1. Petroleum projects are capital intensive and high risk
Large upfront investments with long payout periods define the industry.
2. Cash flow is the central decision variable
Project evaluation is based on projected cash inflows and outflows over time.
3. Time value of money is fundamental
Money today is worth more than money in the future.
4. Discounting converts future cash flows into present value
Future revenues and costs must be discounted to a common base year.
5. Net Present Value (NPV) is the primary decision criterion
Projects are acceptable if NPV > 0 at the required discount rate.
6. Internal Rate of Return (IRR) measures project yield
IRR is compared to the hurdle rate to determine viability.
7. Payback period ignores time value beyond recovery
Useful but limited indicator of capital recovery speed.
8. Nominal vs real cash flows must be treated consistently
Inflation handling must match discount rate basis.
9. Fiscal regimes determine government take
Taxation structure significantly affects project value.
10. Royalty systems deduct revenue before profit
Royalty reduces gross revenue regardless of profitability.
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Economic rent distribution depends on contract structure.
12. Ring fencing limits cost offset between projects
Taxable income may be restricted within project boundaries.
13. Depreciation affects taxable income
Capital recovery mechanisms influence project cash flow timing.
14. Economic limit defines field abandonment timing
Production stops when operating revenue equals operating cost.
15. Reserves classification affects economic assessment
Different reserve categories carry different uncertainty levels.
16. Risk arises from geological, technical, economic, and fiscal uncertainty
Petroleum economics integrates multiple uncertainty dimensions.
17. Expected value combines probability and outcome
Used in exploration and decision tree analysis.
18. Decision trees structure sequential decisions
They model uncertainty and alternative pathways.
19. Portfolio effects reduce overall risk
Combining prospects alters expected value and variance.
20. Sensitivity analysis identifies key value drivers
Examines impact of single-variable changes on NPV.
21. Break-even analysis identifies critical thresholds
Determines minimum price or production for viability.
22. Cost estimation accuracy affects economic reliability
Early-stage projects carry greater uncertainty.
23. Abandonment liabilities must be included in evaluation
Late-life costs affect overall project value.
24. Economic rent is the surplus after required return
Fiscal systems aim to capture part of this surplus.
25. Investment decisions require integration of technical and financial analysis
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📘 Economics for Oil & Gas Crash Course – Value, Risk & Strategy A practical, industry-focused Udemy course designed to help engineers, managers, and technical professionals understand economics, risk, value creation, and strategic decisions in the oil & gas industry. |
| 👉 Enroll on Udemy |
| * Practical insights into oil & gas economics, risk, and strategy. |
Petroleum economics bridges engineering and finance.
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