For this blog entry I continue to quote from a White Paper prepared by Baker Hughes and available on our website. The complete paper can be obtained here. I will present it here in three parts. Executive Brief Since the late 1940s, hydraulic fracturing technology has been used in more than a million U.S. wells to [...]

I collect knives. Custom made knives, hand crafted out of exotic materials by some amazing artists. One of my knives has a bolster made of superconducting[1] materials including such unusual elements as yttrium, bismuth, thallium and strontium. Young professionals may not remember the buzz in the industry when scientists discovered superconducting properties in materials at [...]

Decision trees are a useful way to describe alternative scenarios and select the decision that maximizes the NPV or whatever the decision maker is trying to optimize. In decision theory, the most desired outcome is based on the goals and preferences of the decision maker. The reservoir engineer can use decision trees to describe complex [...]

The concept of using simulations to estimate variability and risk has evolved in acceptance and popularity over my career. An understanding of the concepts involved is so fundamental for reservoir engineers that I have chose to illustrate those concepts very simply. A number of excellent references are given for further study. Commercial software is available that can [...]

Many types of risk analysis approaches are used and if the management of a company is successful with one approach it may be hard to justify changing it. One example of an approach that is not recommended, yet still relatively commonplace is the adjustment of discount rates to account for risk. A manager may wish [...]

The application of Monte Carlo simulations is one of the most important tools that reservoir engineers can master in the field of modern risk analysis. Nearly all business decisions are made under conditions of uncertainty. Decision making under uncertainty implies that adequate information for assuring the right decision is lacking and two or more outcomes [...]

There is a lot more to this subject than is covered here in one blog post. Essentially this is what I think the petroleum engineer as an analyst needs to know. It is far from the level of understanding needed to calculate WACC and many of its applications. Conceptual Framework Several concepts of financial theory [...]

Present Value Ratio (PVR) While NPV fails to deliver a measure of capital efficiency, the Present Value Ratio (PVR) index calculates a measure of investment efficiency that is very useful in ranking projects with significant capital investment. It is the ratio of the discounted (after tax) net cash generated by a project to the discounted [...]

After a long hiatus we are now returning to the series on oilfield economics. Discounted cash flow return on investment (DCFROI) also referred to as discounted cash flow rate-of-return (DCFROR) or Internal Rate of Return (IRR) is defined as the discount rate at which the NPV is zero. It is very attractive to decision makers [...]

At the beginning of this section we discussed the relative components of the various schemes including ownership, the manner in which entitlement to hydrocarbons is given or calculated, the manner in which payment is made, and operational freedom. No one single parameter defines a contract style.  There is a tendency to observe that tax/royalty contracts [...]