The Economics Behind Oil and Gas Evaluations
Economics is a very important part of the oil and gas industry, and the advice of a good economist has never been more needed for a number of oil and petroleum firms, especially because of the rapid decline of the value of oil in recent years. With hands tighter on the purse strings than what has ever happened before, it’s imperative to get it right first time. As such, no detail is spared with putting the shrewdest of oil and gas investment through the hands of multiple economists, as part of the oil and gas reserves evaluation process.
The analysis of each and every potential asset to an Oil and Petroleum company is rather important. An economist, or more accurately, a team of economists will perform financial analyses of the potential asset at different points in its lifecycle. Incremental analysis is undeniably important, of course, the lifecycle of any project can go on for more than 20 years and the entire world’s economy can be changed in a very considerable faction within that amount of time. What may have seemed a fantastic idea some time ago now may very well be a bust.
Price and inflation rate assumptions are considered with a good amount of time and effort, and working interest, taxation items, working capital adjustments, net pre-set values, internal rates of return, payback and of course health safety and environmental concerns are considered greatly as the result of any economist’s reach into a potential asset.
Essentially, an asset is cross-examined not only on its worth now, but its assumed value 10 or 20 years down the line. Depending of course on the asset which has been discovered and the amount of expense needed for large amounts of oil and gas below the earth, an economic analysis can be as far as 50 years into the project’s future.
Of course, other elements of the oil and gas reserves evaluations process is very important, as well. The economics of the process is but a small part, and without the data to hand, can mean absolutely nothing. What is important is the three components of oil and gas exploration working hand in hand, in order to accurately and properly describe the pitfalls of any project.
