Hey guys,

I am struggling and confusing with petroleum economics. I am asked to calculate Profitability Index, PI, for oilfield development. The original PI formula is the ratio of NPV to initial investment as we know. But what is meant by initial investment? Is it exploration and capital expenditures prior to oil production? Or expenditures over the whole life of an oilfield?

I assumed the initial investment to be all expenditures as exploration costs, capital and operation expenditures, licences costs, oil and gas tariffs, and abandonments costs. The reason why I used such expenditures is that you are not only bounded by initials investment as you will have to sustain the oilfield development, and including all expenditures in initial investments will give cleare picture of what you get per pound spent for project.

Thanx.