3JZF’
Workover Economics–Complete but Simple
James L. Rike, SPE-AIME, Rike SeMce
Introduction
Evaluation economics for oil operations expenditures
has essentially evolved to the Profit to Investment
(P/1) Ratio (usually discounted) and Rate of Return
(ROR). These two calculations take into account the
long-term profitability of most oil and gas operations,
while recognizing the time value of money. Many
operators, however, measure the economics of work-
over operations with only a simple payout figure, and
take into account by means of a broad judgment
factor the anticipated risk, accelerated vs captured
oil (increased reserves), and projected life. This leads
to an overpessimistic evaluation of high-risk work-
over opportunities, because they are so much less
attractive than most. In reality, the return on hQh-
risk workovers may be much better than on other
investment opportunities such as service stations, gas
Am-+. “a
ylala,u,
,-.. b.a.,-n enrn~ A.amalnnmant
vti., D“xn.s, -Q. “.”y...b/...
Arillino
. . . ..-...~
nrnnncalc
y...~”=”.=”.
Conversely, payout calculation ignores accelera-
tion economics, and we find more and more workover
opportunities that accelerate oil production only 10,
5, or possibly 2 years as depletion times shorten.
Expenditures are made for quick-payout workovers
whose economics in reality are marginal because the
job may actually effect only a short acceleration of
production.
Regardless of the academic merit of better grading
for the industry’s workovers, management is unwill-
ing to slow down the approval process for all jobs.
Workovers are noted for their extra high over-all
A simple set of tables can be devised to give profit-to-investment ratio and rate of return,
using the payout figure usually calculated, but jurther taking into account acceleration
economics, risk, and anticipated lije. The tables can be applied to any venture having a
single initial cost and a consistent (not necessarily constant) type oj income return.
, ,.
profitability and should not be delayed while a group
of engineers or accountants grinds out alternative
production schedules, cash flow predictions, risk
evaluations, and P/I Ratio and ROR calculations. If
another evaluation system camot approach payout in
speed and simplicity, it could cost as much in the
delay of the large volume of good jobs as it saves in
better grading of the fringe prospects.
The system proposed here is a series of tables simi-
lar to compound interest tables or actuary tables. The
user identifies whether the prospect results in captured
production or accelerated production for a given
period of time and turns to the appropriate table or
section of tables. He estimates the degree of risk asso-
ciated with the job and uses this number to find a
specific table or to calculate a “risk-weighted” pay-
out. If he micu!ates a “risk-weighted” payou~ he
needs only one table for each degree of acceleration
anticipated. Having identified the correct table, he
selects a column according to the payout calculated.
Under each payout column is a series of P/I Ratios
and RORS, each corresponding to a producing life
in months. Tine estimated iife seiected determines tile
final economic evaluation.
Derivation of P/I Ratio and ROR
In Terms of Payout
Payout is a convenient form of relating cost and con-
stant returning cash flow. Suppose we let
 ~.- Al or mdoeic
c=cost of a given job, A-.m.l
dSS@,lilLGU
..,:*L
WIIJ1 VIL
fimamt;nnc
uyelcAL,”,Js.
There
A -----
ic a
. .- ~--. -=..

