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Oil and gas project economics

Economic evaluation answers the investor's main question: whether it is worth investing in the project, and under what conditions it stays profitable.

The lessons start with the industry and oil companies, then cover cash flow and discounting, performance measures, the rights of the state, contracts and taxes, and methods of accounting for risk.

26 / 26 topicsWhere to start: The oil industry in history: demand, supply and prices

The industry and companies

  1. 01The oil industry in history: demand, supply and pricesWhy the oil price swings so sharply: the low short-term elasticity of demand and supply, inventories and spare capacity, calculating the price jump when supply is lost; the price since 1861 in nominal and constant dollars; from kerosene and Standard Oil to the “Seven Sisters”, OPEC and the shocks of the 1970s, the 1986 collapse, shale oil and OPEC+; the energy transition and the 2026 crisis; the oil history of Kazakhstan from Karashungul to Tengiz and Kashagan — with dated data. Basic
  2. 02Oil companies and investmentThe chain from exploration to the filling station and who earns at which link; state-owned, international, independent and oilfield service companies, who owns the reserves; the companies of Kazakhstan and the stakes in Tengiz, Kashagan and Karachaganak; the stages of investment and the investment cycle; the reserve replacement ratio, the reserves-to-production ratio and finding and development cost, with calculations; own cash flow, debt, equity and project finance, the price at which a company covers its investment and dividends, and how to read an oil company's report. Basic

Cash flow and valuation

  1. 03Valuation methods: book value and market valueWhat a field, a licence or a company is worth: book value and depreciation — straight-line, declining-balance, unit-of-production; where the balance sheet departs from value — inflation, dry holes and the methods of accounting for exploration costs, reserves off the balance sheet, impairment; market value and multiples — dollars per barrel of reserves, EV/EBITDA; valuation from cash flow and the sum of the parts (NAV); replacement cost; reconciling the valuations of one company. Basic
  2. 04Project cash flowCash inflows and outflows, capital and operating expenditure, net cash flow and why projects are evaluated on cash flow and not on profit. Basic
  3. 05Cash flow model of an oil and gas projectHow a project model is built line by line: the production profile, the field-gate price and revenue, capital and operating expenditure, payments to the government in general form, abandonment; the economic limit of production, the timing of payments and checks of the model. Intermediate

Time value of money

  1. 06Interest and compoundingSimple and compound interest, doubling time and the rule of 72, nominal and effective rates, continuous compounding, moving sums through time, price growth and the real rate. Basic
  2. 07Discounting and present valueWhy money today is worth more than money tomorrow, the discount factor, the present value of a payment and of a series of payments, the end-year and mid-year conventions. Basic
  3. 08Annuities and discounted productionThe annuity factor and its derivation, series paid in advance, deferred, or growing or declining at a constant rate, the perpetuity and the accumulated sum; discounted production and why, at a constant price, discounting barrels is the same as discounting revenue; the rate for barrels when the price rises, exponential rate decline with continuous discounting and the equivalent level production. Intermediate
  4. 09Choosing the discount rateWhat the rate expresses: the cost of equity and of debt capital (WACC), the opportunity return and risk; a company's hurdle rate, the sensitivity of NPV to the rate, risk premiums and matching the rate to the cash flow. Intermediate
  5. 10Inflation: nominal and real moneyPrice indices, money of the day and constant prices, real and nominal rates, the rule that cash flow and rate must be consistent, escalation of prices and costs, and why inflation increases the real tax burden. Intermediate

Performance measures

  1. 11Cumulative cash flow and payback periodThe cumulative cash flow curve and its measures: maximum cash outlay, simple and discounted payback period, terminal cash surplus and the profit-to-investment ratio — what each of them shows and what it misses. Basic
  2. 12Net present value (NPV)The cumulative discounted cash flow, calculating NPV and the NPV profile, the investment decision rule and what NPV does not show. Basic
  3. 13Unit costs per barrelLifting cost, capital expenditure per barrel and capital intensity, undiscounted technical costs and levelised ones; how levelised costs relate to NPV and the break-even price, full-cycle costs and sunk costs, the effect of water cut and where comparing projects by cost per barrel misleads. Intermediate
  4. 14Annual capital chargeThe capital recovery factor and the level annual payment that returns an investment at the required rate of return: return on capital and return of capital, investments spread over several years, the capital charge per barrel and tariffs, equivalent annual costs of options with different lives and when they mislead, the link with depreciation, income tax and the accounting rate of return. Advanced
  5. 15Internal rate of return (IRR)The rate at which NPV equals zero: calculation by trial and by Newton's method, its meaning as seen through the project's account balance, late costs and MIRR, cash flows with several IRRs and why NPV decides when choosing between options. Intermediate
  6. 16Acceleration projects and incremental analysisThe incremental cash flow “with the project” minus “without the project” and how it is built from two complete forecasts; projects that do not add reserves but accelerate their production: where their value comes from, why their NPV profile is a hump and how it is affected by the rate, the price and the addition of reserves, why their IRR can be enormous or have two values; selecting and ranking projects under a limited budget by NPV and the profitability index. Advanced

