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Economic Calculations

Any decision an E&P company makes is an integrated process that involves economics,
planning, finance and risk management. Therefore, an understanding of how the technical
decisions made might impact the business goals is important.

An economic evaluation is done to justify a decision that will demand a capital
expenditure (drilling new wells, equipment purchases like compressors, workovers) or
impact operational costs. Additionally, short-term (monthly) economic goals need to be
balanced with the longer-term (3-5 year) financial objectives of the company. Ultimately,
management also uses economic evaluations for corporate budgeting, government and
investor reporting, and valuations of oil and gas properties.

Uncertainty and risk both play huge roles in any E&P company’s decision-making.
Economic uncertainties (e.g., in oil prices) have to be taken into account, which can have
a significant impact on the economics of any project.

The goal of this section is to provide some basic knowledge and techniques for
performing investment analysis for geoscientists and engineers. At the end of this section,
they should be able to understand the concepts and calculations needed for an exploration
or field-development project.

Investment and economic analysis can be divided into two main areas: cash flow analysis
and economic decision measures.

Basic Cash Flow

A basic cash flow takes a production estimate and applies price to calculate a revenue
stream. From this revenue stream, we subtract royalties and operating expenses to
achieve an operating income. Capital is then removed to create a Before-Tax Cash Flow
(BTCF). Income taxes are then calculated, and the After-Tax Cash Flow (ATCF) is
created.

Revenue = Production Volume * Price

Operating Income = Revenue – (Royalty + Operating costs)

BTCF = Operating Income – Capital expenditures

Taxable Income = Operating Income – Depreciation (DD&A)

ATCF = BTCF – Taxes Payable

Where:

BTCF = Before-Tax Cash Flow

ATCF = After-Tax Cash Flow

DD&A = Depreciation, depletion and amortization

Production Volumes

In Petrel, production volumes can be obtained from either the ECLIPSE or FrontSim
reservoir simulators. These volumes can be oil, water, gas, or natural gas liquids (NGL)
production, or water and gas injection values.

Prices

Price is the monetary value received for each barrel of oil or cubic foot of gas produced
and sold. Secondary by-products (NGLs) may also be sold from some reservoirs. Prices
may be kept at a constant value or escalated over time.

Escalations are predictions of how the price will change based on market conditions.

The quality of the hydrocarbon being sold (API density, absence of impurities like H2S,
etc.) can also affect the product price.

Royalties

Royalty is value deducted from the revenue stream, which usually has no obligation
toward covering expenses. It is considered to come “off the top”, after product quality
adjustments, but before operating costs or investments are deducted.

Many different formulas are used for the calculation of royalties, which are dependent on
the fiscal regime of a particular region.

Operating costs

Operating costs are the day-to-day costs of operating a property and maintaining
production. Typical charges would include fluid processing costs, lease electricity,
chemicals, water disposal, and overhead. They are identified with a specific property and
might include lease maintenance, treating fluids, general repairs, fuel and electricity, and
secondary or enhanced recovery operations. Overhead type charges such as salaries and
office costs are usually grouped with operating expenses in a basic cash flow analysis.

They are normally deductible for income tax purposes.

Common methods of scheduling operating costs over time are:

Variable ($/bbl or $/mcf)

Well count ($/well/month or $/well/day)

These measures should. age. Most assets lose their value over time (in other words. They often have salvage value. they may be offset by any recoverable equipment sold as salvage. and other non-equipment charges. Spent at the end of the life of a project. It is at this point that tangible assets are depreciated over time. equipment and facilities. and buildings.Fixed (M$/month or M$/year) Capital investments Capital consists of investments for drilling. at the minimum: Allow one to distinguish between acceptable and unacceptable projects by evaluating them with established standards and practices. Depletion is concerned with the exhaustion of mineral reserves as a result of production of these reserves. depletion and amortization Depreciation is a non-cash expense that reduces the value of an asset as a result of wear and tear. Income or Federal Taxes Once an Operating Income has been established. they are considered spent in the scheduled year for the Before-Tax Cash Flow. mud and chemicals. exploration. Decision Measures In order to assess an economic calculation or to compare competitive plans. reducing the income stream available to be taxed. Intangible investments are drilling fees. The tax rate is applied to Taxable Income. Tangible investments are equipment purchases. one should apply several decision measures to determine the profitability. Amortization is the writing off of an intangible asset investment over the projected life of the assets. and the After Tax Cash Flow is created. or obsolescence. income taxes should be calculated. and recovered over time for the After-Tax Cash Flow. Depreciation. and must be replaced once the end of their useful life is reached. They typically have no salvage value. such as pumping units. pipelines. taxes are subtracted. they depreciate). Usually broken down into Tangible and Intangible categories. logging. . compressors. Costs to abandon an area or location are sometimes grouped with capital investments.