MR = monthly cash flow return from the job, reservoir information risk (Res. Risk), which defines
N = number of months the cash, flow is the uncertainty or lack of confidence that the reserves
perpetuated, are present under producible conditions and at eco-
i= interest rate or discount rate (annual), nomic rates. This risk factor is considered applicable
ROR = rate of return (annual). to the anticipated cash flow projected under “no-risk”
assumptions.
From any compound interest handbook we find that
There is present in any well operation a mechanical
[A–A(l+i)-’] risk (Mech. Risk), which defines our uncertainty of
Present Value of Annuity = 7 being able to mechanically complete the job for the
i
amount of money projected. This risk factor is often
where A is the amount of amuity and t is time in applied to the cost to arrive at a larger “risk-weighted”
years. cost. This is the total average cost to obtain a success-
It follows that from a single-cost, constant-cash- ful result — based on a large number of available
flow workover, opportunities, including those that would be unsuc-
Discounted Profit cessful for mechanical reasons.
= [(MR*12)–(MR*12)(1 +i)-’/12] _C In profitability computations, it can be shown that
i these risk factors operate in identical fashion, For
instance, a Risk-Weighted P/I Ratio is calculated as
Dividing by cost, we find that follows:
Discounted P/I Adjusted Profit
= [(MR* 12)–(MR9 12)(1 +i)-x/12]/i– C Risk-Weighted P/I Ratio =
Adjusted Cost
c
or
‘Res” ‘Sk)(cah ‘lOw) – (Me~~sk)
=
Cost/(Mech. Risk)
Discounted P/I
()
~
~R
[=
12– (~ 12
i
–1.
+i)Y/12
1 Multiplying top and bottom by Mech. Risk:
Risk-Weighted P/I
Since Payout = C/MR, the equation becomes
_— (Res. Risk)(Mech. Rkk)(Cash Flow) –Cost
cost
12– (1+~)3’/12
12
[ 1 or dividing top and bottom by Res. Risk:
‘isCounted”1 = (Payout)(i) – 1‘
Risk-Weighted P/I
or
cost

[
12–
P/I (Discounted at 10 %) = –-—-
12
(1 .lo)~/’2
—–
(0. 10) Payout
1 1“
= c-h ‘lOw– (Mech. Risk)(Res. Risk)
Cost/[(Mech. Risk) (Res. Risk)]
. . . . . . . . . . . . (1) Thus any calculation of profitability can adequately
take into account risk by applying a total risk factor
The foregoing equation gives Discounted P/I Ratio (Res. Risk X Mech. Risk) to either the cost or the
in terms of payout and the productive life in months. anticipated return. Since Payout = Cost/(Monthly
For calculating ROR, we need only recall that ROR Return), it follows that:
is the interest rate at which present value of cash flow
returning equals initial cost (for a single-cost project). Risk-Weighted Payout—
This !eads IQ the fo!lowing identity: cost
= (Total Risic)(MontNy Return) ‘
~ = (MR* 12) – (MR. 12)(1+ ROR)-Sl”
(ROR) 9 or if we define total risk as total going-in success
rating,
or
Risk-Weighted Payout

—
c
MR
= Payout = [
12– (1 +R1~R)V/’2
(ROR)
1 “
Unrisked Payout
= Total Going-In Success Rating “ “
(3)

Eqs. 1 and 2 can be modified to take into account

. . . . . . . . . . . . (2) both Res. Risk and Mech. Risk by calculating risk-
Thus we have equations for both Discounted P/I weighted payout according to Eq. 3.
Ratio and ROR, which require only the factors of
Introducing Accelerated Production
payout, project life, and annual discount rate. Eqs. 1 ~mwlo-rn.~~~
and 2 both assume captured cash flow and do not --w..
presume any ris~1. tlsMJLkz,Gu
-.” . . . . ...6-.4 . . ..+h
Wlu’
●ha ?wniv.t
(.lIw y.”,v... The change in cash flow produced by an acceleration
workover takes the form of an increased cash flow
Introducing Risk rate during the early life of the reservoir and a cor-
Most evaluators recognize two distinct types of riik ...=fim~ima
1 G2.yuLzum~
A=..t=.ac~in cash flow rate at the end of
UWV. V.. U- .-

JOURNAL OF PETROLEUM TECHNOLOGY

-..”--.
lGYS1
s-:..
V(J11
1:4-
lllG.
l-ha
L UG abbGlclauuP.
in
o,.,-. ala..”+:m
..s
tha
~.w
Arncm
umti
;mwr-slvd
HA. U..WU Ac~Q~! ~~~o~~ ,-.
. (>)
total block of income shifted can be represented by = Acceleration Multiplier “ “ “
the time lapse between the centroid of the increased
production-time block and the centroid of the de- The P/I Ratio calculated from this pseudoaccel-
creased production-time block. This acceleration time erated payout will be discounted by the discount
is readily approximated from a knowledge of the interest rate used in calculating the acceleration multi-
depletion time for a reservoir and the anticipated life plier. The rate of return calculated from this same
of the well reworked. Using this concept of net accel- type of payout is the rate of return on the present-
eration of a block of income, the discount applicable worth gain; and the discount interest rate is used to
to accelerated production can be determined by start- evaluate the relative worth of the deferred production
ing with the equation for present viaiiue, &kefi fmrn as ~Qrnpared with w~rk~ver results: The usual ~rob-
any compound interest handbook: Iem of two rates of return for an acceleration job is
not present in this system because the ROR calcula-
A tion no longer involves a later negative income block
Present Value of Future A = ————
(1 +i)’ “ the same size as the positive income block. The rate
By definition, of return calculated in this way will be lower than
the upper value calculated in the conventional man-
Net Value of Accelerated Production ner. A table of P/I Ratio and ROR can be computed
= (Current Actual Value) for accelerated production economics by simply cal-
–(Present Value if Produced in Future). culating a pseudoaccelerated payout and using these
It folJows that figures for the computations in Eqs. 1 and 2.

