Changes

==Data requirements==

==Data requirements==

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 section]]s, 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

# Projected dry hole costs

# Projected [[dry hole]] costs

# Ultimate recoverable reserves (including secondary recovery)

# Ultimate recoverable reserves (including secondary recovery)

# Field area (and thus number of producing wells), unless it's a single-well project

# Field area (and thus number of producing wells), unless it's a single-well project

:<math>\text{After-tax NOI} = (\text{Net revenue interest}~\times~\text{Production}~\times~\text{Wellhead price})</math>

:<math>\text{After-tax NOI} = (\text{Net revenue interest}~\times~\text{Production}~\times~\text{Wellhead price})</math>

::<math>-~\text{Wellhead taxes}~-~\text{Operating costs}~-~\text{Federal income taxes} \ </math>

::<math>-~\text{Wellhead taxes}~-~\text{Operating costs}~-~\text{Federal income taxes} \ </math>

After the revenue and expenditure schedule has been determined, we can now calculate cash income taxes for our project. Finally, once the cash income taxes have been calculated for each year, the [[The time value of money|cash flow time diagram]] can be prepared and we are ready to calculate the net present value for our venture.

After the revenue and expenditure schedule has been determined, we can now calculate cash income taxes for our project. Finally, once the cash income taxes have been calculated for each year, the [[The time value of money|cash flow time diagram]] can be prepared and we are ready to calculate the net present value for our venture.

| '''NCF AFIT, $M''' || '''-1375.000''' || '''1359.098''' || '''578.462''' || '''314.450''' || '''168.376''' || '''87.377''' || '''44.916''' || '''19.417''' || '''4.795'''

| '''NCF AFIT, $M''' || '''-1375.000''' || '''1359.098''' || '''578.462''' || '''314.450''' || '''168.376''' || '''87.377''' || '''44.916''' || '''19.417''' || '''4.795'''

|}

|}

^{Source: After Thompson and Wright (1992)}<br>

:^{Source: After Thompson and Wright (1992)}<br>

^{Assumed facts:}<br>

:^{Assumed facts:}<br>

:^{Independent Producer and Royalty Owner status, therefore eligible for percentage depletion}<br>

::^{Independent Producer and Royalty Owner status, therefore eligible for percentage depletion}<br>

:^{NRI = 0.875, Wellhead tax on oil and gas revenue is 8%, annual operating cost is $24,000, incremental tax rate is 34%, oil price is $18/bbl, and gas price is $1.50/MCF}<br>

::^{NRI = 0.875, Wellhead tax on oil and gas revenue is 8%, annual operating cost is $24,000, incremental tax rate is 34%, oil price is $18/bbl, and gas price is $1.50/MCF}<br>

:^{Assumed Time 0 investments made on 1-1-91:}<br>

::^{Assumed Time 0 investments made on 1-1-91:}<br>

::^{Lease Bonus and G&G (depletable basis for tax calculation) = $125,000}<br>

:::^{Lease Bonus and G&G (depletable basis for tax calculation) = $125,000}<br>

::^{IDC's (100 % expensed for tax calculation) = $950,000}<br>

:::^{IDC's (100 % expensed for tax calculation) = $950,000}<br>

::^{Tangible expenditures (depreciable basis for tax calculation) = $300,000}<br>

:::^{Tangible expenditures (depreciable basis for tax calculation) = $300,000}<br>

:<sup>Estimated dry hole cost if the well is unsuccessful is $750,000 (After-tax = $750,000 x (1 - 0.34) = $495,000)

::<sup>Estimated [[dry hole]] cost if the well is unsuccessful is $750,000 (After-tax = $750,000 x (1 - 0.34) = $495,000)

A completed cash flow time diagram is shown in Table 2 along with the equivalent net present value calculation.

A completed cash flow time diagram is shown in Table 2 along with the equivalent net present value calculation.

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|}

The same steps also apply to a multiwell project. Field development projects are constructed by combining individual well models in a realistic time frame. The income tax calculation must be done on a total project basis since oil and gas taxation applies to the total property. An example of a multiwell field extension project is shown in Table 3.

