The Implications of Different Acceptable Prospective Returns to Investment for Activity in the UKCS

University of Aberdeen, North Sea Study Occasional Paper, No. 141, September 2017

68 Pages Posted: 1 Dec 2017

See all articles by Alexander G. Kemp

Alexander G. Kemp

Aberdeen Centre for Research in Energy Economics and Finance, University of Aberdeen

Linda Stephen

University of Aberdeen - Business School

Date Written: September 29, 2017

Abstract

This paper examines the effects of different investment hurdle rates on capital expenditure and production relating to new oil and gas fields in the UK Continental Shelf over the period 2017-2050. Financial simulation modelling, including the use of Monte Carlo technique to model future fields, is employed along with a large database of discovered but undeveloped fields. The investment hurdles employed are (1) real IRR of 10%, (2) real IRR of 15%, (3) minimum NPV of £10 million, (4) NPV/I ≥ 0.3, and (5) NPV/I ≥ 0.5. The last 2 hurdles reflect significant capital rationing. At oil prices of $50 many projects fail even the least demanding hurdle. At $60 price many more projects pass the hurdles but use of the NPV/I ratios result in much lower investment and production over the period.

Keywords: Investment hurdles, Activity in the UKCS, Discount rates, Caiptal rationing

JEL Classification: D21, G17, G18, Q35, Q47

Suggested Citation

Kemp, Alexander G. and Stephen, Linda, The Implications of Different Acceptable Prospective Returns to Investment for Activity in the UKCS (September 29, 2017). University of Aberdeen, North Sea Study Occasional Paper, No. 141, September 2017, Available at SSRN: https://ssrn.com/abstract=3056184 or http://dx.doi.org/10.2139/ssrn.3056184

Alexander G. Kemp (Contact Author)

Aberdeen Centre for Research in Energy Economics and Finance, University of Aberdeen ( email )

Edward Wright Building
Dunbar Street
Old Aberdeen AB24 3QY, Scotland AB24 3QY
United Kingdom
(0)1224 272168 (Phone)
(0)1224 272181 (Fax)

Linda Stephen

University of Aberdeen - Business School ( email )

Edward Wright Building
Dunbar Street
Old Aberdeen AB24 3QY, Scotland AB24 3QY
United Kingdom

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