The state and taxation

  1. 17The state and the subsoil: ownership of resourcesWho owns oil and gas in the ground: ownership by the people, on whose behalf the state acts, in Kazakhstan, and private rights in the United States; the subsoil, the subsoil use right and the produced oil under the Constitution and the Subsoil Code; the aims of the state as owner; resource rent, its division and the maximum government take beyond which a project will not start; the competent authority, stability, the pre-emptive right and strategic areas; the history of the subsoil regime of Kazakhstan, the shelf and the Caspian. Basic
  2. 18Licences and contracts for subsoil useWhat a company receives under a subsoil use contract; concessions (licences), production sharing agreements, service and risk-service contracts — who owns the oil, how costs are recovered and production is shared; how states allocate blocks; the regime of Kazakhstan: a contract instead of a licence, the electronic auction and direct negotiations with the national company, model contracts, the length of each contract period, obligations, transfer of rights and termination; the government take under a concession and under production sharing on the same project, and an auction lot through an investor's eyes. Intermediate
  3. 19State regulation of field developmentHow the state manages development once the contract is signed: why the interests of the investor and the owner of the subsoil diverge; project documents by stage and their review by the Central Commission (TsKRR) and the State Reserves Commission (GKZ); the path of a discovery through the reviews and the cost of waiting; the mandatory project indicators, author supervision and a development analysis when actual results differ from the project by more than 10%; the ban on flaring, permits and the gas processing programme, gas utilisation for the investor and for society; in-country value and procurement; reporting, inspections and sanctions; development options and a pool shared by two blocks. Intermediate
  4. 20Petroleum fiscal systems and taxationHow the state takes its share: bonuses, royalty and mineral extraction tax, export payments, taxes on profit, rent and excess profit, production sharing and the participation of a state company; the government take undiscounted and as a share of rent, the marginal take, the effective royalty rate, progressivity and front-end loading; three regimes on one field at different prices and sizes, small fields and a neutral rent tax; the taxes of a subsoil user in Kazakhstan in 2026 and what changes from 2027. Intermediate

Uncertainty, risk and decisions

  1. 21Sensitivity analysis and scenariosWhat a decision consists of and how risk is brought into it; the sensitivity of NPV to price, production, costs and timing, one parameter at a time, spider and tornado diagrams, break-even values and margin of safety, consistent scenarios and the “worst case”, simulation of NPV — and why the base case is not the average result. Intermediate
  2. 22Expected monetary value and preference theoryThe EMV of a decision from NPV and outcome probabilities, the EMV of an exploration well and the break-even chance of success, farming out a share to a partner, discoveries of different sizes and a programme of several wells; attitude to risk, the utility function and the certainty equivalent — and why companies do not simply maximise EMV. Intermediate
  3. 23Decision trees and the value of informationHow to build and fold back a decision tree: decision and chance nodes, conditional probabilities, folding back on EMV and the resulting strategy, the order of drilling prospects in one play; the value of perfect information, updating probability with Bayes' theorem for a survey with given detection and false-signal probabilities — and when information is worth buying, allowing for its price, the delay and attitude to risk. Intermediate
  4. 24Geological and technical uncertainty of a projectWhere technical uncertainty in a project comes from — volumes, rates, recovery, costs, timing, facility failures — and how it is taken into account in the economics: discounted production, the P90, P50 and P10 cases and the 0.3–0.4–0.3 rule, why the NPV of the average case is not the average NPV, the dependencies between parameters and narrowing the range by appraisal work. Intermediate
  5. 25Market, financial and regulatory uncertaintyUncertainty that no well can reduce: why the oil price is so volatile, crude grades and differentials, gas markets and regulated prices; volatility and the forward curve — contango and backwardation; random walk and mean reversion and simulation of NPV under a random price; costs that follow the price, the tenge exchange rate and inflation; changes in taxes and rules, stabilization clauses and windfall tax; debt, covenants and partners; real options. Intermediate
  6. 26Risk reduction and diversificationHow companies reduce risk: information, transfer, sharing and diversification; why a positive EMV does not protect against ruin and how the probability of ruin depends on the size of the stake; a portfolio of independent prospects and the limit set by the common risk of the play; working interest, farm-out, promote and carry; choosing interests in several blocks by certainty equivalent; insurance, a turnkey fixed-price contract, project finance and price hedging; diversification of the company and scenarios. Intermediate

This section is growing: new topics are published after a technical review.