Homework
April 2018
•The Economics of Energy Corporations (2)

Questions
•Using the Shale Production profile, calculate the NPV and IRR using the following assumptions
–Production starts in 2019
–75% oil exports (export oil price $60 real)
–Capex of $10 per barrel, with 80% of capex in Year 1 (2018) and 20% in Years 2-5
–Opex of $7 per barrel
–Depreciation on a unit of production basis
–Export tax of 30%, Royalty 5%, Other taxes 1% (all oil)
•WACC assumptions
–Cost of Debt – 5% (tax rate 20%)
–Risk-free rate – 1.5%
–Equity market return – 11%
–Company Beta – 1.2
–Debt:Equity split is 40:60
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1.Apply the same discount rate to the Conventional Model
–What are the NPV, IRR and breakeven oil price now?
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2.What is the breakeven oil price for the Shale model?
1.
3.Create the spider graph to show the sensitivities of the Shale model (put in Word Document and
briefly discuss)
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4.Test the shale model with an oil price scenario and discuss the results
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5.If you had to drill an exploration well to justify the shale model and were told that the risk
was 33% and the well cost was $5mm would you proceed?
–What would the risk have to be before you decided not to drill?
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6.Compare the NPVs, IRRs, breakeven oil prices and sensitivities of the two projects. Which do you
prefer?
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•Please send me both models so I can see your workings
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•Please write answers in a Word or Pages document and use graphs where appropriate
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