Chapter 10_Economic Calculations

8/11/2019 Chapter 10_Economic Calculations

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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 technicaldecisions made might impact the business goals is important.

An economic evaluation is done to justify a decision that will demand a capitalependiture !drilling new wells, e"uipment purchases like compressors, workovers# orimpact operational costs. Additionally, short$term !monthly# economic goals need to bebalanced with the longer$term !%$ year# financial objectives of the company. 'ltimately,management also uses economic evaluations for corporate budgeting, government andinvestor reporting, and valuations of oil and gas properties.

'ncertainty 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 havea significant impact on the economics of any project.

The goal of this section is to provide some basic knowledge and techni"ues forperforming 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 eplorationor field$development project.

)nvestment and economic analysis can be divided into two main areas* cash flow analysisand economic decision measures.

Basic Cash Flow

A basic cash flow takes a production estimate and applies price to calculate a revenuestream. +rom this revenue stream, we subtract royalties and operating epenses toachieve an operating income. apital is then removed to create a -efore$Ta ash +low!-T+#. )ncome taes are then calculated, and the After$Ta ash +low !AT+# iscreated.

evenue / Production 0olume 1 Price

2perating )ncome / evenue 3 !oyalty 4 2perating costs#

-T+ / 2perating )ncome 3 apital ependitures

Taable )ncome / 2perating )ncome 3 5epreciation !55&A#

AT+ / -T+ 3 Taes Payable

6here*

-T+ / -efore$Ta ash +low


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AT+ / After$Ta ash +low

55&A / 5epreciation, depletion and amorti7ation

Production Volumes

)n Petrel, production volumes can be obtained from either the E8)P9E or +ront9imreservoir simulators. These volumes can be oil, water, gas, or natural gas li"uids !:;8#production, or water and gas injection values.

Prices

Price is the monetary value received for each barrel of oil or cubic foot of gas producedand sold. 9econdary by$products !:;8s# may also be sold from some reservoirs. Pricesmay be kept at a constant value or escalated over time.

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

The "uality of the hydrocarbon being sold !AP) density, absence of impurities like off the top?, after product "ualityadjustments, but before operating costs or investments are deducted.

@any different formulas are used for the calculation of royalties, which are dependent onthe fiscal regime of a particular region.

Operating costs

2perating costs are the day$to$day costs of operating a property and maintainingproduction. Typical charges would include fluid processing costs, lease electricity,chemicals, water disposal, and overhead. They are identified with a specific property andmight include lease maintenance, treating fluids, general repairs, fuel and electricity, andsecondary or enhanced recovery operations. 2verhead type charges such as salaries and

office costs are usually grouped with operating epenses in a basic cash flow analysis.

They are normally deductible for income ta purposes.

ommon methods of scheduling operating costs over time are*

0ariable !Bbbl or Bmcf#

6ell count !BwellBmonth or BwellBday#


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+ied !@Bmonth or @Byear#

Capital investments

apital consists of investments for drilling, eploration, e"uipment and facilities.

'sually broken down into Tangible and )ntangible categories, they are considered spentin the scheduled year for the -efore$Ta ash +low, and recovered over time for theAfter$Ta ash +low.

Tangible investments are e"uipment purchases, such as pumping units, pipelines,compressors, and buildings. They often have salvage value. )ntangible investments aredrilling fees, mud and chemicals, logging, and other non$e"uipment charges. Theytypically have no salvage value.

osts to abandon an area or location are sometimes grouped with capital investments.9pent at the end of the life of a project, they may be offset by any recoverable e"uipment

sold as salvage.

Income or Federal Taxes

2nce an 2perating )ncome has been established, income taes should be calculated.

)t is at this point that tangible assets are depreciated over time, reducing the incomestream available to be taed. The ta rate is applied to Taable )ncome, taes aresubtracted, and the After Ta ash +low is created.

epreciation! depletion and amorti"ation

epreciationis a non$cash epense that reduces the value of an asset as a result of wearand tear, age, or obsolescence. @ost assets lose their value over time !in other words,they depreciate#, and must be replaced once the end of their useful life is reached.

epletion is concerned with the ehaustion of mineral reserves as a result of productionof these reserves.

#morti"ation is the writing off of an intangible asset investment over the projected lifeof the assets.

ecision $easures

)n order to assess an economic calculation or to compare competitive plans, one shouldapply several decision measures to determine the profitability. These measures should, atthe minimum*

Allow one to distinguish between acceptable and unacceptable projects by evaluating

them with established standards and practices.


