Importance of Economics in Production and Reservoir Engineering
- Thomas C. Frick (The Atlantic Refining Co.)
- Document ID
- Society of Petroleum Engineers
- Journal of Petroleum Technology
- Publication Date
- September 1958
- Document Type
- Journal Paper
- 11 - 12
- 1958. Original copyright American Institute of Mining, Metallurgical, and Petroleum Engineers, Inc. Copyright has expired.
- 1.6 Drilling Operations
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In petroleum engineering work established profitability standards must be met in the development of an oil or gas lease. To determine profitability the petroleum engineer must know the starting place and the alternates of where and how to proceed with development. Are wells to be drilled for additional reserves, or are they to be drilled for rate of production only, or both? Wider well spacing plus the early application of secondary recovery processes might be more profitable than drilling wells on close spacing. Advantage must be taken in production and mechanical engineering to minimize well and lease investment and reduce operating costs. Contractual obligations and government regulations must be followed even though they are contrary to the best engineering practices. More than likely, cash availability and the tax position of the developer will affect the timing of the development of the lease or reservoir.
Why Is It Necessary to Determine Profitability?
Profitability guides managers in most of their business decisions. However, not all engineers, not to mention managers, accountants, labor leaders and economists, can agree on how to determine profitability. Some managers like to report profitability on the basis of per cent of dollar income rather than start with investment. Walter Reuther likes to determine profitability on initial investment rather than total investment. In the oil and gas producing business one of the most popular methods of determining profitability is the investor's cash flow method. In this method we calculate the maximum rate of return at which an investor can borrow money, invest it in the proposed project, and payoff the interest and principal from the return on the project.
The term profits has several meanings. One economic authority starts with what he calls gross operating profit, which is the difference between cash income and cash outgo. Gross operating profit is composed of production maintenance profits plus net profit. Production maintenance profits include wages of owners, business rent, and interest on money invested because, generally speaking, these items are costs which must be met if the business is to be carried on. The net profit is what you have left with which to pay dividends or to reinvest in the company.
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