Workover Economics-Complete but Simple
Authors: Rike James L. 
Published: December 2007

A simple set of tables can be devised to give profit-to-investment ratio and rate of return, using the payout figure usually calculated, but further taking into account acceleration economics, risk, and anticipated life. The tables can be applied to any venture having a single initial cost and a consistent (not necessarily constant) type of income return.

Introduction

Evaluation economics for oil operations expenditures has essentially evolved to the Profit to Investment (P/I) Ratio (usually discounted) and Rate of Return (ROR). These two calculations take into account the long-term profitability of most oil and gas operations, while recognizing the time value of money. Many operators, however, measure the economics of workover operations with only a simple payout figure, and take into account by means of a broad judgment factor the anticipated risk, accelerated vs captured oil (increased reserves), and projected life. This leads to an overpessimistic evaluation of high-risk workover opportunities, because they are so much less attractive than most. In reality, the return on high-risk workovers may be much better than on other investment opportunities such as service stations, gas plants, or even some development drilling proposals. plants, or even some development drilling proposals. Conversely, payout calculation ignores acceleration economics, and we find more and more workover opportunities that accelerate oil production only 10, 5, or possibly 2 years as depletion times shorten. Expenditures are made for quick-payout workovers whose economics in reality are marginal because the job may actually effect only a short acceleration of production. production. Regardless of the academic merit of better grading for the industry's workovers, management is unwilling to slow down the approval process for all jobs. Workovers are noted for their extra high over-all profitability and should not be delayed while a group profitability and should not be delayed while a group of engineers or accountants grinds out alternative production schedules, cash flow predictions, risk production schedules, cash flow predictions, risk evaluations, and P/I Ratio and ROR calculations. If another evaluation system cannot approach payout in speed and simplicity, it could cost as much in the delay of the large volume of good jobs as it saves in better grading of the fringe prospects.

The system proposed here is a series of tables similar to compound interest tables or actuary tables. The user identifies whether the prospect results in captured production or accelerated production for a given period of time and turns to the appropriate table or section of tables. He estimates the degree of risk associated with the job and uses this number to find a specific table or to calculate a "risk-weighted" payout. If he calculates a "risk-weighted" payout, he payout. If he calculates a "risk-weighted" payout, he needs only one table for each degree of acceleration anticipated. Having identified the correct table, he selects a column according to the payout calculated. Under each payout column is a series of P/I Ratios and ROR'S, each corresponding to a producing life in months. The estimated life selected determines the final economic evaluation.

Derivation of P/I Ratio and ROR In Terms of Payout

Payout is a convenient form of relating cost and Payout is a convenient form of relating cost and constant returning cash flow.

JPT

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