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Enable one to rank the best investment project from a group of projects.

;ive some insight into the outcome of a proposed project on the overall profit of the

company.

5etermine if the project adds value or return to the investors.

And give a measure of rate by which the revenue is generated in the project.

Economic decision measures are a range of different indicators defined and employed forthe comparison process of a group of projects. Each has its advantages and disadvantages.9ome decision measures embrace the concept of time value o% money. @oney is worthless, the longer you have to wait to receive it. )n the same regard, money receivedyesterday is worth more than money received today. onsider that you can takeyesterday(s earnings and invest it, earning additional value. )f you have to wait to receivemoney, you must delay the investment, therefore potentially losing money. Also considerthat inflation will erode the value of money.

5ecision measures can generally be grouped into three categories*

C. Value creation measures* These summari7e future net cash flows in today(s money!for eample, :et Present 0alue !:P0#, )nternal ate of eturn !)#, ProfitB)nvestmentratios !P)##.

=. &urvival $easures* These place an importance on short$ and medium$term riskimpact !for eample, Payout Period, risk management, Total capital eposure#.

%. Competitive measures* These can be supply cost measures like break$even prices, or

hurdle rates or financial measures such as earnings or return on capital employed!2E#.

Terminology

The economic indicators can be described as follows*

'et present value ('PV) / present value of cash inflows 3 present value of cash

outflows !or minus initial investment.# ;enerally a project with positive :P0 adds valueto the investors in the project, and conversely, a negative :P0 will not generate anade"uate return.

Rate o% return (ROR) or internal rate o% return (IRR) is the single discount rate that

produces a :P0 of 7ero. )t is also described as the discount rate that e"uates the presentworth of cash flows to be e"ual to the present worth of the investments.

Pro%it to Investment Ratio (PIR)3 also known as the eturn on )nvestment !2)#,

this indicator is similar to the 5P). )t simply divides total :P0 by total capital. Dnown asthe >bang for the buck? indicator, it is very useful for ranking projects when capital islimited.


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iscounted Pro%ita*ility Index (PI) is a measure of investment efficiency, and is

used to evaluate multiple rates of return projects relative to the investment re"uirements.onsistent use of the same discount rate is necessary when comparing projects by using5P). This indicator is sometimes called P).

Pay*ac+ period is the time to return an investment. )t is calculated from the net cash

flow stream. The point at which the cumulative net cash flow stream becomes positive isthe Payout.

,sing the $era+ Economics process

'se the $era+ Economicsprocess to create or edit an economic model that can be usedto compute economic indicators. ou can compute economic indicators for the simulationcases listed in Petrel(s Casespane, and the results are added to the Resultspane.

ou can perform economic valuations for single wells, groups, or fields, by selecting theappropriate identifier from the Resultspane and dragging it onto the omainsbo on the

Calculationtab in the $era+ Economicsdialog bo. )n a typical economic run, you cancombine wells, groups, and fields together. The data for all valid domain items are addedtogether for each simulation in the run.

The $era+ Economicsprocess automatically obtains the capital ependiture profilefrom the simulations for development or infill drilling and workovers, if these optionshave been used.

Preparing your data %or economic simulations

)f performing economic calculations, it is strongly recommended to re"uest the E8)P9E

or +ront9im simulations to output additional data used to enhance the economiccalculations.

To do this, open the &imulationfolder on the Processespane, and then double$click the5efine simulation case process to open the 5efine simulation case process dialog. ;o tothe Resultstab, and then select the Economicscheck bo in the -ine .raphs(&,$$#R/)option group.


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6hen you select the Economicscheck bo and run an economic calculation, thesimulator will output the following summary vectors*

F$0PR1Total number of production wells currently flowingF

F$0E'1Total number of injection wells currently flowingF

F$0R1 Total number of drilling events during this timestepF

F$0T1Total number of drilling events in totalF

F$00O1Total number of workover events during this timestepF

F$00T1 Total number of workover events in total.

Creating an economic calculation run

This section describes how to build and run an economic calculation.

ou can set up an economic$calculation run from the &imulation folder in Petrel(sProcessespane, or from within the Process $anager. To set up a run from within theProcessespane*

C. 2pen the &imulation folder in the Processespane.


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=. 5ouble$click to open theMerak Economicsprocess. The In%otab provides a briefdescription of how the @erak Economics process works.

