Economic Risk Analysis Model
Authors: Nekhom Marc , Barker A. Wayne 
Published: December 2007

The need for an economic risk analysis model developed during the late 1960's and a generalized model with automatic sensitivity calculations was created in 1969.

The original version of the Economic Risk Analysis System (E.R.A.S.), PROCESS, was not sophisticated enough to handle the complexities of bidding in federal lease sales in the Gulf of Mexico. As a result, a second option, Model-1, was developed in 1970. In 1976, a third model, Model-2, was designed to analyze the investment opportunities encountered in the Atlantic and Alaska.

PROCESS and Model-1 have been used successfully since their implementation; Model-2 will be used as soon as leasing is resumed outside the Gulf of Mexico.

Introduction

An economic analysis system (EASY) was developed in 1960 go run on the IBM 7070 computer. This system was used primarily for the economic evaluation of oil and gas properties. EASY was expanded and converted to the IBM 360 in 1966. Through the years, the need for a more sophisticated model became apparent. The new model had to permit general economic studies and provide automatic sensitivity analysis to such factors provide automatic sensitivity analysis to such factors as price and cost variations.

In 1969 this model was developed with the added capability of Monte Carlo Simulation. The Economic Risk Analysis System (E.R.A.S.) has been successfully accepted and used since its implementation. It offers three options:PROCESS - for general economic studiesModel-1 - for the evaluation of on-shore and Gulf of Mexico oil and gas leasesModel-2 - for the evaluation of Atlantic and off-shore Alaska oil and gas leases.

STRUCTURE OF THE MODEL

E.R.A.S., under any of its three versions, consists of thirty-five computer programs and subroutines The Main Program monitors the handling of the information submitted by the user. The data is selected and processed by a simulation model, which calculates processed by a simulation model, which calculates schedules of production, expenses, and investments. Three Economic Analysis Modules calculate the income, depreciation, depletion, royalties, taxes, cash flow, and profitability indicators. The Monte Carlo Simulation features permit the sampling of the basic information for repeated analyses, which are then statistically analyzed at the end of the run. Various plot programs display the results graphically. plot programs display the results graphically. The complete output consists of a best estimate economic analysis, an economic analysis based on the statistical mean values of the schedules produced by the simulation, a statistical summary, and twenty-two plots. plots.

ECONOMIC ANALYSIS

E.R.A.S. is basically a comprehensive economic analysis model programmed to process up to twenty-four schedules (production expanses, investments, etc.), six products, one optional income (non-depletable), five operating expenses, four optional expenditures (expensed, capitalized, or depleted according to requirement), salvage, salvage claimed (or working capital), tangible and intangible development costs, lease cancellation, dry holes, equity payments, and equipment purchased with property.

The model performs a cash flow calculation and offers such options as price escalation, royalties override, production payments, joint interests and split joint interest, different tax options, options for automatic depreciation of any or all investments. The Profitability Index (internal rate of return), Percent Profitability Index (internal rate of return), Percent Payout, Payout Period, and Present Worth of the Net Payout, Payout Period, and Present Worth of the Net Cash are also provided.

The report includes the schedules, an economic analysis summary, and the detailed economic calculations.