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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 […]

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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 […]

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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 […]

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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 […]

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Discounting Monthly Cash Flows One method of discounting monthly cash flows is to use the number of years (a non-integer) corresponding to those months and use the annual discount factor[1]. Another alternative is to use a monthly discount rate and to use the integer months for the calculation. In this latter example, there are two […]

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NTIR or Number of Times Investment Returned is similar to the Profit-to-Investment ratio. The PI ratio is often called ROI; however, this is discouraged because of inevitable confusion with DCFROI.  It is a simple, undiscounted measure of the total net cash flows other than the “investment.” In the payout example the cumulative undiscounted cash flow […]

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this graph shows npv versus cos for the drill and farmout case
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Evaluation Criteria and cash flow analysis Payout In this and some following blog entries, many of the common measures of cash flow are defined and illustrated.  Perhaps the most common economic measure and one of the simplest is “payout.”  Also known as payback time, it is defined as the length of time required to recover invested capital […]

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In this example the reservoir engineer is called on to estimate the potentially recoverable resources in an exploration project that is located near a series of small discoveries. The engineer has a map generated (by geologists and geophysicists) from seismic, geological and petrophysical data and has estimated a “most likely” gas-in-place based on analysis of […]

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