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

:::^{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.

:^{Incremental tax rate is 34%}<br>

:^{Incremental tax rate is 34%}<br>

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

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

:^{Assumed investment schedule:}<br>

:^{Assumed investment schedule:}<br>

:^{Assumed Production Schedule}<br>

:^{Assumed Production Schedule}<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>

::^{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]]