Net Accelerated VaJue Presenting the Data for Maximum LMiity

Eqs. 1 through 5 are all relatively simple, with Eq. 2
= currentAcmalvalue[
l--l ~
where i is the annual interest rate and t is the number
presenting a minor challenge for hand calculating
ROR. It is easy to develop a computer program for
these computations and to obtain a printout of easy-
of years accelerated. to-read tables such as Tables 1 through 3. A 10-
For 10 percent discounted value, percent discount factor was used for all P/I Ratios
calculated for these tables.
Net Accelerated Value Table i IS an exampie of using individual sheets
for each variation in Total Going-In Success Rating
1
= Current Actual Value
[
1– —
(1.10)’ 1
‘
(or Risk Factor). A group of 10 such tables could be
made, one for each risk factor of 10, 20, 30, . ..100.
or based on G@Ked prdtti~ti~ii. Shdar ~iOid~S Of 1(!
tables could be developed for 20-year accelerated
Acceleration Multiplier
production, 15-year accelerated production, 10-year,
and so forth. One version of this system is a booklet
‘l–(l;
[ 1
i)’”””””-”
(4)
arranged in groupings of 10 such tables under divi-
sions specifying captured production or one of five
Applying the acceleration multiplier transforms
different acceleration terms. The user approximates
the positive and negative income blocks into equiva-
the gross degree of acceleration economics to be ap-
lent positive captured production, using the discount plied and selects the group of tables in that division.
interest rate. Stated differently, the multiplier applied
He then selects a sheet with the success rating closest
to the actual positive cash tlow generated by the work- to that of his project. Payout for the job in question
over establishes the difference in present value profit is selected from the major headings. Anticipated pro-
with and without acceleration. In practice, the dis-
ducing life is selected under that major columnar
count interest rate should be equal or close to the heading, and P/I Ratio and ROR are read directly
cost of capital for a given firm. opposite. Extrapolation can be used between sets of
The multiplier 1 – ~~ can be calculated for tables, between sheets within a set, or between pay-
out columns.
2, 5, 10, 15, 20, or any other number of years for Tables 2 and 3 demonstrate how a complete set
which acceleration economics is anticipated. These of data for most workovers can be compressed into
five time terms give a comprehensive range that per- a few sheets. Each sheet represents either captured
mits reasonable extrapolation for intermediate accel- production (Table 2) or some degree of acceleration
er~~on ~irn.e~.The rnu!tip!ier can be directly applied --. -.—-:--- (/-r.A tlulc
Ll. 2\ Th --- .-...:,.. fw.1,, -.. I’lm.rl;-me
CX(J1lU1lIIU J). L llG luaJul bulurlllm A1tiau, AA&
to cash flow, so that represent risk-weighted payout. In practice, payout
Pseudoaccelerated Payout (as typically computed for a presumed successful
venture) is converted to risk-weighted payout by
cost dividing by the total going-in success rating (see Eq.
= (Acceleration Multiplier) (Cash Flow) ‘ 3). Answers are read from the appropriate columns
and rows, just as before.
or
Table 2 alone, with a simple additional calculation,
Pseudoaccelerated Payout can be made to serve all acceleration situations as

