Chapter 16: Petroleum Economics

Economics drives the entire oil/gas producing industry. Almost every decision is made on the basis of an economic evaluation. Economic evaluations are also performed to determine reserves and the “standardized measure of value” for reporting purposes for publicly held companies. In many cases, the goal of the company is to make decisions that have the best chance of maximizing the present day profit. This chapter discusses economic evaluation under two conditions. First, techniques that assume we know the future parameters with certainty are discussed. Later, methods of handling the inherent uncertainty involved in oil/gas operations are discussed.

Having stated a company goal in terms of profit, it behooves us to examine the definition of profit. There are at least three ways to calculate profit, each with its own set of assumptions and rules and each leading to a different answer. The three models are the net cash flow model, the financial net income model, and the tax model.