What Is Petroleum Economics?
Petroleum economics is the discipline that answers one critical question for any oil and gas project: Is this project worth doing?
Behind every field development, drilling campaign, or facilities upgrade lies an economic evaluation that determines whether the project will move forward or be rejected. Technical excellence alone is never enough. A project can be innovative, well-engineered, and technically feasible—yet still fail if it does not create sufficient economic value.
At its core, petroleum economics translates engineering decisions into financial outcomes over time. It connects reservoir performance, production profiles, capital investment, operating costs, and schedules to measurable business indicators such as cash flow, profitability, and risk.
Why Petroleum Economics Is More Than Just Numbers
The question “Is this project worth doing?” sounds simple, but the answer rarely is.
Economic evaluation must consider:
-
Capital expenditure (CAPEX) required to build and develop the asset
-
Operating expenditure (OPEX) needed to keep it running
-
Production volumes and decline behavior over the life of the field
-
Timing of cash flows, not just total volumes or revenues
-
Risk and uncertainty, both technical and commercial
A project that looks attractive on paper can quickly become uneconomic if production is delayed, costs escalate, or performance falls short of expectations.
Why Engineering Assumptions Drive Economic Results
A critical principle in petroleum economics is this:
Every economic model is only as good as its engineering assumptions.
You can build a flawless financial model with sophisticated mathematics, but if the input assumptions are wrong, the results are meaningless. Overestimated production rates, underestimated costs, or unrealistic schedules will produce misleading indicators such as inflated net present value (NPV) or internal rate of return (IRR).
This is why engineers play a central role in economic evaluation. When a production engineer estimates that a well will produce 500 barrels per day, that estimate is not just technical—it is an economic statement. It directly impacts revenues, cash flow timing, investment recovery, and ultimately the project decision.
How Economic Knowledge Gives Engineers Influence
Engineers who understand petroleum economics gain a strategic advantage.
They are able to:
-
Explain technical choices in terms of value creation
-
Defend design decisions using economic trade-offs
-
Anticipate what decision-makers care about before reviews
-
Propose alternatives and clearly compare their impacts
Instead of being limited to execution, these engineers become trusted advisors in project teams and management discussions.
Economics Is Not About Cutting Costs
A common misconception is that petroleum economics is about reducing costs at all costs. In reality, economics is about maximizing value, not minimizing spending.
Sometimes the best economic decision is:
-
Spending more upfront to reduce long-term operating costs
-
Accepting higher OPEX to significantly lower CAPEX
-
Choosing a more expensive design that reduces schedule risk
Petroleum economics provides a structured way to evaluate these trade-offs intelligently rather than relying on intuition or cost-cutting pressure.
Economics as a Project Filter
Economics acts as a filter that determines which projects proceed and which are stopped. It does not replace other considerations—such as safety, environmental impact, or regulatory compliance—but it plays a decisive role in investment approval.
Projects that cannot demonstrate acceptable economic value, even if technically feasible, rarely survive the decision process.
Why Early Economic Thinking Matters
Understanding petroleum economics early in the project lifecycle makes a major difference.
Engineers who think about value from the concept stage:
-
Design with economic constraints in mind
-
Avoid late-stage surprises during project approval
-
Align technical solutions with business objectives
-
Communicate more effectively with management and stakeholders
When economics is integrated from the beginning, projects are stronger, decisions are clearer, and outcomes are more predictable.
🎓 Subsea Engineering Courses
Economics for Oil & Gas — Crash Course
Learn value, risk & strategy in the oil and gas industry.
Enroll Now
Subsea Risk-Based Inspection (RBI) – Practical & Industry Focused
Learn how inspection decisions are made in real subsea projects.
Enroll Now
Comments
Post a Comment