Internal Rate of Return (IRR). Give some insight into the outcome of a proposed project on the overall profit of the company. Total capital exposure). Rate of return (ROR) or internal rate of return (IRR) is the single discount rate that produces a NPV of zero. Decision measures can generally be grouped into three categories: 1. Net Present Value (NPV). Some decision measures embrace the concept of time value of money. money received yesterday is worth more than money received today.Enable one to rank the best investment project from a group of projects.and medium-term risk impact (for example. earning additional value. And give a measure of rate by which the revenue is generated in the project. Competitive measures: These can be supply cost measures like break-even prices. . risk management.) Generally a project with positive NPV adds value to the investors in the project. Known as the “bang for the buck” indicator. Terminology The economic indicators can be described as follows: Net present value (NPV) = present value of cash inflows – present value of cash outflows (or minus initial investment. a negative NPV will not generate an adequate return. you must delay the investment. Payout Period. Also consider that inflation will erode the value of money. Consider that you can take yesterday’s earnings and invest it. or hurdle rates or financial measures such as earnings or return on capital employed (ROCE). this indicator is similar to the DPI. It simply divides total NPV by total capital. it is very useful for ranking projects when capital is limited. Profit/Investment ratios (PIR)). It is also described as the discount rate that equates the present worth of cash flows to be equal to the present worth of the investments. Economic decision measures are a range of different indicators defined and employed for the comparison process of a group of projects. Value creation measures: These summarize future net cash flows in today’s money (for example. Each has its advantages and disadvantages. Determine if the project adds value or return to the investors. 2. Survival Measures: These place an importance on short. Money is worth less. the longer you have to wait to receive it. and conversely. If you have to wait to receive money. 3. therefore potentially losing money. Profit to Investment Ratio (PIR) – also known as the Return on Investment (ROI). In the same regard.

The Merak Economics process automatically obtains the capital expenditure profile from the simulations for development or infill drilling and workovers. it is strongly recommended to request the ECLIPSE or FrontSim simulations to output additional data used to enhance the economic calculations.Discounted Profitability Index (DPI) is a measure of investment efficiency. and the results are added to the Results pane. The point at which the cumulative net cash flow stream becomes positive is the Payout. Consistent use of the same discount rate is necessary when comparing projects by using DPI. Go to the Results tab. by selecting the appropriate identifier from the Results pane and dragging it onto the Domains box on the Calculation tab in the Merak Economics dialog box. In a typical economic run. You can compute economic indicators for the simulation cases listed in Petrel’s Cases pane. you can combine wells. Payback period is the time to return an investment. and then select the Economics check box in the Line Graphs (SUMMARY) option group. Preparing your data for economic simulations If performing economic calculations. groups. or fields. if these options have been used. and fields together. This indicator is sometimes called PI. To do this. The data for all valid domain items are added together for each simulation in the run. and then double-click the Define simulation case process to open the Define simulation case process dialog. It is calculated from the net cash flow stream. groups. and is used to evaluate multiple rates of return projects relative to the investment requirements. You can perform economic valuations for single wells. open the Simulation folder on the Processes pane. Using the Merak Economics process Use the Merak Economics process to create or edit an economic model that can be used to compute economic indicators. .

