D014 Petroleum Economics and Risk Analysis

Course Facts

Course Code:
5 days
Virtual Classroom
4.0 Continuing Education Units
40 Professional Development Hours
Certificate Issued Upon Completion


Business Impact: This course will provide attendees with methods to identify and incorporate subsurface facilities and commercial uncertainties into an economic evaluation of a project.  Additionally, it will provide practice with tools with which to manage the associated risks, thereby reducing the investor’s exposure to financial downside while taking advantage of potential upside.

This course details the main financial concepts and economic evaluation techniques and related financial concepts that are used in the oil and gas upstream business to assist decision making on either the investment of capital or the divestment of assets. The course will be focused upon the conversion of hydrocarbon volumes to ‘monetary value’ and the requirement for consistent means of determining both the absolute and relative attractiveness of investment opportunities, from exploration, through appraisal and new field development to portfolio management decisions. 

Duration and Training Method

A virtual classroom course divided into 10 three to three and a half hour webinar sessions (equivalent to a five-day classroom course), comprising of a mixture of lectures, case studies, and practical exercises to be completed by participants during and between sessions.

Participants will learn how to:
  1. Employ the principal elements and techniques of Petroleum Economics.
  2. Analyse wider trends that determine worldwide hydrocarbon reserves, supply and demand pressures, and possible trends for the future.
  3. Illustrate how Petroleum Economics is critical to the project decision-making process.
  4. Analyse the nature of discounted cash flow, Net Present Value, Rate of Return indicators, and the Cost of Capital.
  5. Demonstrate how Profitability and Efficiency are measured for a project, including the role of inflation.
  6. Distinguish the various Petroleum Fiscal Systems in operation around the world (tax and royalty-based, PSC’s).
  7. Examine more fully, and from a wider perspective, how projects are screened and ranked economically.
  8. Perform sensitivity analysis within the ranking and screening process, along with risk and its quantification.
  9. Employ decision trees in analysing business opportunities at various stages of the upstream field life, from exploration through to late life development opportunities.
  10. Use TRACS MCApp or @RISK® and Precision Tree® software for Monte Carlo simulation and decision tree analysis.
  11. Apply quantitative risk analysis tools, such as the Bow Tie model, to identify and manage project risk and to capture actions on a risk register.
This course will explain the petroleum economics techniques that are applied in the oil and gas business to assist decision making on either the investment of capital or the divestment of assets. This course will focus on the conversion of hydrocarbon volumes to ‘dollars’ and the requirement for consistent means of determining the attractiveness of investment opportunities, from exploration, through appraisal and new field development to new field developments to portfolio management decisions. The course materials include many exercises to embed the principles of petroleum economics and some related financial concepts across the E&P asset life cycle. A feature of this course is the use of TRACS MCApp tool for Monte Carlo simulation.


  • The global oil and gas industry; distribution of reserves; world supply and demand; trends for the future
  • The role of petroleum economics in decision making

Development Economics

  • The input required for constructing a project cash flow
  • Principles of cash flow analysis
  • Constructing the project cash flow
  • Indicators from the undiscounted project cash flow
  • Petroleum Fiscal Systems; tax and royalty; Production Sharing Contracts
  • The principles of discounting
  • Discounted cash flow
  • Indicators from the discounted cash flow (NPV, IRR)
  • Use and abuse of EXCEL to calculate NPV, IRR
  • Calculating the cost of capital (weighted average cost of capital)
  • Profitability indicators and efficiency ratios
  • Project screening and ranking
  • Sources and measures of inflation
  • Incorporating inflation into the project economics
  • Understanding real terms, money of the day, Internal Real Rate of Return
  • Sensitivity analysis and spider diagrams

Exploration Economics

  • Understanding and incorporating exploration risk
  • Introduction to gambling theory
  • Introduction to decision tree analysis
  • Exploration ranking using Expected Monetary Value EMV
  • Exploration risking
  • Detailed decision tree analysis
  • Use of MCApp to create P90, P50, P10 estimates
  • Combining continuous distributions with decision tree analysis

Incremental Economics

  • Defining an incremental project
  • Analysis of incremental project economics; alternative methods
  • Risking incremental projects; appropriate discount rates
  • Operational decision making

Defining Uncertainty and Risk; Statistician’s vs Practitioner’s View

  • Identifying relevant parameters which exhibit uncertainty
  • Expressing uncertainty as probability distributions
  • Basic statistics
  • Distribution types (normal, triangular, log-normal, etc.)
  • Dependent and independent variables (Bayes theorem)
  • Combining uncertainties
  • Monte-Carlo methods, parametric methods
  • Getting to know TRACS MCApp (or @RISK) for Monte Carlo simulation

Economics of Appraisal

  • The objectives of appraisal; Value of Information (VOI) concepts
  • VOI calculations in appraisal
  • Appraisal planning for maximum value

Heuristics - Human Bias in Uncertainty Estimation

  • Identifying human bias
  • The impact of human biases
  • How to manage human bias

Risk and Uncertainty in Development Planning

  • Causes and consequences - the Bow Tie Model
  • Managing risk - the risk register and action plan

Portfolio Management

  • Portfolio management theory
  • Why and how companies diversify in the oil industry

Who should attend

Subsurface professionals of all disciplines (geoscientists, engineers and managers) involved in the E&P process who wish to obtain an understanding of petroleum economics, and those who are transferring from a technical discipline into the world of commercial evaluation.

Prerequisites and linking courses

A working use of Excel is required (including an understanding of formula use and basic Excel functions).

Upon completion of this course possible follow up courses could include N006 (An Introduction to Reservoir Engineering), N412 (A Critical Guide to Reservoir Appraisal and Development), N425 (Play Analysis for Targeted Prospect Identification) and N995 (Managing Uncertainty and Risk in Appraisal and Development).

Click on a name to learn more about the instructor

Mark Cook

Related Subjects

"Whether you do economic analysis or need to have a detailed understanding of what different economic measurements mean this course would be useful. Decision tree analysis and risking was also great to see."