Practical Application of Digital Computers to Economic Analysis Of Producing Properties

Abstract

Abstract The economic situation of today's domestic petroleum industry requires a closer look at potential investments. Prudent investment decisions will provide the only means for survival as exploration, development and operating costs continue to increase. Complete comparative evaluations are now a prerequisite for weighing alternate uses of money. This paper discusses current techniques and trends in the use of computers for economic studies. Some of the requirements for an evaluation program and suggested techniques for generating these requirements are presented in the form of examples. Introduction There is a trend today in the petroleum industry to be more thorough in evaluating capital expenditures. The need for rapid and accurate decision-making aids to describe the economic merits of an investment proposal is now finding assistance in the use of electronic computers. Until 1957, precise evaluations based upon several alternate possible courses of action were seldom required because:economic means for rapid and thorough evaluations were not available, andtime and economics seldom allowed detailed engineering to be accomplished. Therefore, hand calculation techniques were based to some extent on experience factors, rules of thumb and numbers recognized and used throughout the industry. Today the restricted market for domestic crude oil, the technological advancement of petrophysics and reservoir engineering and the development of high-speed digital computers have reversed these factors. As exploration, development and operating costs continue to increase, prudent investment decisions will provide the only means for survival. The ratio of success enjoyed by an investor will reflect the extent to which he has utilized all available data and techniques in evaluating each investment opportunity. Although a computer is no guarantee of successful evaluation, automated techniques do provide an accurate and rapid method for evaluating the sensitivity of the investment over a range of possibilities. An example might be the well-spacing consideration in development drilling. The complete effects of allowable, recovery, production rate, capital investment and operating cost can be estimated before the actual expenditure. Complete comparative evaluations are now a prerequisite for weighing alternate uses of money. Apart from speed of calculation, further substantiation for computer usage in economic analysis results from the fact that a general system or technique can be developed for application to investments ranging from a small equipment expenditure to the acquisition of a large major producing company. Efficiency is improved with the general system because personnel become familiar with standard data preparation, forms and procedures. The digital computer, with high calculation speed, accuracy and with large memory capacity, has provided a new tool to prepare studies that were previously impractical. It also allows the technical staff to concentrate on engineering instead of mechanics. This paper discusses current techniques and trends in the use of computers for economic studies, and presents several examples of common problems as solved by computer programs. Possible requirements for an evaluation program and the techniques suggested for generating these requirements are presented. Methods for optimizing data preparation and machine procedures are suggested and possible improvements are projected, utilizing estimates of future equipment. The object of the paper is not to present any specific program, but rather is to demonstrate some of the considerations now included in the computer evaluation procedures used in industry. Discussion Estimates of reserves, the rate at which reserves can be produced, the costs of operation, and the price at which the producing fluids will be sold must be made to prepare an evaluation of an oil or gas property. An appraisal is never an end in itself, but may be required for a wide variety of purposes. Some of the major uses of evaluations are:corporate planning;property sales, purchases, and mergers;financing;tax accounting; andunitization.