A selection of subjects that cover the economic evaluation of prospects, or groups of prospects in a concession or play.

- Overview
- Some basic principles
- Cashflow calculations
- Taxation
- Contract types
- Economic Cutoff estimation
- Expected Monetary Value (EMV)
- Group of prospects
- Summation of reserve estimates
- Decision trees
- Oil price, Gas price
- Scenarios
- Ranking of opportunities

Economic analysis is, in this context, the translation of barrels of recoverable oil or cubic feet of gas into dollar value. There is an interaction between the meaning of "recoverable" and economics, because secondary recovery is more costly than primary, not to speak of enhanced recovery. When we say "dollar value" we have to make clear whether we speak of real value (considering inflation) and/or present value (money in the future has normally less value than today). Oil and Gas prices obviously are most important amongst the various factors in the calculation. Unfortunately, such prices are quite unpredictable in the long term, such that calculations are often made for a number of oil price scenarios. To complicate matters further, the types of contract that govern the possible profits for a company are many, and history has shown painfully that a contract may not last till its specified end date, through a sudden re-negotiation or nationalization. These aspects will be highlighted in the following pages. You may also find the paper by Haldorsen (1996) useful as an introduction that covers most of the economic aspects of evaluation and decisionmaking. A more recent book that has been made available on the internet is by Kasriel & Wood (2013), which is specifically aimed at the Upstream.

Here are some definitions of the terms that are commonly used:

**Inflation**

**Real value**

**Present Value****Cash Surplus****Earning Power****Pay-out time****Capital Expenditure****Operating Costs****Capex per barrel plateau production****Unit Technical Cost****Ultimate Recovery per Well****Well Initial**

The PV calculations become very important if the phasing of capital expenditure is made over a number of years and when the positive cash flow out of production comes much later over a twenty or more years period. For instance, the PV value of $ 100.- in the year 2000 is only $ 32.69. This results from discounting the $ 100.- by 15% eight times for the eight years between the middle of the year 2000 and the middle of 1992.

The formula for calculating PV of an amount is given in its simplest form as:

where X is the undiscounted amount in the future, d the discount rate (as a fraction) and n the number of years. This the "discrete" formula. It can be argued that money can be re-invested in the company continuously. Therefore, the above formula would not be entirely correct. The difference between annual and continuous discounting can best be explained by considering the growth of a capital sum X that is put in a savings account with annual interest 100i%. Then similar to the above formula the growth of capital on the annual basis is:

Now assume that the year is divided into m equal parts. The interest over the m-th part of the year is i/m. Hence:

Capital growth on a continuous basis is derived by letting m increase to infinity:

This calculation uses the mathematical fact that:

where e = 2.7183...

When discounting, the X is divided by

Well production is a function of the viscosity of the oil, the temperature of the reservoir, hence depth, the "drawdown", i.e. pressure differential between the formation and the borehole/tubing, permeability, and the "skin factor" a measure of the damage by drilling to the formation, that may reduce the inflow into the well. Translated into factors a geologist might be able to estimate for a prospect, we get the following proxies: API gravity, depth and porosity.