Open the Simulation folder in the Processes pane. You can set up an economic-calculation run from the Simulation folder in Petrel’s Processes pane. FMWWT: Total number of workover events in total. .When you select the Economics check box and run an economic calculation. or from within the Process Manager. FMWWO: Total number of workover events during this timestep. FMWEN: Total number of injection wells currently flowing. Creating an economic calculation run This section describes how to build and run an economic calculation. FMWDR: Total number of drilling events during this timestep. To set up a run from within the Processes pane: 1. FMWDT: Total number of drilling events in total. the simulator will output the following summary vectors: FMWPR: Total number of production wells currently flowing.

. choosing the identifiers (wells.2. Double-click to open the Merak Economics process. choosing an economics model. 3. groups. Click the Calculation tab to define the basic parameters of your economic calculation (see Defining basic economic-calculation parameters). or field) for which you want to perform calculations. This includes choosing whether you will create a new run or overwrite an existing one. The Info tab provides a brief description of how the Merak Economics process works. and choosing the simulations that you want to use for the calculation.

and Butane if desired (see Defining mapping for ethane. choosing how drilling costs will be defined. . and butane). propane. setting up Peep Export file parameters if desired. Propane. This includes defining the start date of your calculations.4. Configure the settings for your economic calculation (see Configuring settings for an economic calculation). 5. Define mappings for Ethane. and choosing the data-sampling frequency for your simulation.

you can do one of the following: Click the Run button to perform the calculation for the currently selected run. When you perform a run. These changes are saved. and close the Merak Economics dialog box. and then passes the results back to Petrel for inclusion in the Results pane. and will be reflected the next time you select that run on the Calculation tab. and will be reflected the next time you select that run. Any changes you have made to the run’s properties are saved. all input data is sampled into the specified frequency and passed on to the Merak Economic Engine. but leave the Merak Economics dialog box open. These changes are saved. Click the Apply button to apply any changes that you have made to the currently selected run. Click the OK button to save any changes that you have made to the currently selected run. Defining basic economic-calculation parameters . which performs the economic calculations. Once you have set up your economic calculation as desired. Click Cancel to close the Merak Economics dialog box without saving any changes that you have made to the currently selected run. and will be reflected the next time you select that run.6.

When you select this option and choose an economic run from the drop-down list. Settings. by selecting the run upon which you want to base your new run. or overwrite an existing run: 1. and Mapping tabs. changing it as desired.Use the Calculation tab of the Merak Economics dialog box to define the basic parameters of your calculation. and the settings from that run populate the Calculation. the wells. the Calculation. Tip: When you open the Merak Economics dialog box. groups. This enables you to create a new run that is similar to a previously created run. and the simulations whose data will be used as inputs for the run. At this point you can: . or field for which the calculation will be performed. the last-used run is automatically loaded. Overwrite existing run: Select this option if you want to base your run on a previous economic calculation run. How to define basic economic-calculation parameters Choose whether you want to create a new run. and then creating a new run based on your changes. Settings. including the economic model that will be used for the calculation. and Mapping tabs are updated with that run’s properties.

Create new run: After selecting an existing run and changing its properties on the Calculation. its properties are not updated until you click the Run. As a result. To select all the identifiers between two points. You may want to do this if the data in the simulations selected for the run has changed since you last performed the economic run. Apply. When you save a new run. Specify the identifiers (wells. In the Economic Model option group. select (or multi-select) them. or field) for which you want to obtain data. overwriting the previous run results and changing the run’s properties. or for an entire field. the two selected identifiers and all those between them will be selected. you can edit a model before selecting it. choose the economic model upon which you want to base your calculation. The sum of all the production. and then run it again. When you change a run.Perform a run using the current settings. and then click the Run. Select an existing run whose properties are similar to the new run you want to create. and Mapping tabs. overwriting the results for that run. it is added to the Overwrite existing run drop-down list. and then click the Add selected domains button. If necessary. etc. Apply. Changes might include adding wells to (or deleting them from) the Domains list. select this option to create a new run based on your changes. and then click the Remove selected domains button. groups. basing your run on a different set of drilling costs. and the run upon which it was based remains unchanged. or OK buttons to save your new run. basing your run on a different simulation. To add identifiers to the Domains box. While you can perform a run for different combinations of wells or groups. generally you will not combine these identifiers with the Field identifier in the same run. then press and hold the <Shift> key. Create a new run based on the currently selected run (see below). Tip: To multi-select identifiers from different points in the tree. 2. 3. by adding them to the Domains box. or OK buttons. you will need to remove the Field identifier before performing the run. and then select all the desired identifiers. and select another. select them from within the Identifier folder in the Results pane. This saves work. and drilling/workover outputs for all items in the Domains list is used for an economic run. injection. or create a new model (see Editing or creating an economic model). and you want your run to reflect those changes. select one. press and hold the Ctrl key. . To remove identifiers from the Domains box. Change the selected run’s properties as required. minimizing the number of changes you will have to make in order to create the new run. You can perform a run for selected wells and/or groups from one or more simulations. Settings. Type a name for your new run in the adjacent field. if you are adding wells or groups to the Domains box.