%. lick the Calculationtab to define the basic parameters of your economic calculation!see 5efining basic economic$calculation parameters#. This includes choosing whetheryou will create a new run or overwrite an eisting one, choosing an economics model,choosing the identifiers !wells, groups, or field# for which you want to perform

calculations, and choosing the simulations that you want to use for the calculation.


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G. onfigure the settings for your economic calculation !see onfiguring settings for aneconomic calculation#. This includes defining the start date of your calculations, choosinghow drilling costs will be defined, setting up Peep Eport file parameters if desired, andchoosing the data$sampling fre"uency for your simulation.

. 5efine mappings for Ethane, Propane, and -utane if desired !see 5efining mapping forethane, propane, and butane#.


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H. 2nce you have set up your economic calculation as desired, you can do one of thefollowing*

lick the Runbutton to perform the calculation for the currently selected run. 6henyou perform a run, all input data is sampled into the specified fre"uency and passed on tothe @erak Economic Engine, which performs the economic calculations, and then passesthe results back to Petrel for inclusion in the Resultspane. Any changes you have madeto the run(s properties are saved, and will be reflected the net time you select that run onthe Calculationtab.

lick the #pplybutton to apply any changes that you have made to the currently

selected run, but leave the $era+ Economicsdialog bo open. These changes are saved,and will be reflected the net time you select that run.

lick the O2button to save any changes that you have made to the currently selectedrun, and close the $era+ Economicsdialog bo. These changes are saved, and will bereflected the net time you select that run.

lick Cancelto close the $era+ Economicsdialog bo without saving any changes

that you have made to the currently selected run.

e%ining *asic economic3calculation parameters


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'se the Calculationtab of the $era+ Economicsdialog bo to define the basicparameters of your calculation, including the economic model that will be used for thecalculation, the wells, groups, or field for which the calculation will be performed, andthe simulations whose data will be used as inputs for the run.

Tip* 6hen you open the $era+ Economics dialog bo, the last$used run is automaticallyloaded, and the settings from that run populate the Calculation, &ettings, and $appingtabs. This enables you to create a new run that is similar to a previously created run, byselecting the run upon which you want to base your new run, changing it as desired, andthen creating a new run based on your changes.

4ow to de%ine *asic economic3calculation parameters

hoose whether you want to create a new run, or overwrite an eisting run*

C. Overwrite existing run19elect this option if you want to base your run on a previouseconomic calculation run. 6hen you select this option and choose an economic run fromthe drop$down list, the Calculation, &ettings, and $appingtabs are updated with thatrun(s properties. At this point you can*


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Per%orm a run using the current settings, overwriting the results for that run. ou

may want to do this if the data in the simulations selected for the run has changed sinceyou last performed the economic run, and you want your run to reflect those changes.

Change the selected run5s properties as re6uired! and then run it again , overwriting

the previous run results and changing the run(s properties. hanges might include adding

wells to !or deleting them from# the omainslist, basing your run on a differentsimulation, basing your run on a different set of drilling costs, etc. 6hen you change arun, its properties are not updated until you click the Run, #pply, or O2buttons.

Create a new run *ased on the currently selected run !see below#. 9elect an eisting

run whose properties are similar to the new run you want to create. This saves work,minimi7ing the number of changes you will have to make in order to create the new run.

=. Create new run1After selecting an eisting run and changing its properties on theCalculation, &ettings, and $appingtabs, select this option to create a new run based onyour changes. Type a name for your new run in the adjacent field, and then click the Run,

#pply, or O2buttons to save your new run. 6hen you save a new run, it is added to theOverwrite existing rundrop$down list, and the run upon which it was based remainsunchanged.

)n the Economic $odeloption group, choose the economic model upon which you wantto base your calculation. )f necessary, you can edit a model before selecting it, or create anew model !see Editing or creating an economic model#.

%. 9pecify the identifiers !wells, groups, or field# for which you want to obtain data, byadding them to the omainsbo. ou can perform a run for selected wells andBor groupsfrom one or more simulations, or for an entire field.

The sum of all the production, injection, and drillingBworkover outputs for all items in the5omains list is used for an economic run.

To add identifiers to the omainsbo, select them from within the Identi%ierfolder in

the Resultspane, and then click the #dd selected domainsbutton.

