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Break-even price for upstream activities in Brazil: Evaluation of the opportunity cost of oil production delay in a non-mature sedimentary production region

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  • Szklo, Alexandre Salem
  • Carneiro, Jason Thomas Guerreiro
  • Machado, Giovani

Abstract

Some Latin American policy-makers and analysts state that it would be better to hold oil reserves in place than to produce and cash it now, given the recent oil prices spikes and the fear related to future oil supply disruptions. This article evaluates the strategy of delaying the start-up of oil production in a discovered field with proved reserves. A Reference Discounted Cash Flow (FCD-R) for a typical 350 million barrel Brazilian oil field was simulated. The study estimated which future oil price may render the project insensitive to a delay of 5, 10, 15 or 20 years in its production beginning. Additionally, the value of the in situ oil stock was calculated, providing the opportunity cost for delaying oil production in a frontier area, such as Brazil. It is an application of the Hotelling Principle. Findings indicate that progressive delays of 5 years in the start-up of operation of a typical oil field reduce its revenues by a factor of 2. A delay of 10 years would be justifiable at international oil prices higher than US $15/bbl. Delays higher than 10 years lead this break-even price to values between US $200 and 350/bbl.

Suggested Citation

  • Szklo, Alexandre Salem & Carneiro, Jason Thomas Guerreiro & Machado, Giovani, 2008. "Break-even price for upstream activities in Brazil: Evaluation of the opportunity cost of oil production delay in a non-mature sedimentary production region," Energy, Elsevier, vol. 33(4), pages 589-600.
    • Handle: RePEc:eee:energy:v:33:y:2008:i:4:p:589-600
    DOI: 10.1016/j.energy.2007.11.013
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    References listed on IDEAS

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    2. Goldemberg, José & Schaeffer, Roberto & Szklo, Alexandre & Lucchesi, Rodrigo, 2014. "Oil and natural gas prospects in South America: Can the petroleum industry pave the way for renewables in Brazil?," Energy Policy, Elsevier, vol. 64(C), pages 58-70.
    3. Won, Chaehwan, 2009. "Valuation of investments in natural resources using contingent-claim framework with application to bituminous coal developments in Korea," Energy, Elsevier, vol. 34(9), pages 1215-1224.
    4. Castelo Branco, David A. & Szklo, Alexandre S. & Schaeffer, Roberto, 2010. "Co2e emissions abatement costs of reducing natural gas flaring in Brazil by investing in offshore GTL plants producing premium diesel," Energy, Elsevier, vol. 35(1), pages 158-167.
    5. Castelo Branco, David A. & Szklo, Alexandre & Gomes, Gabriel & Borba, Bruno S.M.C. & Schaeffer, Roberto, 2011. "Abatement costs of CO2 emissions in the Brazilian oil refining sector," Applied Energy, Elsevier, vol. 88(11), pages 3782-3790.
    6. Draeger, Rebecca & Cunha, Bruno S.L. & Müller-Casseres, Eduardo & Rochedo, Pedro R.R. & Szklo, Alexandre & Schaeffer, Roberto, 2022. "Stranded crude oil resources and just transition: Why do crude oil quality, climate ambitions and land-use emissions matter," Energy, Elsevier, vol. 255(C).
    7. Rafael Henrique Mainardes Ferreira & Claudia Tania Picinin, 2018. "Bibliometric analysis for characterization of oil production in Brazilian territory," Scientometrics, Springer;Akadémiai Kiadó, vol. 116(3), pages 1945-1974, September.

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