Abstract
Economics performed by projected cost per unit analysis will give better insight into the merits of an oil production project than conventional measurements. This alternative economic metric can easily be used to determine if the project meets the objectives of a particular oil company. The proposed method will give pertinent values to see if return on investment, return on capital employed, operating expense, and cash flow goals will be met. As an additional benefit, cost per unit analysis also incorporates all the accounting pseudo charges. The inclusion of all actual and financial impacts will give a clearer picture as to the outcome a project will achieve. The calculations are not dependent upon predicting future oil prices or assigning a time value to money. Conventional economic measurements (net present value (NPV), internal rate of return (IRR), profitability indexes) can be misleading as to the actual benefit the project has for an oil company. They require that you predict oil prices and, in the case of NPV, assign a time value to money. These typical economic measures were designed to compare one project against another. High IRRs for capital investments can be due to initially high oil production and/or high tax regimes that allow for accelerated depreciation. A good NPV is sometimes achieved just by the large size of a project. Examples will be shown how projects with excellent NPVs and IRRs turned into disastrous economic failures despite performing close to prediction. Using the alternative method described in this paper would assist in avoiding costly mistakes and will help achieve the financial goals a company aspires.