Tip* To multi$select identifiers from different points in the tree, press and hold the Ctrlkey, and then select all the desired identifiers. To select all the identifiers between twopoints, select one, then press and hold the 7&hi%t8key, and select anotherF the twoselected identifiers and all those between them will be selected.

To remove identifiers from the omainsbo, select !or multi$select# them, and thenclick the Remove selected domainsbutton.

6hile you can perform a run for different combinations of wells or groups, generally

you will not combine these identifiers with the Fieldidentifier in the same run. As aresult, if you are adding wells or groups to the omainsbo, you will need to remove theFieldidentifier before performing the run.


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G. 9pecify the simulations from which you want to obtain data for your economiccalculations*

To add simulations to the &imulationsbo, select them from within any of the cases on

the Casespane, and then click the #dd selected simulationsbutton. ou can add all thesimulations within a case by selecting the case and then clicking the #dd selected

simulationsbutton.

)f you have performed a dynamic data calculation on a case, you can also add that

calculation to the &imulationsbo for inclusion in your run.

To remove simulations from the &imulationsbo, select !or multi$select# them, and

then click the Remove selected simulationsbutton.

. 2nce you have finished defining your economic$calculation parameters, configure thesettings !see onfiguring settings for an economic calculation# and define the mapping!see 5efining mapping for ethane, propane, and butane# if desired before running your

simulation.

Editing or creating an economic model

6hen performing economic calculations in Petrel, after selecting an economic model,you can view or edit the contents of that model, create a new economic model, or delete apreviously created model.

To perform any of these operations, click the Edit9Createbutton on the Calculationtabof the $era+ Economicsprocess dialog bo to open the $era+ Economics $oduledialog bo.


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4ow to view the properties o% an economic model

C. 9elect the model from the Economic $odeldrop$down list whose properties you wantto view.

=. lick the .eneral, Operating Costor Capital Costtabs to view the data on those

tabs.

%. Edit the values on any of those tabs as appropriate and press #pply or O2 when done.

4ow to edit the properties o% an economic model

C. 9elect the model from the Economic $odeldrop$down list whose properties you wantto edit.

=. lick the .eneraltab*

9elect the desired fiscal model from the Fiscal $odeldrop$down list, which contains a

list of models representing over CII fiscal regions, defining how the royalty, ta rates,etc., vary for each one.

2n the Oil Pricetab, select the ,se Existing Oil Price Fileoption button if you want

to base the oil prices in your model on a saved oil$price file. Then select the desired pricefile from the drop$down list.


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)f price files are not available !or if you want to create a custom price array#, select the

,se Price #rrayoption button, and then create an array by clicking the first row in theatecolumn, then choosing the desired month and year. Then type a price value for thatmonth. ontinue until you have added all the desired prices to your array.

2n the .as Price, Propane Price, Butane Price, and Ethane Pricetabs set up prices

in the same way as you did for oil prices.

lick the #dvanced &ettingsbutton to open the #dvanced &ettingsdialog bo*

)n the iscount Ratefield, type the discount rate percentage that you want to use for

economic calculations or analysisF

)n the Revenue Interestfield, set the :et$Profit working$interest percentages for your

asset !for '.9. and anadian regions only#F

)n the Cost Interestfield, 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 allof these interests#.

%. lick the Operating Costtab*


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)n the Fixed Operating Costoption group, specify fied operating costs for each active

producer or injector well per month. Also add any other fied operating costs on a per$month basis !this could be for a well, a group, or a field#.

)n the Varia*le Operating Costoption group, specify the operating costs for oil, gas,

water, or injection, on a per$production$unit basis.

)n the '.- Operating Costoption group, specify the operating costs for propane,

butane, or ethane, on a -2E basis.

G. lick the Capital Costtab to specify your capital ependitures*


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lick the first row in the atecolumn, and then choose the desired month and year for

your first ependiture.

)n the #mountcolumn, specify the amount of the ependiture.

lick the drop$down list in the Typecolumn and choose a cost type. This is importantbecause it determines how this cost will be treated in economic calculations !e.g.,e"uipment depreciation or epensed capital items#. apital types can vary between fiscalregions. The day of the month which the cost is incurred does not matter for economiccalculation purposes.

