NPV presentation given to the Aberdeen Group 18th January 2018

1. www.advisian.com
Hot to use Net
Present Value (NPV)
to gain project
approval
Alan William Stokes

2. Lost in Translation

3. The OneWay™ Framework
committing to personal
leadership….
...achieving our
vision.
through our
people….
Expectations
Our behaviors
Our actions
What we deliver on
Zero harm to people & assets
Zero environmental incidents
1. Leadership and Governance
2. Risk Management
3. Caring for our People & the
Environment
4. Selection and Competency
5. Working with Customers
6. Engineering
7. Working with Vendors and
Contractors
8. Field Execution
9. Management of Change
10. Crisis and Emergency Management
11. Incident and Behavior Analysis
12. Assessment and Improvement
Element 7. Working with Vendors and Contractors

4.  A new fuel tanker arrives on location at a site in the middle east
 The HSE manager tells the fleet supervisor to ensure that the tanker is
clearly labelled “Diesel Fuel” and “No Smoking” in Arabic
 The result…
Clear Communications

5.  Despite the hilarity, what are the implications of a breakdown in
communication?
 Personnel safety
 Process safety incident
 Equipment damage
 Reputation
 Environment
 How clear are your instructions?
 Is there anyway that they can be misinterpreted or interpreted in a
different way?
Clear Communications

6.  Communication is the transfer of information from one person to
another
 Effective Communication is when the receiver understands the exact
message that the sender was trying to deliver
 What can impact on effective communication
 Assumptions
 Common Knowledge
 Verbal vs. written communication
Clear Communications

7. Introduction
Net Present Value is used to
• 1 Establish profitability
• 2 Rank all the projects at budget time
Topics for tonight
• Introduce NPV
• Demonstrate an NPV calculation tool
• Use the tool for two examples
• Discuss the best time to use the tool
Advisian / 7

8.  Project:
 Problem: power generation at 70 Mtpa Iron Ore development in Mauritania
 Studied 9 options for power generation
 Options consisted of various combinations of the following:
− 2 conventional technology options
− 4 non-conventional (renewable) technology options
 Examined NPV and PV for each option at base-case parameters, sensitivity to
parameters such as Capital Expenditure, fuel gas price, carbon price and
financial discount rate
 Outcome:
 A hybrid combination of the 2 conventional options showed the best returns
Mauritania: power generation at mine site

9. Refresher on Net Present Value
Net Present Value (NPV) is the difference between the present value of
all cash inflows and the present value of all cash outflows.
NPV is used in capital budgeting to analyze the profitability of a
projected investment or project.
The following is the formula for calculating NPV:
Ct = net cash inflow during the period t
Co = total initial investment costs
r = discount rate, and
t = number of time periods
Advisian / 9

10. Basic NPV rule
A positive net present value indicates that the projected earnings
generated by a project or investment (in present dollars) exceeds the
anticipated costs (also in present dollars).
An investment with a positive NPV will be a profitable one and one
with a negative NPV will result in a net loss.
This concept is the basis for the Net Present Value Rule, which dictates
that the only investments that should be made are those with positive
NPV values.
Returns from a project with positive NPV exceed what is required to
compensate you for the risks involved
Simple level if NPV is negative then bin the option
If positive NPV then take the proposal to the next stage
Advisian / 10

11. NPV past and future
NPV work used to be the realm of a specialist in the Operator
Not for Project Engineers.
The Grown ups will do the evaluation
Now
Excel has a formula
NPV = C0 + NPV( r, C1 : Ct )
So any one can build the NPV model to test an investment
opportunity
Project Engineers should calculate the NPV on their own computer
to sell an improvement to the Project
Advisian / 11

12. CAPEX
OPEX
Revenue
Decommission
Tax rebate
Carbon / GHG
Community
Waste
Biodiversity
Others
Project Analysis

13. Britoil Clyde Oilfield
Design
• 80,000 b.o.p.d.
• 80m water depth
Project economics of 1983 and oil
at $50 per barrel!!!
Advisian / 13

14. CLYDE PROJECT ECONOMICS
Slide 14
Paper No. OTC-25247 • Decommissioning Costs Can Be Reduced • Alan William Stokes

15. Base Case
Advisian / 15
Operating Costs Capital Costs
Decommissioning Costs
Gas and Oil Price
Tax Rebate Discount Rate

16. Example
Case 1 Decommissioning costs.
Reduce decommissioning costs by changes
to valves for flushing of pipelines, amend
well design for plug and abandonment,
change auxiliary power generation
Needs extra capital
Calculate savings in Decommissioning costs
Advisian / 16

17. Decom down by 25%
Advisian / 17

18. Example of NPV use
Case 2 Eliminate a control room operator
Needs capital investment on new instrumentation,
communication and software. Will save operating
costs
Your engineers can calculate the capital cost and
your operations team can calculate the saving
Advisian / 18

19. Opex down 8% Capex up 5%
Advisian / 19

20. Vision
Advisian / 20
Have the NPV model on your desk to use
Not during Identify stage as inadequate
detail available
Not during Execute as changes are not
welcome
Yes to Evaluate and start of Define
Yes to Operate

21. Vision for the future
Integrating decision-making
25/01/20
18
CapEx OpEx NPV / NPC~
Schedule
risk
Shadow
costs*
Social and
enviro. risks#
Complexity of assessment / Value to optimisation
Financialcostsassessment
Life-cycle financialassessment
Market price
uncertainty
Inc. possible future costs / benefits
Inc. fulllife-cycle costs / benefits
Assessment components
~ “NPV /NPC” – NetPresentValue /NetPresentCost – is the time value of money
* “Shadowcosts”donot appearon companybalance sheets,butare notionalprices on assetsorliabilities to track potential future costsor benefits.
# “Social andenvironmentalrisks”are businessrisksdue to environmentalorsocial factorssuch as climate change,ecological damage,reputationrisk,etc.
Conventional
estimating
Our estimating group
EcoNomics™ integrated decision-making
An extension
on what we
do currently

22. Thank you for your time
Happy New Year
Alan Stokes
Advisian / 22

23. Inflation
The NPV formula changes to allow for a predicted inflation
The bottom line becomes
( 1 +r )t ( 1 + i )t
Where r is discount rate and i the rate of inflation
Advisian / 23

24. HOW TO GET SAVINGS
Slide 24
Paper No. OTC-25247 • Decommissioning Costs Can Be Reduced • Alan William Stokes