Management's Use of Petroleum Engineering Evaluations
- John M. Houchin (Phillips Petroleum Co.)
- Document ID
- Society of Petroleum Engineers
- Journal of Petroleum Technology
- Publication Date
- July 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, 5.2.1 Phase Behavior and PVT Measurements, 4.2 Pipelines, Flowlines and Risers, 5.7 Reserves Evaluation, 4.6 Natural Gas, 5.1.1 Exploration, Development, Structural Geology
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Management is normally confronted with more profitable investments than it has funds available. It is only through accurate engineering evaluations that management can determine which proposed investments will result in the greatest company profit.
Why Engineering Evaluations Are Important
Engineering evaluations required and used by management must contain reserve estimates along with predicted rates of recovery and the economics of the proposal.
Several types of data are needed. The engineer needs knowledge of formation characteristics including types of rock, net pay thickness, porosity, permeability and unusual characteristics such as fractures. He must know about proration and allowables. Formation fluid characteristics such as initial gas in solution, reservoir volume factors, and relative permeability are important. Gas-oil ratios, pressure, and production performance history are important factors in the later life of a reservoir.
Profit Making Aspects
Management's interest in reserve estimates goes beyond the number of barrels of oil and rates at which it is produced. This interest includes evaluating the profit making aspects of a proposal. The most convenient and reliable yardstick for evaluating investments is the annual rate of return calculated by the discounted cash flow method. This method takes into account fluctuations in income over the life of an investment, the effect of federal income taxes, amortization and all other taxes and costs.
The rate-of-return concept calculated using predicted recoveries, and reserves from prospective properties and in the drilling of wildcats should be used to a greater extent, especially in these days of high lease costs in active areas of operations. A wiser selection of wildcat acreage will be made if consideration is given to rate-of-return studies from actual production experience in pools which have similar geologic formations and drilling and operating practices. The risk in leasehold and wildcat investments is being reduced appreciably by those managements who are looking at their engineering evaluations using comparative reservoir experience as well as the geological and geophysical justifications.
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