JANUARY. 1972 69
well as captured-production conditions. The nsk- Other evaluators lean toward discounted P/I Ratio
weighted payout must further be converted to a as a final guide for selection or rejection. Development
pseudoaccelerated risk-weighted payout, by dividing drilling proposals often sink or swim based on mini-
by the appropriate acceleration multiplier (see Eq. mum P/I Ratios of 0.5 to 1.0. This criterion leads to
4). This computation is not too cumbersome to solve potential rejection of quick-payout, but short-life,
rapidly by hand or with a slide-rule or desk calculator. workover opportunities, especially if risk is incorpo-
This makes Table 2 usable for a wide range of situa- rated into the calculations. One need only reflect on
tions or variations without resorting to the multiple the degree of enthusiam he would feel if he could
extrapolations possibly required in the other sets of repeatediy inve~t .+ k:. mnrc
,110=Wl mal ~oney
.0..-. .. . in 3-month pay-
tables. out projects with 4-month life projected. (He doubles
his money in less than a year.) Yet this individual
Establishing Minimum Workover project has a Discounted P/I Ratio of 0.3.
Profitability Note that Discounted P/I Ratio nzuhiplied by ROR
The results of workover economics calculations point would result in a profitability index that preserves
up some interesting questions about the minimum the merits of both types of calculations. An operator
profitability acceptable for workovers and the cor- should have an unusually large backlog of favorable
rect system for estabhi%ng relative va!w in a !eng investment opportunities and a poor credit rating to
list of high-profitability jobs. A quick glance at justify rejecting any workover (or possibly any other
Tables 1 through 3 shows that ROR rapidly reaches investment opportunity) with a risk-weighted profit-
and exceeds 50 after payout is reached. Acceptable ability index (P/I Ratio X ROR) of 25 or more, In
ROR for development wells is often considered 20, Tables 1 through 3, a dashed line has been drawn
or sometimes less. Some analysts tend to reject ROR across each page to separate the areas where P/I
as a numerical evaluator when high rates are calcu- Ratio (discounted at 10 percent) times ROR becomes
lated, because the rate presumes the ability to con- greater than 25. This is not intended as a guideline
Hnua!!y ~einvest money in comparable activity. Work- for rejecting workover proposals. It happens to be
. . ..
overs are a continuing and constant requirement in close to gwctennes applied io dewlcpmtl.n-f ~ =m.!..e
“11’no

maintaining production, and for many companies the proposals by part of the industry. A complete set of
number of workovers annually is 10 to 30 percent of tables discloses that the following workovers are
the total number of wells they operate. Such an in- approximate equivalents according to the discounted
vestment opportunity approaches the presumption of P/I Ratio times ROR profitability index:
continual reinvestment opportunity at the rates cal- 1. A captured oil, 20-percent success rated job,
~,q~t~~. BeQa~~e of the repetitive characteristic of with a 2-month payout and an 18-month producing
workover opportunities, ROR, even at high computed life.
rates, should be accorded more respect in workover 2. A 20-year acceleration job with 90 percent
evaluations. anticipated success, a 12-month payout, and a 36-

TABLE l—WORKOVER ECONOMICS, CAPTURED PRODUCTION, 70-PERCENT GOING-IN SUCCESS RATING

(P/1 Ratio discounted at 10 percent)

2 UON7H PAVOUT 3 MOM)! PAYOUT 6 ❑ ONTH ?AVOVT 6 160NTM PAYOUT 9 M2M7H PAYOUT 12 MONTH PAYOUT

PROOUC lNG PROOUCIFFG MOOUCING PROOUCING PR mUC I NC M 00uC 1 NG

LIFE LIFE LIFE LIFE LIFE LIFE
IFFCWTHSI P! I ROR Inmws) PII nom ( MW4TMS) VII Rot Iwotmtsl PI] ROR {MONTHS) P/I am ( MONTHS) P/1 nm

3 0.0 a.

4 0.3 63.
.— --- -----
5 0.6 116.
i s 0“1 2+.

6 1.0 159. I 0.3 55. 0.0 7.

l-b
1 1.3 19s. -7--3.7 -;3:7 : 0.1 29.

a 1.6 231. 8 0.7 10s. I 8 0.3 49.

L ----- -----~
* 1.9 259. 9 0.9 130. 9 0.4 67. [ 9 0.0 6.

10 2.2 283. 10 1.1 1+9. 10 0.6 03.

