Economic Calculation

Before deciding whether to invest in an exploration program, companies typically make an economic calculation based on a number of factors:

• an estimate of the geological risk

• the amount of expected production

• the likely selling price

• drilling and operating costs

• distance to processing facilities and pipelines

• taxes and royalties

• inflation and interest rates

• the amount that might be earned by investing elsewhere

The result tells companies if a geological prospect is worth exploring and how much they can afford to spend to acquire the mineral rights for a parcel of land.

Companies may decide the numbers are too discouraging and shelve the prospect until there is some change in economic conditions or an improvement in geological knowledge of the area. They may decide to reduce the risk by asking the company's land department to find a partner.

Petroleum Communication Foundation. Our Petroleum Challenge: Exploring Canada's Oil and Gas Industry, Sixth Edition. Calgary: Petroleum Communication Foundation, 1999. With permission from the Centre for Energy.