configure the settings (see Configuring settings for an economic calculation) and define the mapping (see Defining mapping for ethane. or delete a previously created model. 5. To perform any of these operations. Specify the simulations from which you want to obtain data for your economic calculations: To add simulations to the Simulations box.4. You can add all the simulations within a case by selecting the case and then clicking the Add selected simulations button. . and then click the Remove selected simulations button. and then click the Add selected simulations button. after selecting an economic model. and butane) if desired before running your simulation. Editing or creating an economic model When performing economic calculations in Petrel. select (or multi-select) them. click the Edit/Create button on the Calculation tab of the Merak Economics process dialog box to open the Merak Economics Module dialog box. you can view or edit the contents of that model. you can also add that calculation to the Simulations box for inclusion in your run. select them from within any of the cases on the Cases pane. If you have performed a dynamic data calculation on a case. Once you have finished defining your economic-calculation parameters. propane. To remove simulations from the Simulations box. create a new economic model.

which contains a list of models representing over 100 fiscal regions. How to edit the properties of an economic model 1. 2. On the Oil Price tab. etc..How to view the properties of an economic model 1. tax rates. Select the model from the Economic Model drop-down list whose properties you want to edit. Then select the desired price file from the drop-down list. Edit the values on any of those tabs as appropriate and press Apply or OK when done. 2. . vary for each one. defining how the royalty. Click the General. 3. Click the General tab: Select the desired fiscal model from the Fiscal Model drop-down list. select the Use Existing Oil Price File option button if you want to base the oil prices in your model on a saved oil-price file. Select the model from the Economic Model drop-down list whose properties you want to view. Operating Cost or Capital Cost tabs to view the data on those tabs.

Continue until you have added all the desired prices to your array. select the Use Price Array option button. set the operating-cost and all other capital-cost interest percentages for your asset (this assumes that you will be using the same percentage for all of these interests). On the Gas Price. Click the Operating Cost tab: .If price files are not available (or if you want to create a custom price array). Click the Advanced Settings button to open the Advanced Settings dialog box: In the Discount Rate field. 3. In the Revenue Interest field. and then create an array by clicking the first row in the Date column. In the Cost Interest field. then choosing the desired month and year. and Ethane Price tabs set up prices in the same way as you did for oil prices. Butane Price. Then type a price value for that month. Propane Price. type the discount rate percentage that you want to use for economic calculations or analysis. set the Net-Profit working-interest percentages for your asset (for U. and Canadian regions only).S.

a group. Use the Drilling and Workover fields to input any drilling or workover costs on a per- well basis.In the Fixed Operating Cost option group. gas. equipment depreciation or expensed capital items). Take the total costs and determine average values.. specify the operating costs for oil. Click the drop-down list in the Type column and choose a cost type. specify fixed operating costs for each active producer or injector well per month. or injection. or ethane.g. In the Variable Operating Cost option group. In the NGL Operating Cost option group. and then input them here. water. or a field). The day of the month which the cost is incurred does not matter for economic calculation purposes. Capital types can vary between fiscal regions. In the Amount column. This is important because it determines how this cost will be treated in economic calculations (e. Also add any other fixed operating costs on a per- month basis (this could be for a well. Click the Capital Cost tab to specify your capital expenditures: Click the first row in the Date column. butane. . and then choose the desired month and year for your first expenditure. on a BOE basis. specify the operating costs for propane. specify the amount of the expenditure. 4. on a per-production-unit basis.