J 10 0.1 la.
I
11 2.5 30.3. 11 1.3 166. 11 0.8 91. ! ii 0.2 30.
1
12 2 .a 320. 12 1.5 180. 12 0.9 110. I 12 0.3 40.
L ----- ----
1
15 3.7 357. 15 2.1 213. 15 1.4 140. 15 0,6 6S. i 15 0.0 15.
I
I
18 64 330. 18 2.7 234. 1s 1.0 160. 18 0.9 84. , 18 0.2 31. 18 0.0 4.
L -— --- ----
-1
24 6.3 403. 26 3.9 258. 24 2.6 18+. 24 1.4 107. 24 0.6 5+. IL 24 0.2 26.
------ —--

s 36 6.0 215. 36 4.2 202. 36 2.5 128, 36 1.3 16. 36 0.1 49.

48 12.3 619. +8 7.9 279. +8 5.7 208. 48 3.4 135. 48 2.0 E5. +8 1.2 5Q.

(ALL RESULTS BASEO ON MAINTAINING *ROOXTIW A7 A C~SYA#7 RATE Throughout THE lNolcATEo PRoDucl NG LIFE)

JOURNAL OF PETROLEUM TECHNOLOGY

month producing life. Some workovers involve “outside” production lost
3. A 10-year acceleration job with 50 percent or deferred as a result of the workover; i.e., produc-
anticipated success, a 6-month payout, and a 48- tion lost from the original completion while perform-
month producing life, ing a multicomplete workover, or production lost
4. A 2-year acceleration job with 90 percent an- from a limited-capacity well while it is being stimu-
,-. J _ J - -1--- .. --.41.? -lam -A T+ ;. .,, mr-.td the~
ticipated success, a 2-monfh payout, and a 24-month lat~a iitiu s~USIS~UCUUy ~lGaiku. AL la .u~&..w . . .

producing life. payout be adjusted in such cases, and that the present
value of lost or deferred production be treated as
Variations in Utility of the additional cost of performing the job.
Economics Tables Straight-1ine, decline-type production schedules for
Several extrapolations and adjustments are available most w&kovers can be b;~adiy approximated in these
to whoever uses the sets of tables described. For in- tabIes by using an artificially inflated payout that is
stance, an acceleration workover on a 100-percent 50 percent greater than the payout based on antici-
working interest lease with a remaining life of about pated initial increase. An exponential decline (to 10
7 years, in a competitive reservoir with 30-percent percent of initial production) can be broadly approxi-
operator participation in the total reservoir, could be mated by using an inflated payout that is 100 percent
evaluated by assuming a case of 70 percent captured greater than initial payout. If such approximations
oil and a case of 30 percent acceleration for 5 years. prove inadequate, tables can be developed for

TABLE 2—WORKOVER ECONOMICS, CAPTURED OR UNADJUSTED CASH FLOW BASED ON RISK-WEIGHTED PAYOUT
(P/1 Ratio discounted at 10 percent)
0. t “ON,” .,,0”, 0., ●ull” ●b”ou7 1.0 ●om. ?avoul 2.0 tm.w *mo.T 3.0 monw .Avan . nun. ●*voL17 + mum *AVCW 12 nu!lw vavou~

,,”O”C ,* L ,“m”c, w ?nODuclnc *“ODUI”G PRcm”c , w, ..muc I rk ?~~m 8NC WOO(IC 1.6
L,,E L16E L,. E LIFE LIF? LI*E L,6E L,f E
1-1”5! 9/, “0, ,“W,” S, ,,, RCI, ,KQI,” S, ,,, “o” ,“oI,”s, ,,, “09 ,“u4T”s, .,, ,~ ,moM,lls, P,, “M ,“W,” S, ,,, ,0? ,“0!4,” S, ,,! R=
-.l----—-__—__— __ —___ ______ __________ __
27.3 8000. 3 ..7 11,.. 3 ,.* 3,*. , 0.. *7. ,

. ?4.5 ,37, . . ●.S 1.,.. . 2.8 5*.. . 0.,

L--–—”-:—--L,
5 .5.7 ,02... % *.3 167.. 5 ,.7 *... 5 1.3 23*. 5 0.6 101.
I
6 5..0 10967. 6 10.2 In%. 6 ‘.. ,00. * 1.0 300. 6 0.9 1... ; . 0.0 0.

