Journal of Financial Risk Management
2013. Vol.2, No.2, 43-45
Published Online June 2013 in SciRes (
Copyright © 2013 SciRes. 43
Evaluation of Developed Low-Grade Reservoir by Cash Flow
Economic Evaluation Method
Liming Liu1, Youming Xiong1, Songlin Zhang2,3, Lixue Ch en2, Haohan Li u 2,3
1School of Petroleum Engineering, Southwest P et roleum University, Ch e n gd u , China
2School of Computer Science, Sou thwes t Pet roleum University, Chengdu, China
3Department of Computer Engineering, Sich ua n C ollege of Architectural Technology, Deyang, China
Email: liulimi,
Received March 5th, 2013; rev ised Ap ril 6th, 2013; accepted April 14th, 2013
Copyright © 2013 Liming Liu et al. This is an open access article distributed under the Creative Commons At-
tribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the
original work is properly cited.
There is no united method to evaluate developed low-grade reservoir. Cash flow economic evaluation
method is widely used in China and other countries. Cash flow method contains three different economic
evaluation methods, they are VP, IRR and investment recovery period methods. In this paper, we evaluate
a developed low-permeability sandstone reservoir and a developed middle-high permeability complex
fault block sandstone reservoir with the cash flow economic evaluation method. We get the evaluation
standard charts of the developed low grade big reservior, developed fault block reservior with mid-
dle-high permeability, developed fault block reservior with low permeability and heavy oil thermal re-
covery reservior. This new cash flow method lays theoretical foundations for evaluation of developed
low-grade reservoir and other kinds of reservoirs.
Keywords: Cash Flow; Developed; Low-Grade Reservoir; NPV; IRR; Investment Recovery Period
It is difficult to forecast some parameters based on the cash
flow economic method without proper mathematical models. In
China, many related experts proposed some methods, such as
minimum economic reserve method (Li & Luo, 1999), million
ton capacity investment method (Li & Wu, 2006) and movable
oil price method (Zhong & Ye, 2009) to facilitate the operation.
For example, the minimum economic reserve method is to use
the physical properties of oil reservoirs, such as permeability
and oil viscosity, reservoir depth, reserves abundance and pos-
sible economical factors to model related mathematical models
and to calculate the minimum economical reserve. If the evalu-
ation reserve is larger than the minimum economical re- serve,
we can draw a conclusion: There is no value for devel- opment
of this kind of reserve. The geological institute of Shengli oil-
field proposed the movable oil price method after years of prac-
tical experience (Chen & Tian, 2009; Chen, Hu, & Wang,
2011). This method is based on the theory that the oil price in
development project can not be the present real oil price. This
method is to determine a decision-making oil price according to
the trend of the international oil price and other factors. For
example, the decision-making oil price is 35$/bbl before Chi-
nese fifteen policy, the decision-making oil price is 18$/bbl
during the Chinese fifteen policy. If the profit rate of invest-
ment is less than 0.12, then we think this reserve is im- proper
for development. Million ton capacity investment me- thod is
similar to the movable oil price method. It is to deter- mine the
investment per million ton capacity according to the plans de-
sign, indices forecast and cost and investment forecast. If the
investment is larger than the inner ruled investment, then we
think this reserve is improper for development. Besides, some
exports think that it is more feasible for margin reserve evalua-
tion by combing the evaluation foundation, evaluation unit,
evaluation parameter and evaluation method (Zhang & Xie,
1999; Zhao & Yu, 2011; Guo, 2011; Luo & He, 2012). Here,
we will introduce the cash flow economical method with three
kind of mathematical models to evaluate developed low-grade
reservoir and other kinds of reservoir
Cash Flow Economical Method
Cash flow economical method (Xu, Xie, & Zhang, 2011) is
to use the following three mathematical models to evaluate
different reserves. The evaluation indices are net present value
(NPV), Internal Rate of Return (IRR) and the payback period
NPV Method
NPV is the sum of present value after discount of future net
cash flow according to the discount rate. From the point view of
investment decisions, it is profitable when the net present value
is bigger then 0. The calculation formula is:
PV is net present value;
i and are cash inflows and outflows of certain year; CO
is the discount rate;
t is the evaluation year during the evaluation period;
n is the time period from the evaluation beginning to the
evaluation end.
CI Product operating income recovery of the residual
value of fixed assets + re covery of liquidity;
CO Capitalization part of investment + development pro-
ject investment + liquidity + operating cost + sales tax and sur-
IRR Method
IRR is the discount rate during evaluation period when the
cumulative discount value of net cash flow is zero. It reflects
the capital profitability; it is the major dynamic evaluation in-
dices to reflect the investment profitability. When the IRR > 0
or IRR = 0, the related project is feasible. The mathematical
model is:
By using Equation (2), we can work out the IRR by using
test and interpolation method.
TP Method
T is the period of return on investment, it is to say,
T is-
the time after recovery of all the initial investment. To the in-
T should be short to avoid the risk of investment.
The mathematical model is:
where is the initial inves tment cost;
This model shows:
T is the time that makes the cumula-
tive cash inflows be equal to the cumulative outflows, it reflects
the process of return of investment.
Evaluation of Developed Low-Grade Reserve
Here, we take a certain oilfield in China for example. Ac-
cording to the above-mentioned three mathematical models, we
evaluate the developed reserves with different reserve types,
different well depth, and different oil price. And we get Fig-
ures 1-4, here, w
is maximum water concentration which is
Figure 1.
Caculation chart of developed low grade big reservoir .
Figure 2.
Caculation chart of developed fault block reservior with
middle-high permeability.
Figure 3.
Caculation chart of developed fault block reservior with low
Figure 4.
Caculation chart of heavy oil thermal recovery reservoir.
By using cash flow economical method, it is, by using three
mathematical models with NPV, IRR,
T being the evaluation
indices to evaluate the developed low grade big reservior, de-
veloped fault block reservior with middle-high permeability,
developed fault block reservior with low permeability and
heavy oil thermal recovery reservior , we get: Standard plates
of developed low grade big reservior, developed fault block
reservior with middle-high permeability, developed fault block
reservior with low permeability and heavy oil thermal recovery
Copyright © 2013 SciRes.
Copyright © 2013 SciRes. 45
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