserves. With information from working trips to Uzbekistan and thanks to year long experience in exploration and exploitation at home and abroad, this thesis shall provide preliminary evaluation on the project and recommend way forward in prudent and cost effective manners. The below image is an expression of the corporate pride: first success in discovery overseas (Bock - 6 bis Well, Block 433a&416b, Algeria) 1 Chapter 1. Introduction 1.1. Rationale of the research study In view of the declining oil & gas reserves in Vietnam, PVEP has been expanding its exploration & production abroad. Investing in a petroleum field in Uzbekistan is to follow the strategic development of PVEP set for period to 2015 and orientation to 2025. The study aims at analyzing a case study in which preliminary data have been collected regarding an opportunity to invest in Uzbekistan. With knowledge gained from MBA and seven year long experience working in PVEP, I shall perform an independent analysis on whether or not to invest in the project. 1.2. Problem statement Sourcing from internal database, petroleum reserve in Vietnam is estimated to be at 2,7 billion barrels. With production output of 0.370 million per day, the reserve shall be adequate for consumption for 7,297 days (equal to above 20 years). Therefore, it is imperative that we go out of Vietnam to seek for replacement of reduced reserve for the purpose of long term energy security. Middle Asia is one of main areas that PVEP has been targeting. Therefore, such investing in Uzbekistan is considered the right way towards solving the described problem. 1.3. Research methodology - Input data including financial terms in the Contract and minimum commitments, estimated production quantity, estimated cost for CAPEX, OPEX,… - Economic feasibility shall be evaluated based on main methods: Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period; 2 - Evaluation of sensitivity of factors affecting economic feasibility of the project. 1.4. Limitation of the research - All input data are collected by a working team dedicated to the project through business trips to Uzbekistan BUT not verified by another independent entity. - There have been no thorough lessons learnt from failed projects of same type. - Since this is a capital – intensive project and is located overseas with huge inherent uncertainty, it is critical that a more thorough and systematic risk analysis shall be further deepened. 3 Chapter 2. Strategy towards Oversea Investment 2.1. About PVEP PVEP was established on May 4, 2007 in accordance with Decision No. 1311/QD- DKVN of the Management Board of PetroVietnam on the basis of merging two Members of the Group, PetroVietnam Exploration and Production Company (PVEP old) based in Ho Chi Minh City and PetroVietnam Investment Development Company (PIDC) based in Hanoi. Achievements from five year planning (2006-2010) Five year period from 2006 to 2010 records successful accomplishments, namely: - New discoveries of oil and gas: 24 discoveries, in which 14 in the country and 10 abroad. - Reserves Increase gained high results: (i) completed targets to increase reserves in the country; (ii) completed in excess of planned increases in oversea reserves. With assistance of the Government and PVN, PVEP has been granted for investment of Junin-2 field in Venezuela; - Putting 12 new fileds into production, in which, 09 domestic fields, including: Rong Doi / Rong Doi Tay (block 11-2), Yellow Tuna (block 09-2), Eastern (block 15-2), Golden Lion (block 15-1), Doc Rivers (block 46-02), gas and oil Bunga Orkid (block PM-3 CAA), Nam Rong-renovation (block 09-3 and 09-1 ), Pearl (batch 01-02); and 03 oversea fields, including: Cendor lot PM 304, Dana mine, mine D30 batch SK 305 - Malaysia. Deploying field development Northeast Black Lion, White Lion, Topaz, Stage-2 field development Dai Hung, phase-3 filed development Lan Do (block 06-1), White Rhinoceros (block 16-1), BRS Field Block 433a & 416b - Algieria; - The first production of oil and gas in foreign countries from Cendor field, Block PM-304 - Malaysia on September 2006 (to 2010 PVEP will have 03 fields from PM304 and SK 305 to be put into operation). Safe and effective 4 production of existing fields with 5 year production results: crude oil - 40.1 million tons, gas - 33.7 billion m3; - Revenue plan and state budget contribution completed: revenue reached 126,320 billion VND (about 7,560 million USD). Contribution to State budget reached 47,200 billion VND (about 2,840 million USD); - PVEP has been investing actively and strongly in oil and gas exploration and production in and outside the country, rapid growth both in quality (ability to manage and operate oil and gas projects) and on the number and scale of oil and gas projects at home and abroad; PVEP’s Performance Result Period 2006-2010 is generalized as below: No Description Period 2006 – 2010 Bil. VND Results (%) Actual Plan 1 Revenue 126.321 108.597 116% 2 Donation to State budget 47.186 40.259 117% 3 After Tax Profit 36.167 24.437 148% 4 Investment and Costs 98.403 111.822 88% Sources: Report on PVEP’s business result of 2006-2010 period in general and of 2010 in particular (December, 2010) Project Portfolio So far, PVEP has been investing in 56 projects in Vietnam and overseas, detailed by category as follows: Categorized by Total At home Overseas 1- Location 56 38 18 [...]