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==Data requirements==
==Data requirements==
[[File:Charles-l-vavra-john-g-kaldi-robert-m-sneider capillary-pressure 1.jpg|thumbnail|left|'''Table 1.''' Cash flow model for a development well]]
The basis of economic evaluation of any proposed drilling venture—a new field, pool, or just a single well—is the ''cash flow model'' of investments, expenses, taxes, and wellhead revenues involved with the project. The values for the parameters in this model must come from a geotechnical analysis (including maps, cross sections, and reservoir analysis) of the anticipated new field or well and from geotechnical estimates of area, ultimate recoverable reserves, and projected well production schedules. Here are the general data that are required:
The basis of economic evaluation of any proposed drilling venture—a new field, pool, or just a single well—is the ''cash flow model'' of investments, expenses, taxes, and wellhead revenues involved with the project. The values for the parameters in this model must come from a geotechnical analysis (including maps, cross sections, and reservoir analysis) of the anticipated new field or well and from geotechnical estimates of area, ultimate recoverable reserves, and projected well production schedules. Here are the general data that are required:
# All front end costs—leases, geology and geophysics (G & G), overhead, exploration drilling, and completion costs
# All front end costs—leases, geology and geophysics (G & G), overhead, exploration drilling, and completion costs
# Abandonment costs
# Abandonment costs
# Annual federal income taxes. The model can be adapted for the analysis of international prospects by changing this item in the cash flow model to "outsider's take." Simply apply the [[About taxes|tax rules]] for that country.
# Annual federal income taxes. The model can be adapted for the analysis of international prospects by changing this item in the cash flow model to "outsider's take." Simply apply the [[About taxes|tax rules]] for that country.
# Anticipated price or cost escalation schedule, if any (the example shown in 1 uses the constant dollar concept, thus no price or cost escalation schedule is provided). Inflation (loss of purchasing power) is also assumed to be zero.
# Anticipated price or cost escalation schedule, if any (the example shown in [[:Image:Charles-l-vavra-john-g-kaldi-robert-m-sneider capillary-pressure 1.jpg|Table 1]] uses the constant dollar concept, thus no price or cost escalation schedule is provided). Inflation (loss of purchasing power) is also assumed to be zero.
# Net revenue interest (NRI) of lease (1.00 - royalty interest) and company share of working interest
# Net revenue interest (NRI) of lease (1.00 - royalty interest) and company share of working interest
# Company discount rate
# Company discount rate
==Calculations in the cash flow model==
==Calculations in the cash flow model==
[[File:Rose time-value-of-money 1.jpg|thumbnail|'''Table 2.''' Comparison of project cash flows and equivalent present value fir example development well (in $ thousands)]]
[[File:Rose time-value-of-money 1.jpg|thumbnail|left|'''Table 2.''' Comparison of project cash flows and equivalent present value fir example development well (in $ thousands)]]
The ''net cash flow'' (NCF) for each assumed time period, including time 0, can be determined using the following equation.
The ''net cash flow'' (NCF) for each assumed time period, including time 0, can be determined using the following equation.