Page 129 - Well Logging and Formation Evaluation

CHAPTER 8

VALUE OF INFORMATION

It is important for petrophysicists to have a feel for the economic impact
of the work they are performing and whether or not the cost of running a
certain log is really justified in view of the economic benefit it will ulti-
mately bring. In this chapter, some considerations and tools for assessing
this will be explained.
In a normal oilfield economic model, money is expended on exploration
until a discovery is made. Following discovery, there is a development
phase involving significant capital expense (called CapEx) on wells and
facilities. At a certain point, money will start coming in from production
and start to pay back CapEx. There will also be ongoing operating
expenses (OpEx) and tax on revenues. At the payback time, the revenues
will have covered the sunk CapEx and OpEx and the project starts to move
into the black. At any point in time, the field will have a future value
(ignoring all the sunk costs), which will be denoted as net present value
(NPV). The NPV will be calculated from the production forecasts,
together with assumptions about hydrocarbon prices, taxes, and future
OpEx and abandonment costs. The time element in these costs and rev-
enues is taken into account with present value accounting, which relates
all cash flows to a fixed reference point.
It is important to realize how information is related to NPV. Obviously
the more information you have about a field, the more wisely the CapEx
may be expended (e.g., in right-sizing the facilities and drilling the most
cost effective wells) and the greater the revenue. However, there will be
an effect of diminishing returns. This is illustrated in Figure 8.1. Due to
the cost of information, the NPV will rise with information up to a point,
then start to fall. Even if money is being spent on information at a steady
rate, the incremental value will become less with time during the life of

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