Effect of Depreciation Calculation Methods on the Evaluation of Petroleum Projects

Abstract

The development of oil reserves requires critical decision-making due to the high investment costs involved. Given the substantial investment costs in petroleum projects, these decisions can significantly impact profitability. A key component of these costs is the depreciation, depletion, and amortization (DD&A) of assets over their useful life. This study provides guidelines for managing asset costs in petroleum projects by employing cash flow and financial models. Two cases were analyzed: Case 1 (fixed asset costs) applied S.L. and DDB, while Case 2 (production-linked costs) employed UOP. Although both models yield the same total profit, the cash flow model reflects profits only after several years, whereas the financial model accounts for profit from the first year by distributing the investment cost over the project's estimated life. The study compares the implications of these methods—Straight-Line, Double Declining Balance, and Unit of Production—on profit recognition and investment recovery.