quarterly. 2. 2. and choosing the data-sampling frequency for your simulation. Click OK to delete the model. select the model from the Economic Model drop-down list that you want to delete. 5. 3. A pop-up message asks you to confirm the deletion. Click the Create button. 3. semi-annually. In the Merak Economics Module pop-up dialog box. Configuring settings for an economic calculation The Settings tab of the Merak Economics process is used to configure the settings for the economic calculation. How to create a new economic model 1. In the pop-up dialog. select the model from the Economic Model drop-down list upon which you want to base your new model. or annually) in order to complete additional capital expenditures over that period.These costs are multiplied by the number of drilling/workover events in a given period (monthly. Click the Delete button. Working in the Merak Economics Module dialog box. Working in the Merak Economics Module dialog box. The new model is added to the Economic Model drop-down list on the Calculation tab. How to delete an economic model 1. Edit the model if desired (see How to edit the properties of an economic model). or type a different name to create a new model based on your changes. and then click OK. click OK to save the changes to the current model. setting up Peep Export file parameters if desired. This is in addition to any costs incurred in the Capital Expenditure grid. This includes defining the start date of the calculations. . enter the desired name for your new model. choosing how drilling costs will be defined. 4.

To override drilling costs. The Merak Economic process will then look for the value associated with that variable. the Average Drilling Cost field becomes available. the calculation engine takes data starting from the selected date. the drilling cost for that well is displayed in the Average Drilling Cost field. and then click the Add well log button to use the drilling cost from that log. you can also enter a variable name (that was previously defined in the workflow) as your Average Drilling Cost value.pex) file into which you want to add the economic run. select the Override Economic Model’s drilling cost check box. or P10 Cost log. the run looks at the first result output date from the simulation. you can use the Valuation Date drop- down calendar to set a start date. and each data set also has its own start date. The Merak Economics process will create the Peep Export file. P50 Cost. You can override these costs if desired. replacing them with costs from the Osprey Risk Plug- in. which you can then import into Merak Peep for analysis. See the Using the Merak Economics process within the Process Manager section for more information. and then uses the data from that date forward to calculate the value for the first month.How to set when you want calculations to start for an economic run Each simulation has its own start date. Note: The Valuation Date chosen here corresponds to the Discount Date used in Merak Peep. How to send results of an economic run to a Peep Export (PEX) file: Select the Peep Export check box. Type a value that will be used for every well in the run. In this case. When you select an Osprey Risk well log. or with an average cost that you define. Select the Define manually option button to input your own drilling cost. and then specify the path and name of the Peep Export (*. You can use the Date Settings option group to define the date from which you want data passed for an economic run: Define from simulation: When this option is selected. Define manually: When this option is selected. When the Merak Economics process is run from the Process Manager. When this is selected. and use it in the calculation. How to override the economic model’s drilling costs Normally. and then: Select the Define from Osprey Risk Plug-in option to use Osprey Risk Plug-in costs from the Input pane. Select a P90 Cost. . drilling costs come from the economic model (defined as Capital Cost). and this value is used for every well in the run.

Defining mapping for ethane. How to map NGLs to production outputs 1. This process is optional. then the result will be less accurate. and butane Some by-products are frequently recovered as part of field operations. Propane. How to set the data-sampling frequency Working in the Data Sampling Frequency option group.You cannot import Peep Export files generated from Merak Peep back into the Merak Economics process. you can specify which outputs from production streams that you will use to represent Ethane. Select the check box next to the natural gas liquid for which you want to create a mapping (e. If desired. propane.g. Examples of these include natural gas liquids (NGLs) and condensate. using the Dynamic Data Calculator. . The results of these calculations may then be used on the Mapping tab to account for the economics associated with NGLs. and is only required if you have NGLs in your recovery stream. and Butane. It is common practice to establish the volume of NGLs recovered by applying various empirical formulae. select one of the option buttons to define the frequency at which input data is sampled from simulations.. If the sample frequency is larger than the frequency of input data. Ethane (C2)).

