It is the special responsibility of the geotechnical professional to estimate the magnitude of reserves, production rates, and costs to reduce the level of uncertainty as much as possible through sound scientific and technological judgment (and investigation, where warranted) and to convey estimates-as well as uncertainty levels-to management accurately and consistently. These uncertainties are diverse, relating to geology, engineering, law, politics, economics, and Acts of God. Uncertainty attends every item in Equation (2) except the net revenue interest. Wherever a dollar value is expressed as a present value (PV), it means that the value has been discounted to reflect the time value of money.
Third, to consider the time value of money, the net cash flows are expressed as a discounted cash flow stream, so the entire venture can be comparedto current alternative financial investments. Second, the equation expresses the profit or (loss) as if it were a "lump sum" payment, whereas it is actually received over a long period of time, a net cash flow stream combining production decline, price fluctuations, expenses (including taxes), and inflation. The remainder goes to the royalty owners-generally the landowner. This reduced proportion is the net revenue interest ( NRI net revenue interest). First, the owners of the producing property usually pay 100% of the costs but receive a reduced proportion-ordinarily from about 70% to 87.5%-of the revenue from production. Several important observations can be made about Equation (2). P = After-tax profit or (loss), expressed as present value of the cumulative net cash flow stream.The basic economic equation for evaluating a producing property is as follows: The purchase of any oil and gas producing property is a complex business venture. So the time value of money invested and received must be taken into account. Also, maintenance costs are incurred repeatedly during a project's lifetime. Profits are not received as lump sums or even in predictable installments. However, there is a second reason why most business ventures today are not so simplistic: money is often invested months before revenues begin to be generated and years before profits begin to be realized. Such complications-plus the accounting procedures they have engendered-obscure the financial performance of most businesses. In modern business, this simplistic equation becomes complicated by various forms of taxes and tax provisions, such as depreciation and allowable depletion calculations. The viability of any business venture can be expressed as the difference (either profit or loss) between revenue and costs. 3 Expected net present value equation for drilling ventures.
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