... cooperation with national oil companies and based on prestigious position of PVN/PVEP and Vietnam; - Having undergone construction and development process, PVEP: has initially developed a professional staff, qualified professional, managerial and operational experience in the international environment; has accumulated potential technical, technological, financial and management experience in the oil and... state-level, and in partnership with other oil companies to expand investment activities in the following areas/countries: - Southeast Asia and Oceania: consolidate / strengthen relations with Petronas, Pertamina (has cooperation agreements) for development projects in Indonesia, Malaysia, Australia; actively consider implementing opportunities in Brunei Formation of regional investment in Southeast Asia with... Russia has pumped in a lot of capital in the natural gas industry of Uzbekistan The domestic company Uzbekneflegaz has signed an agreement with Itera, a Russian company for exploration and development of new natural gas reserves Trinity Energy of Britain has invested large amount of capital in increasing production of natural gas in the country Uzbekistan is a major exporter of oil and natural gas to... be taken before final decision to be made: 1 Setting up an internal appraisal committee or external international consultancy to verify all input data and to advise on final decision to be made by PVEP 2 Negotiation with UNG for more favorable terms and conditions of the Petroleum Sharing Contract, for example oil profit sharing ratio, preferential taxation regime for PVEP 30 3 Negotiation with Gazprom... gas, build-up of alliance partnerships to invest in the areas with partners (Total, Petronas, PTTEP ) Formation of reginal investment in Africa with Algeria / Angola as the central field of action; - Middle East: Being positive in development of investment in Iran, Iraq, Oman , focusing on build-up of alliance partnerships to invest in the areas with regional partners (Petronas, PTTEP, Total ) Formation... always a huge challenge in the past 5 years and coming years The remaining area of petroleum potential becomes narrower - Exploration and production conditions become increasingly difficult, particularly, in Vietnam it should be reaching out to deep water/far offshore, taking into consideration development of marginal fields, and gas fields with high CO2 content; - Competition in the world exploration and... and gas projects at home and abroad; created and have increasingly confirmed the position and prestige of PVEP in the international oil and gas community - With the application of the Model of the parent company subsidiary, it has initially created legal framework and mechanisms for PVEP to act as a real oil 6 and gas company The organization structure and management mechanisms have been built up and... America: implementation of cooperation agreements at all levels for new E&P projects in Venezuela, Peru, Ecuador, Bolivia, Nicaragua Formation of regional investment in South America with Venezuela as the central field of action; - Africa: Proceeding with investment in countries Algeria, Angola, Tunisia, Libya, Nigeria Pay attention to implementing the Protocol on cooperation with the Angolan oil and... shall carry out first exploration phase with total cost from USD 13 million to USD 29,4 million Therefore, in worst scenario that the exploration phase fails, the loss shall be in that range - The economic evaluations contain so many uncertainties related to Capex and Opex, probability of finding and producing economically viable reservoirs The costs (Capex and Opex) are variables depending on market... with Malaysia as the central field of action; - Russia and the countries of the former Soviet Union: to continue strengthening relations with Gazprom, Zarubeznheft and try to win highranking level relations to have a chance in Russia and other CIS countries, focusing on Kazakhstan, Azerbaijan, Uzbekistan Formation of regional investment in the FSU with Russia as the central field of action; - South America: . Uzbekistan and thanks to year long experience in exploration and exploitation at home and abroad, this thesis shall provide preliminary evaluation on the project and recommend way forward in prudent. technological, financial and management experience in the oil and gas projects at home and abroad;  created and have increasingly confirmed the position and prestige of PVEP in the international. Oceania: consolidate / strengthen relations with Petronas, Pertamina (has cooperation agreements) for development projects in Indonesia, Malaysia, Australia; actively consider implementing