7 .3.0 11236. 7 12.0 1,9,. , 5.5 9*4. 7 2.2 351. 7 1.2 ,8, . ; r 0.1 21.

8 ,2., 11**>. 1 13., m,.. 8 *.. ,,0. 8 2.7 ,*3. * 1.5 213. ~ * O.? ●1.
9 81. * 11671. , 15.. 2169. , 1., 100, . , 3.1 .2*. 9 ,.8 1*O. ~- 9 0.. 38.
— --------- ~
10 W.. 11781. 10 17.3 2226. Lo 0.2 1042. 10 >.* .5*. ,0 2.1 *6+. 10 0.5 74. , 10 0.0 12.

11 ,9.. 11,.9. 11 19.1 Zzba. 11 9.0 1075. ,1 ..0 ..0. ,1 Z.3 283. 11 0.7 W. / 11 0.1 23.

12 100.0 11*O1 . 12 20.8 2300. 12 *.9 L1OO. 12 4.5 500. 12 2.6 300, 12 O.* 100. / 12 0.2 33.

I------------

100.0 11970. 15 d6. O 2356. 15 12.5 11.9. 541. 15 3.5 331. !5 ,.2 ,2.. ,, 0.5 ,a. ~ ,5 0., Zz.

100.0 11990. [s 15.0 1174. 1. 7.0 %5. 1* 6.3 359. 18 1.7 1’9. ,, 0., 76. i 18 ~.> ,..
(L ___________
2’ 100.0 12005. 2. .0.7 23,.. 2. 19.8 &l V>. 587. 2. 5.9 3.3, . z. z.. ,73. 2. 1.3 1.0. *. c,., bz.

?4 ,!.0.0 120. s. 36 5“.7 2.00. Y. 28. * 1200. ..0 192. 3. 2.3 ,21. 3. ,.5 ,..

100.0 12C45. ‘8 75.1 2400. ‘“ 37.0 1200. 600. .s ,1.7 ,99. ., +., ,,,. ., 3.2 ,2, . .8 2.2 93.

t&Lt I16WLTS BA5f0 n. .AINIA!. rNG PmOOUC710N AT . CONSTANT .AIF T.RfW.W.1 1.E tWl CA7f0 0. O.UC8.G LIFE)

TABLE 3—WORKOVER ECONOMICS, PRODUCTION ACCELERATED 10 YEARS, DISCOUNTED AT 10 PERCENT AND

BASED ON RISK-WEIGHTED PAYOUT
G.1 “ml. *.,W1 0., .,-SIT. ,.,0”, , .2 “0.1. ●a”o”, 2.0 IIDN,H ?,,0”, 3., “ml. .*”our 6 ..*W .4!0.7 s “ml. .,,0”, ,Z “m, ” ,,,0”,

I
. 22.1 $.3t. 3.6 731. . 1.3 251.
I-————-——-
‘ o-z 3’.

5 27.7 6M,. . . . ,,,. 5 1.* , 0.. %0. I 5 ..0 3.

.11. a.,
6 33.3 ..65. ,.9 10>7. * ?.i 5 L20. : 6 o-i ~1.
, 30.9 .7*. ,.0 113’.. , 3.0 .70. 7 1.0 155. , 7 0.3 57.
‘—_———_—_ .
8 .4.. .9., . 8.1 1209. * 3.5 5,9. 8 1.3 185. . 0.5 7*. 1

, .9.9 707.. *.2 12,7. , . . . , 1.5 ?1,. . ..7

,0 $5.3 71.>. 10. , 13,2. 10 . . . ,90. ,. r.” 23.. ,0 0..

