Economic Calculations Any decision an E&P company makes is an integrated process that involves economics, planning, finance and risk management. Therefore, an understanding of how the technical decisions made might impact the business goals is important. An economic evaluation is done to justify a decision that will demand a cap ital ependiture !drilling new wells, e"uipment purchases like compressors, workovers# or impact operational costs. Additionally , short$term !monthly# economic goals need to be balanced with the longer$term !%$year# financial objecti ves of the company. 'lti mately, management also uses economic evaluations for corporate budgeting, government and investor reporting, and valuations of oil and gas properties. 'ncertainty and risk both play huge roles in any E&P company(s decision$making. Economic uncertainties !e.g., in oil prices# have to be taken into account, which can have a significant impact on the economics of a ny project. The goal of this section is to provide some basic knowledge and techni"ues for performing investment analysis for geoscienti sts and engineers. A t the end of this section, they should be able to understand the concepts and calculations needed for an eploration or field$development project. )nvestment and economic analysis can be divided into two main areas* cash flow analysis and economic decision measures. Basic Cash Flow A basic cash flow takes a production estimate and applies price to calculate a revenue stream. +rom this revenue stream, we subtract royalties and operating epenses to achieve an operating income. apital is then removed to create a -efore$Ta ash +low !-T+#. )ncome taes are then calculated, and the After$Ta ash +low !AT +# is created. evenue / Production 0 olume 1 Price 2perating )ncome / evenue 3 !oyalty 4 2perating costs# -T+ / 2perating )ncome 3 apital ependitures Ta able )ncome / 2perating )ncome 3 5epreciation !55&A# AT + / -T+ 3 Taes Payable 6here* -T+ / -efore$Taash +low