Changes

# Some firms use mid-year discounting (rather than end-of-year discounting) as being more realistic.<ref name=Megill_1988>Megill, R. E., 1988, An introduction to exploration economics, 3rd ed.: Tulsa, OK, PennWell Books, 238 p.</ref> Some firms use continuous rather than annual discounting.

# Some firms use mid-year discounting (rather than end-of-year discounting) as being more realistic.<ref name=Megill_1988>Megill, R. E., 1988, An introduction to exploration economics, 3rd ed.: Tulsa, OK, PennWell Books, 238 p.</ref> Some firms use continuous rather than annual discounting.

# Although the final cumulative net present value can only be determined by projecting the cash flow model out through the full life of the field, the final few years will typically represent only a small fraction of its worth. Ordinarily, a field production model of about 15 years will be adequate for most purposes, except in the case of very large fields or in cases of "late" [[enhanced oil recovery]] (EOR) projects on older fields.

# Although the final cumulative net present value can only be determined by projecting the cash flow model out through the full life of the field, the final few years will typically represent only a small fraction of its worth. Ordinarily, a field production model of about 15 years will be adequate for most purposes, except in the case of very large fields or in cases of "late" [[enhanced oil recovery]] (EOR) projects on older fields.

# The present value of most projects will decrease as successively higher corporate discount rates are utilized. The exception would be an acceleration project<ref name=Thompson_etal_1985>Thompson, R. S., and J. D. Wright, 1985, Oil property evaluation, 2nd ed.: Golden, CO, Thompson-Wright Associates, 212 p.</ref>. The discount rate at which the present value is zero is called the ''[[Key economic parameters|discounted cash flow rate of return]].''

# The present value of most projects will decrease as successively higher corporate discount rates are utilized. The exception would be an acceleration project<ref name=Thompson_etal_1985>Thompson, R. S., and J. D. Wright, 1985, Oil property evaluation, 2nd ed.: Golden, CO, Thompson-Wright Associates, 212 p.</ref>. The discount rate at which the present value is zero is called the ''[[Key economic parameters#Discounted cash flow rate of return|discounted cash flow rate of return]].''

# All figures and estimates should be objective. You should neither purposefully ''overestimate'' (to sell the deal) nor ''underestimate'' (to be conservative and thereby protect yourself from being wrong). Be professional, give it your best shot

# All figures and estimates should be objective. You should neither purposefully ''overestimate'' (to sell the deal) nor ''underestimate'' (to be conservative and thereby protect yourself from being wrong). Be professional, give it your best shot

# It is a good idea to make several cash flow "cases" using different assumptions for reserves, number of wells, initial potentials (IPs), and decline rates. This is easy to do using modern software. Such ''sensitivity analyses'' give the decision maker a better idea of the range of possibilities for project outcomes. However, one shortcoming of many sensitivity analyses is that no probability of occurrence can be assigned to a given case. As a result, the decision maker has an idea of the ''range'' of possible outcomes, but no sense of the ''chance'' of occurrence of any one outcome Fortunately, this deficiency is readily correctable by using probabilistic ranges for key variables and Monte Carlo simulation to combine such variables. (For more information on ranges and probabilities, see the chapter on "Uncertainties Impacting Reserves, Revenue, and Costs.")

# It is a good idea to make several cash flow "cases" using different assumptions for reserves, number of wells, initial potentials (IPs), and decline rates. This is easy to do using modern software. Such ''sensitivity analyses'' give the decision maker a better idea of the range of possibilities for project outcomes. However, one shortcoming of many sensitivity analyses is that no probability of occurrence can be assigned to a given case. As a result, the decision maker has an idea of the ''range'' of possible outcomes, but no sense of the ''chance'' of occurrence of any one outcome Fortunately, this deficiency is readily correctable by using probabilistic ranges for key variables and Monte Carlo simulation to combine such variables. (For more information on ranges and probabilities, see the chapter on "Uncertainties Impacting Reserves, Revenue, and Costs.")