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
Date Written: September 29, 2017
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: Suggested Citation