11 .0.7 723, . 11.3 13.7. >.2 ,,6. 1, 2.L 2,3. ,, ,.,

12 . ..0 7273. 12.. 1375. 5.7 *,,. 12 2.. 2... ,. 1.2

15 01.. 7338. 1,.* ,.>,. 7.3 **1. 1’ 3.1 30.. 15 1.6

*7. Z 7360. L,. * ,.5,. s., ,0 ,.* 327. 18 7.3

,00.0 737, . 26.6 1. . . . 11. a z. s.. 3s1. 2. 3.3 ?.22. 2- 1.1 ‘s8. : 2+ 0.. .?. 2. 0., .’.
24
,— ____ ------ ~

,00.0 ?37, . 3,.7 )47.. ,7.3 7,6. 36 1.2 36s. 36 5.1 2.0. 36 2.1 110. ‘. :.? 36 0.5 3,.

lo ___________

?2.6 ,,7. ,, 10. ? W*. M *.a >*. , be ?.9 lt7, .8 i., 13. .0 0.9 .,.
:.0.0 737, . .$.1 1475.

IA, L Otsulls C.ASEC @* ● JIM1,

IN!NG PRco”cl lo. AT J .0. s,.”1 **Tf !.kow.ou! E lNolcl Tto Uoll”cl.r. L,Ffl

JANUARY, 1972
straight-line and exponential decline by using the
appropriate formula describing that flow pattern. The
tables included here as examples are all based on a
constant income generated.
Some operators in certain areas, such as offshore,
must establish priority for all or a certain class of
workover opportunities. When combined with the
rig time anticipated, economic evaluations from these
tables may be useful for this purpose. Where opera-
tions are rig-limited, or a backlog of workovers exists,
Pfi.Q@ scheduling might take the following form:
simple, by use of a set of tables that take into account
accelerated vs captured production, anticipated risk,
and projected life, while using the basic payout figure
as the key profitability indicator.
4. The system can be compressed to the use of
only a few tables and still give quick and accurate
results. It is possible to compress the system into one
table by adding one reasonably simple calculation.
5. Rate of Return is believed to be more repre-
sentative of workover profitability than is Profit-to-
Investment Ratio, even at high rates of return, be-
..:fi~ ~w~v-.
cause of the qu.k~ -n. fillt ---- reD@ing
. . investment
and

P/I X ROR
Priority Index = opportunities available in an operating company’s
Rig Days To Complete Job usual workover program.
Tables computed accordhg to the principles de- 6. A profitability index consisting of P/I Ratio
scribed can be applied to any investment proposal times ROR is suggested for comparing all types of
with a single initial cost and a consistent (not neces- investment proposals. Use of such an index would
sarily constant) type of income return. The concept result in a profitability-index cutoff of 25 for the sys-
is equally applicable to many development wells, gas tem used by some operators to pass on development
plants, electrification projects, unitization proposals, well prospects. Workovers that meet even lower
and many other ventures that fit the basic criteria. criteria look highly attractive in short-payout situa-
Payouts longer than 12 months are often required tions.
for many of these alternative applications, and tables 7, The system is adaptable, by extrapolation or
with longer payouts would have to k- U. A= dnnsd
u.v..-r.-. The adjustment, to combination captured and accelerated
answers are “after income tax,” provided payout is production situations, to consideration of ~~itide lost
calculated after Federal income tax and provided the production, to declining production, to determina-
tax picture does not change in later years. tion of rig priority, and to economics after taxes as
well as before.
Conclusions 8. The concept is equally applicable to develop-
1. Payout figures are an inadequate measure of ment wells, gas plants, unitization, or any other proj-
workover profitability, resulting in missed opportuni- ect that entails a single initial cost and a consistent
ties as well as in some unprofitable work. (not necessarily constant) cash flow return. J_PT
2. The prevalent use of a different economic eval-
uation scheme for workovers as opposed to other Original manuscript received in Society of Petroleum Engineers
ventures probably results in the shelving of high-risk office June 28, 1971. Revised manuscript received Oct. 18, 1971.
Pa~er (SPE 3588) was gresented at SPE 46th Annual Fall Meeting,
workover programs when, in fact, total risk-weighted heid in New Orleans, “Oct. 3-6, 1971; and at SPE South Plairia
profitability might exceed alternative opportunities. Re~ional Meeting. held in Lubbock. Tex.. Nov. 11-12. 1971. 0 CoDv-
rig~t 1972 Ame~kan institute of Minin.& Metallurgical, an~ Pe&-
3. Evaluation can be made complete, but kept Ieum Engineers, Inc.

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