W22_TRI_ Sensitivity Analysis on Selected Gas Project

1.      Problem recognition, definition and evaluation

As discussed in previous part, the gas project to be proposed to management will be Option 2, namely delivering 60 BBTUD sales gas to buyer B for about 9 years, then delivering 15 BBTUD to buyer B for next 7 years. In order to comprehend the project economics, a sensitivity analysis needs to be provided.

2.      Development of the feasible alternative

Option 2 has the economic indicators as follows.

	CASE 2
IRR	13.44%
NPV@10% (MUSD)	59,644
ERR	-0.57%

3.      Development of the outcome

A sensitivity analysis is built 3 using economic indicators, i.e. IRR, NPV and ERR, applied for the changes of OPEX, CAPEX and Gas Price. Sensitivity analysis is conducted adopting to the principle of ‘Ceteris Paribus', which is a shorthand for indicating the effect of one economic variable on another, holding constant all other variables that may affect the second variable. As a result in this analysis, when OPEX change, the others remain constant.

4.      Selection of criteria

The result of sensitivity analysis is shown in Table 1.

Table 1.  Sensitivity Output

5.      Analysis

From Table 1 above, the charts of sensitivity are developed for each indicator. Figure 1 is a sensitivity chart for NPV when applying changes for CAPEX, OPEX and Gas Price.

Figure 1. NPV Chart for Sensitivity Analysis

According to that chart, the change of gas price has stronger impact on NPV than the change of CAPEX and OPEX. Meanwhile, the change of CAPEX change has stronger impact on NPV than the change of OPEX. The radar chart of such NPV sensitivity is shown in Figure 2.  

These findings are also consistent with other indicators, i.e. IRR and ERR as shown in Table 3 and 4. As a result, Gas Price is the strongest variable to influence the economics.

Figure 2. NPVRadar Chart for Sensitivty Analysis

Figure 3. IRR Radar Chart for Sensitivty Analysis

Figure 4. ERR Radar Chart for Sensitivty Analysis

6.      Selection of alternative

Based on above analysis, the sequences of high-low impacted variable on project economics is as follows:

1.       Gas Price

2.       CAPEX

3.       OPEX

7.      Performance monitoring and post-evaluation of results

To summarize, the sensitivity analysis is required to look at the impacts of each variable on the project economics. Having looked at the marginality of project economics, the management shall leverage the project with sequential approach which impacts to the economics, starting from gas price negotiation, then CAPEX optimization including EPCI negotiation, and finally OPEX reduction.

References:

·         Asmoro, Trian Hendro. (2012, Nov 24). W20_TRI_ Economic Evaluation on Gas Development Project. Retrieved from: http://aacemahakam.blogspot.com/2012/11/w20tri-economic-evaluation-on-gas.html

·         Brassard, M and Ritter, D (2010), The Memory Jogger (2nd Edition),Canada, Radar Chart

·         Investopedia. (2012, Dec 14). Definition of 'Ceteris Paribus'. Retrieved from: http://www.investopedia.com/terms/c/ceterisparibus.asp#axzz2EzMOq9kj