'se the rillingand 0or+overfields to input any drilling or workover costs on a per$

well basis. Take the total costs and determine average values, and then input them here.These costs are multiplied by the number of drillingBworkover events in a given period!monthly, "uarterly, semi$annually, or annually# in order to complete additional capitalependitures over that period. This is in addition to any costs incurred in the Capital

Expendituregrid.

. )n the $era+ Economics $odulepop$up dialog bo, click O2to save the changes tothe current model, or type a different name to create a new model based on your changes.

4ow to create a new economic model

C. 6orking in the $era+ Economics $oduledialog bo, select the model from theEconomic $odeldrop$down list upon which you want to base your new model.


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=. Edit the model if desired !see


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from the selected date, and then uses the data from that date forward to calculate thevalue for the first month.

:ote* The Valuation ate chosen here corresponds to the iscount ate used in @erakPeep.

4ow to override the economic model5s drilling costs

:ormally, drilling costs come from the economic model !defined as Capital Cost#. oucan override these costs if desired, replacing them with costs from the 2sprey isk Plug$in, or with an average cost that you define.

To override drilling costs, select the Override Economic $odel5s drilling costcheckbo, and then*

9elect the e%ine %rom Osprey Ris+ Plug3inoption to use 2sprey isk Plug$in costs

from the Inputpane. 9elect a PJI ost, PI ost, or PCI ost log, and then click the

#dd well logbutton to use the drilling cost from that log. 6hen you select an 2spreyisk well log, the drilling cost for that well is displayed in the #verage rilling Costfield, and this value is used for every well in the run.

9elect the e%ine manuallyoption button to input your own drilling cost. 6hen this is

selected, the #verage rilling Costfield becomes available. Type a value that will beused for every well in the run.

6hen the $era+ Economicsprocess is run from the Process $anager, you can alsoenter a variable name !that was previously defined in the workflow# as your #veragerilling Cost value. The $era+ Economic process will then look for the value

associated with that variable, and use it in the calculation. 9ee the 'sing the @erakEconomics process within the Process @anagersection for more information.

4ow to send results o% an economic run to a Peep Export (PE:) %ile1

9elect the Peep Exportcheck bo, and then specify the path and name of the PeepEport !1.pe# file into which you want to add the economic run. The $era+ Economicsprocess will create the Peep Eport file, which you can then import into @erak Peep foranalysis.

ou cannot import Peep Eport files generated from @erak Peep back into the $era+

Economicsprocess.

4ow to set the data3sampling %re6uency

6orking in the ata &ampling Fre6uencyoption group, select one of the option buttonsto define the fre"uency at which input data is sampled from simulations. )f the samplefre"uency is larger than the fre"uency of input data, then the result will be less accurate.

e%ining mapping %or ethane! propane! and *utane


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9ome by$products are fre"uently recovered as part of field operations. Eamples of theseinclude natural gas li"uids !:;8s# and condensate. )t is common practice to establish thevolume of :;8s recovered by applying various empirical formulae, using the 5ynamic5ata alculator. The results of these calculations may then be used on the $appingtabto account for the economics associated with :;8s.

)f desired, you can specify which outputs from production streams that you will use torepresent Ethane, Propane, and -utane. This process is optional, and is only re"uired ifyou have :;8s in your recovery stream.

4ow to map '.-s to production outputs

C. 9elect the check bo net to the natural gas li"uid for which you want to create amapping !e.g., Ethane !=##.

=. )n the &ourcedrop$down list, select &imulationor Calculatorto define the type ofproperty you will be using.

%. +rom the Resultspane, select the name of the result property that you want to use torepresent the current :;8.

G. lick the #dd propertybutton on the current row to populate the Propertyfield withthe property that you selected.

)f the property that you added is non$component$based !e.g., :;8 production rate#,

then that rate will be used to represent the :;8.


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)f the property that you added is component$based, then the Componentfield becomes

available, and you will need to select a component to represent the :;8

. )f the property that you added was component$based, select a fluid from within the

Fluid Identi%ierfolder in the Resultspane, and then click the #dd component

button to add the selected component to the Componentfield.

H. epeat the previous steps to map :;8s for Propane !%# and -utane !G#.

Visuali"ing the results o% economic calculations

After you run an economic calculation, the results are stored in the Economic Indicatorand Economic Pro%ilefolders in the Resultspane.

4ow to view results o% economic calculations

C. )nsert a new +unction window from the 6indow menu !0indow ; 'ew %unctionwindow)

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Chapter 10_Economic Calculations

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