ComboCurve: Breakeven Calculations

ComboCurve: Breakeven Calculations

Description

Breakeven price represents the price per unit volume of oil/gas necessary to achieve a cumulative cash flow of 0 dollars. Thus, a price above breakeven would result in a positive cumulative cash flow whereas a price below breakeven would result in a negative cumulative cash flow.

Setup

After you create a scenario, you can model breakeven calculations in the Pricing Model. For this example, we will use the pricing Advanced View. However, the same principles applies to the Standard View. In the Pricing model, you can set up your Oil, Gas, NGL, and Drip Condensate as usual. These prices will be used to calculate economics apart from the breakeven price. For more information on how to model pricing, feel free to check the "ComboCurve: Pricing" article. 

After entering the standard prices, you can add another row "+ Key" to model the 8/8ths Breakeven Price.
Let's look at the options:
  1. Key
    1. you can select "8/8ths Break Even"
  2. Criteria
    1. Direct
      1. Gas price is determined by the input price of Gas 
      2. In the example above, this would be 4 $/MMBTU
    2. Based on Price Ratio
      1. Gas Price is determined by dividing the oil price by the ratio
  3. Unit 
    1. NPV Discount %
      1. The discount % of the cumulative cash flow 
  4. Value
    1. The value of the NPV discount %
  5. Price Ratio
    1. The ratio to calculate gas price
    2. Note: this is only required when selecting Criteria of "Based on Price Ratio"
In the example below, we are calculating Breakeven price based on a 10% discount rate and 20 oil/gas price Ratio

Logic

  1. Input a discount rate and a oil/gas price ratio (ratio not required if using a "Direct" criteria)
  2. Use two prices of oil [10,60] (flat) to overwrite the price model:
    1. If Criteria = "Direct", the gas price is the same as the input gas price
    2. If Criteria = "Based on Price Ratio", gas price will be calculated by oil price based on the ratio (flat)
      1. Example: if the ratio is 20, the gas price will be between 0.5 (10/20) and 3 (60/20)
  3. Algorithm calculates the cum discounted cash flow based on the new price model (differentials are not changed) on the input discount rate.
  4. Assume a linear relationship between oil price and cum cash flow from the 2 oil prices [10,60] and the 2 cum cash flows [cum1,cum2] to calculate the oil price that will result in 0 cum cash flow
    1. Example, if the cum cash flow at 10$/bbl oil price is -50 M$ and the cum cash flow at 60$/bbl is 200 M$, the resulting breakeven price will be 20 $/bbl
  1. For Gas breakeven price, the same logic is applied. 
    1. The price range for gas will be [0,5]
    2. The price range for oil will be:
      1. "Direct" Criteria: Oil input price 
      2. "Based on Price Ratio" Criteria: oil price is gas price range times the Oil/Gas Ratio 
        1. Example: if ratio is 20, oil price range will be between 0 (0*20) and 100 (5*20)

Running Scenario with Breakeven

After selecting the necessary inputs in the Pricing model, you can go ahead and click on "Run Scenario". Before you move on to running economics, you want to make sure that the Breakeven price output is selected. You can click on the + icon next to "Additional Oneline Summary Options" to expand the view and search for "Oil Break Even" and "Gas Break Even" 



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