Changes

# A permanent alternative to any petroleum venture is to put the investment capital "in the bank" (that is, alternative safe investments), where it will earn regular interest at the corporate rate.

# A permanent alternative to any petroleum venture is to put the investment capital "in the bank" (that is, alternative safe investments), where it will earn regular interest at the corporate rate.

# If prices and costs are assumed to be in terms of constant purchasing power, then the discount component should only include the real interest component. The inflation component should not be included. If the prices and costs are escalated, then the discount rate selected should include the real interest rate and the inflation component.

# If prices and costs are assumed to be in terms of constant purchasing power, then the discount component should only include the real interest component. The inflation component should not be included. If the prices and costs are escalated, then the discount rate selected should include the real interest rate and the inflation component.

# Higher discount rates tend to favor shorter term and lower dollar volume projects (in preference to longer term and higher dollar volume projects), whereas lower discount rates allow substandard projects that may be a drag on corporate earnings. Either excess is deleterious, but the excessively high discount rate is clearly more harmful (Capen, pers. comm., 1990).

# Higher discount rates tend to favor shorter term and lower dollar volume projects (in preference to longer term and higher dollar volume projects), whereas lower discount rates allow substandard projects that may be a drag on corporate earnings. Either excess is deleterious, but the excessively high discount rate is clearly more harmful.

# Some firms use mid-year discounting (rather than end-of-year discounting) as being more realistic (see Megill, 1988)<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 (see Thompson and Wright, 1985)<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 ''discounted cash flow rate of return'' (DCFROR) (for more information on DCFROR, see the chapter on [[Key economic parameters]]).

# 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 ''discounted cash flow rate of return'' ([[Key economic parameters|DCFROR]]).

# 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 professionalgive 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

12.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

[[File:Thompson__building-a-cash-flow-model__Table_1.png|thumb|{{table_number|1}}Cash flow model for a development well]]  

[[File:Thompson__building-a-cash-flow-model__Table_1.png|thumb|{{table_number|1}}Cash flow model for a development well]]  

[[File:Thompson__building-a-cash-flow-model__Table_3.png|thumb|{{table_number|3}}Cash flow model for example multiwell extension project]]  

[[File:Thompson__building-a-cash-flow-model__Table_3.png|thumb|{{table_number|3}}Cash flow model for example multiwell extension project]]  

[[File:Thompson__building-a-cash-flow-model__Table_4.png|thumb|{{table_number|4}}Assumptions for example multiwell extension project]]  

[[File:Thompson__building-a-cash-flow-model__Table_4.png|thumb|{{table_number|4}}Assumptions for example multiwell extension project]]

==See also==

==See also==