Society of Petroleum Engineers 6200 North Central Expressway Dallas, Texas 75206
THIS PAPER IS SUBJECT TO CORRECTION
American Institute of Mining, Metallurgical, and Petroleum Engineers, Inc.
Industry relies on various economic parameters to select investment opportunities. parameters to select investment opportunities. Utilization of these parameters is not always consistent with corporate goals of maximizing treasury growth and maintaining liquidity. Several new parameters are presented here to illustrate shortcomings in the parameters currently in use and recently proposed. More importantly, we indicate why parameters for selecting projects are only models of corporate profitability and, like all models, do not apply profitability and, like all models, do not apply to every company at every point in time.
There are many limitations on the conventional economic parameters—payout, leverage present worth, present worth/investment, rate present worth, present worth/investment, rate of return, and others. Although utilization of these parameters has not always resulted in achieving corporate goals, they continue to be used because they have been successful in generating corporate profits. However, in very few cases have profits been maximized and liquidity been maintained at all times.
The ideas to be presented will apply to all areas of the petroleum industry, but particularly to capital investment decisions. particularly to capital investment decisions. There are two main objectives to be presented. The first is to create an awareness of the limited flexibility offered by conventional economic parameters for investment decisions. parameters for investment decisions. The second objective is to present approaches that better evaluate the effect of different life projects on growth of the corporate treasury. projects on growth of the corporate treasury. Since all investment decision processes involve choosing between several alternatives that rarely have the same life span, this new approach should offer more realistic investment criteria.
The industry has maintained a profit position with the use of conventional economic position with the use of conventional economic parameters. However, with rapidly increasing parameters. However, with rapidly increasing costs and smaller reserves in new discoveries, the investment criteria utilized in decision making has become, and will continue to be, more critical than ever. The base income of most large corporations today is long-term projects that were initiated in the 1950's or projects that were initiated in the 1950's or early 1960's. In an attempt to replace production, most companies operating in the U.S. production, most companies operating in the U.S. are choosing high initial potential, short-term projects, and are foregoing participation in projects, and are foregoing participation in the long-term projects that would provide the base income of the future.
