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
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… $155M is the net revenue (profilt) per year which was found by dividing total revenue value of $1.2375B by 8 (i.e. $1.2375B/8)
Again, $400M is ignored since it represents opportunity (sunk) cost.
Given that the total profit over 8 years is $1.2375B (or $155M per year for 8 years), we will now compute the Present Value of this amount using the following formula:
P = F(1 + i)-N where i is 15% as mentioned in the case suggestions and N is 8 as we found above, and F is $1.2375B
P = $1.2375 (1.15)-8
P = $1.2375 (0.3269)
P = $404.5M
The Present Worth of this project with a 36,000 bbl/day facility is $404.5M and the total profit that Wildcat Oil is expected to make is $404.5M - $260.4M, which amounts to $144.1M.
We will now calculate the costs and benefits, if any, from resizing the facility to process a total of 41,000 bbl/day (i.e. increase of 5,000 bbl/day).
Wildcat’s Cost when Oil Production is 41,000 bbl/day
The Power Sizing Technique formula discussed in Chapter 3, is used to determine the cost of the 41,000 bbl/day facility.
Cost41000 =[ (36000/41000) .67] / [$260.4M]
Cost41000 = $284M
Given that the cost of 41000 bbl/day facility is $284M, we will now calculate the number of years to recover 100M bbl of Oil at a rate of 41,000 bbl/day.
Number of years to extract 100M bbl at production rate of 41,000 bbl/day
Number of years = 100M/(41000 * 365) = 6.7 years
We will assume that the number of years to extract