The same steps also apply to a multiwell project. Field development projects are constructed by combining individual well models in a realistic time frame. The income tax calculation must be done on a total project basis since oil and gas taxation applies to the total property. An example of a multiwell field extension project is shown in Table 3. Since the project has a longer life than the example development well, the results are summarized in a slightly different format. The production, investment, and tax assumptions for the multiwell extension project are outlined below the table.

{| class="wikitable"

{| class="wikitable"

| '''Totals''' || '''680.632''' || '''1101.931''' || '''11991.572''' || '''7225.000''' || '''4766.572''' || '''1131.851''' || '''3634.721''' ||  || '''2729.760''' || || '''6859.396'''

| '''Totals''' || '''680.632''' || '''1101.931''' || '''11991.572''' || '''7225.000''' || '''4766.572''' || '''1131.851''' || '''3634.721''' ||  || '''2729.760''' || || '''6859.396'''

|}

|}

 

Since the project has a longer life than the example development well, the results are summarized in a slightly different format. [[:Image:Charles-l-vavra-john-g-kaldi-robert-m-sneider_capillary-pressure_3.jpg|Table 4]] presents the production, investment, and tax assumptions for the multiwell extension project.

:^{Annual operating cost is $24,000/well. Note in the last four years the operating costs are not a multiple of $24,000. This is because the typical well produces only a fraction of a year in the eighth year.}<br>

:^{Oil price is $18.00/bbl. Gas price is $1.50/MCF}<br>

:^{Cost of Failure is assumed to be the after tax cost of 2 [[dry hole]]s.}<br>

::^{(750,000 x (1 - 0.34) x 2 = $990,000)}<br>

::^{Time 0 investments made on 1-1-91:}<br>

:::^{DHC's (100% expensed for tax calculation) = $1,500,000 (for two dry  holes)}<br>

:::^{Tangible expenditures (depreciable basis for tax calculation) = $600,000}<br>

:::^{Lease bonus and G&G = $100,000}<br>

:::^{IDC's (100% expensed for tax calculation) = $950,000 (for one completion)}<br>

::^{The production forecast for the typical well in the Example Development Well was used for the Multiwell Extension Project. A typical well was assumed to be placed on production at the beginning of each of the years 1991, 1992, 1993, and 1994.}<br>

==Points to remember==

==Points to remember==

Here are a few final points that are important to remember concerning cash flow models:

Here are a few final points that are important to remember concerning cash flow models:

# Cash flow analysis is the third step in evaluating a proposed (or existing) petroleum property; it occurs after estimating (a) the reserves, rates, and costs and (b) the chance of success.  

# Cash flow analysis is the third step in evaluating a proposed (or existing) [[petroleum]] property; it occurs after estimating (a) the reserves, rates, and costs and (b) the chance of success.  

# Do not carry out cash flow analysis of "risked reserves"—the cash flow model is built on the success case

# Do not carry out cash flow analysis of "risked reserves"—the cash flow model is built on the success case

# Net cash flow is the sum of outlays and inflows.

# Net cash flow is the sum of outlays and inflows.

==See also==

==See also==

* [[Expected value and chance of success]]

* [[Risk: expected value and chance of success]]

* [[The time value of money]]

* [[Economics: time value of money]]

* [[Dealing with risk aversion]]

* [[Risk: dealing with risk aversion]]

* [[Fundamental economic equations for oil and gas property evaluation]]

* [[Economics: fundamental equations for oil and gas property evaluation]]

* [[Key economic parameters]]

* [[Economics: key parameters]]

* [[Economics of property acquisitions]]

* [[Economics of property acquisitions]]

* [[About taxes]]

* [[Taxes]]

* [[Introduction to economics and risk assessment]]

* [[Introduction to economics and risk assessment]]

* [[Uncertainties impacting reserves, revenue, and costs]]

* [[Uncertainties impacting reserves, revenue, and costs]]

[[Category:Economics and risk assessment]] [[Category:Pages with unformatted equations]]

[[Category:Economics and risk assessment]] [[Category:Pages with unformatted equations]]