and you will need to select a component to represent the NGL 5. Select the check box(es) next to the desired economic run(s) from the Cases pane. Repeat the previous steps to map NGLs for Propane (C3) and Butane (C4). 3. select a fluid from within the Fluid Identifier folder in the Results pane. then the Component field becomes available. then that rate will be used to represent the NGL.. 4. If the property that you added is non-component-based (e. NGL production rate). Any associated indicators. Select the check boxes next to the desired indicators or profiles to view them in the window. 3. profiles. . 2. How to view results of economic calculations 1.2.g. Visualizing the results of economic calculations After you run an economic calculation. select Simulation or Calculator to define the type of property you will be using. the results are stored in the Economic Indicator and Economic Profile folders in the Results pane. From the Results pane. 6. and then click the Add component button to add the selected component to the Component field. Insert a new Function window from the Window menu (Window | New function window). If the property that you added was component-based. or rates will become available on the Results pane (the names of those that are unavailable are grayed-out). Click the Add property button on the current row to populate the Property field with the property that you selected. select the name of the result property that you want to use to represent the current NGL. If the property that you added is component-based. In the Source drop-down list.

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In addition. it provides facilities for maintaining an audit trail to understand who did what.Rates obtained as a result of Merak Economics calculations are stored in the same Rates folder as rates from the simulation(s). It also forms the basis as to how uncertainty in economic parameters (e. The Merak Economics dialog box from within the Workflow will look like the example below.. when and how. drilling capital costs or oil price) can be modeled efficiently. Using the Merak Economics process within the Process Manager The Merak Economics process can be used inside the Process Manager to automate the generation of economic results.g. The following examples illustrate the use of the Merak Economics process in the Process Manager. Example 1 (Running the Economics Process once over a set of cases): This example shows how to generate an economic run for every case within a folder (e. These rates account for the effects of the fiscal model used in the economic calculation. .. Note that the simulation in the Simulations box corresponds to the variable name in the Child reference field of the Process Manager (above).g. after running an Uncertainty Workflow).

Note that each simulation has a Merak Economic run with the name specified in the above dialog. In this example. and each of these runs will use a different economic model that corresponds to high. and LOW) assigned to it. BASE. each of the three Merak Economics process statements in the workflow will have a different run name (HIGH. .Below is a sample output of the result of this run. base and low oil-price scenarios. Example 2: (Running several Merak Economics processes per Case): This example shows how to analyze uncertainty in a parameter in the economic model.

It was necessary to do this. These runs will have real names (whatever was substituted by the Process Manager). This allows you to either re-run the workflow after editing the run that has the $RUNNAME run name. Therefore on the Cases pane you will get multiple nodes of the same name. since each run that you generate from the workflow manager could be unique depending on the values of the various fields in the process.Example 3: (Using variables): You can substitute both Well Drilling cost and Run Name with variable names. In this scenario. when the workflow is run. However. if you create a String variable with the name $RUNNAME and use this as the run name in the Merak Economics dialog box. This can help you organize your various economic runs so that you can easily identify them. which can be edited in the normal way. This is the list you see in the drop-down list in the Merak Economics dialog box. allowing the name of the run to be controlled from the workflow. The run name in the process can be a string variable. then a run will be created called $RUNNAME. or re-run individual runs by selecting the run that has the appropriate run name. . These cannot be represented on the Cases pane by a single generic run. This example below creates a new run name “$RUNNAME” where the simulation to use is set as “Variable A”. but for each simulation the run names will be unique. the name of the run will be substituted with the value of the $RUNNAME string variable. It is the run’s name that makes it unique. Each run can perform the economics calculations on several simulations. The illustrations below show how new runs can be created by the Process Manager. You will see the subsequent nodes appearing on the Cases pane.

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provided that the variable name is provided as the Osprey Risk Plug-in well log (below). . add a reference. A single economic run can be used. we are associating three different values with the same variable.Example 4: (Using well logs to populate the variables in a workflow): This example shows how you can use specified well logs to populate the variable in a workflow. In the Process Manager. adding the variable and well log that you want to associate with that variable (in this case.