How can you calculate the net present value of a reservoir?

1 Cash inflows and outflows

The cash inflows of a reservoir are the revenues generated from selling the oil and gas produced from the reservoir. The cash outflows are the costs incurred for exploring, developing, operating, and abandoning the reservoir. The cash inflows and outflows depend on various factors, such as the reservoir characteristics, the production profile, the oil and gas prices, the tax and royalty regimes, and the discount rate. To simplify the calculation, you can use average or expected values for these factors, or perform a sensitivity analysis to account for uncertainty.

3 Example calculation

Assuming a reservoir with an initial investment of $100 million, a production profile of 10,000 barrels of oil equivalent (BOE) per day for 10 years, oil and gas prices of $50 per BOE, operating costs of $10 per BOE, abandonment costs of $20 million, a tax and royalty rate of 30%, and a discount rate of 10%, the net present value (NPV) can be calculated. To do this, the net cash flow for each year must be estimated. For example, the net cash flow for year 1 is: CF_1 = (10,000 * 365 * 50 * (1 - 0.3)) - (10,000 * 365 * 10) = $76.65 million . This process should be repeated for the remaining years, taking into account the abandonment costs in the last year. The NPV of the reservoir is then: NPV = (76.65 / 1.1) + (76.65 / 1.1^2) + ... + (56.65 / 1.1^10) - 100 = $189.32 million . This indicates that the reservoir has a positive NPV and is worth investing in.

4 Limitations and variations

The NPV calculation has some limitations and variations that you should be aware of. First, the NPV assumes that the cash flows are reinvested at the same discount rate, which may not be realistic. Second, the NPV does not account for the timing and variability of the cash flows, which may affect the risk and return of the project. Third, the NPV does not consider the option value of the project, such as the ability to delay, expand, or abandon the project in response to changing conditions. To address these issues, you can use alternative methods, such as the internal rate of return (IRR), the modified internal rate of return (MIRR), the profitability index (PI), or the real options analysis (ROA).

5 Benefits and applications

The NPV is a useful tool for evaluating the economic viability and attractiveness of a reservoir. It can help you compare different reservoirs, rank them by their NPV, and select the ones that maximize the value of your portfolio. It can also help you assess the impact of different scenarios, such as changes in oil and gas prices, costs, production rates, or discount rates, on the NPV of the reservoir. Moreover, it can help you optimize the reservoir management, such as choosing the best development strategy, production schedule, or recovery technique, to increase the NPV of the reservoir.