Economic Analysis FAQ

(Also See Economic Analysis Help and Economic Analysis Example)

 

What is the Major Phase?

The Major Phase of an oil well is the oil production, and the Major Phase of a gas well is the gas production.

 

What Initial Major Phase Flowrate should I use?

Typically, the Initial Major Phase Flowrate would be the average daily flowrate from the most recent month.  However, the user might want to input a higher or lower value if he has more recent knowledge of a well problem or an enhancement, like putting the well on compression, artificial lift or stimulation.

 

What is ”BTU content of gas (BTU/SCF)”?

This is the heating value of the gas on a volumetric basis.  BTU/SCF is the abbreviation for British Thermal Unit per Standard Cubic Foot.  This information is available from gas analyses taken by the operator or purchaser.  If the BTU content is unknown, the program uses a default BTU content of 1000 BTU/SCF, which is approximately that of pure methane.

 

Note that some refer to the heating value of gas in other units, such as MMBTU/MCF, or Million BTU per Thousand Cubic Feet.  Using these units, 1000 BTU/SCF gas can also be referred to as 1 MMBTU/MCF gas.

 

Gas is bought and sold on a heating content (BTU, or MMBTU) basis.  Sometimes prices are referred to, or used interchangeably with, a price per MCF basis, but this is only due to the fact that 1 MCF of methane (the primary component in distribution quality gas) is approximately equal to 1 MMBTU.  To be correct, however, gas prices should always be referred to in terms of price per MMBTU.

 

What is ”Gas-Oil-Ratio”?

The Gas-Oil-Ratio, also know as GOR, is the ratio of gas production to oil production over a period of time.  The program calculates the gas-oil-ratio (GOR) as an average from the last 12 months of production.  Note that the term GOR is used for consistency on both oil and gas wells.  The GOR is used to calculate the future Minor Phase flowstream, based on the declining Major Phase flowstream.

 

The user can enter a different GOR if desired.

 

The units for the GOR are scf/bbl, or standard cubic feet of gas per barrel of oil (or condensate).

 

The well I wish to analyze is a gas well, and it makes condensate, not oil.  What do I use for GOR?

The term GOR is used by this program for consistency on both oil and gas wells.

 

The liquid phase (condensate) from a gas well is often referred to the gas production using a ”liquid yield” parameter.  In reality, this parameter is just the reciprocal of the GOR.  If a gas well has a liquid yield of 20 barrels of condensate per million cubic feet, the GOR, as used by this program is:

1 divided by 20 BC/MMCF = 0.05 MMCF/BC x 1,000,000 MMCF/SCF = 50,000 SCF/BBL GOR.

 

I only own 50 % WI in a well, and my joint interest bill (JIB) is $750 per month.  What number do I enter if I wish to run economics on just my 50% interest?

The program requires entry of the operating expense for a 100% WI, or ”8/8ths”.  So you must ”gross up” your operating expense for use in this program. To do this, divide your net operating expense by your decimal working interest:  $750/0.50 = $1500 per month, gross operating expense.  So use $1500 per month in the program.

 

What is Working Interest (WI)?

Working Interest represents that interest of those who paid for the drilling, completion, etc. of the well.  If an entity owns all of the WI in the lease, the working interest would be 100 % and would be entered as 1.0.

 

What is Net Revenue Interest (NRI)?

The NRI is the decimal revenue interest which is attributable to a given WI, after all royalty burdens are subtracted.  Occaisionally the net revenue interest is referred to as the ”WI NRI”, or working interest-net revenue interest.

 

I don’t know the Plugging and Abandonment Cost, or Salvage Value of the lease?

Neither of these parameters are required inputs.  However, both are important parameters when valuing oil and gas properties - so you should take this into consideration.

 

How are the cash flow streams discounted?

The program discounts cash flows as if both income and expenses occur at the end of each fiscal year, also known as year end discounting.  In reality, revenue and expenses are received and disbursed on a monthly basis.  Thus, on a positive cash flow well the year end discouting yields a somewhat lower discounted value than would be obtained with monthly discounting.

 

Can the ad valorem or severance tax parameters be changed?

No.  The program assumes ad valorem taxes to be 2.5 % of gross revenue, gas severance tax to be 7.5% and oil severance tax to be 4.6%.  Note that some wells in Texas receive a severance tax exemption when they are brought back on production after a long shut-in period.

 

What is Cum?

Cum refers to cumulative production.

 

What is RRR?

RRR is an abreviation for remaining recoverable reserves, ie, what is left in the ground that can be recovered with today’s technology, from the day of the analysis forward.

 

What is EUR?

EUR is an abbreviation for expected ultimate recovery, which is simply the sum of the Cum and the RRR.

 

Where did the ”Valuation Parameters” come from?  Which of these is the value of the well?

Different banks, corporations, individuals and other entities have different metrics for valuing oil and gas reserves.  The ”Valuation Parameters” of NPV18, 50% of undiscounted cash flow and 3 year payout are offered only for the convenience of those who might use these metrics.