CaseMark Modeling Resource Depletion Economics
Builds depletion models with production decline, reserve replacement economics, and terminal value analysis for finite-life assets.
When To Use
- Valuing oil & gas properties, mining concessions, or timber tracts where asset life is bounded by extractable reserves
- Forecasting production revenue streams under hyperbolic, exponential, or harmonic decline assumptions
- Evaluating reserve replacement economics — whether infill drilling, secondary recovery, or exploration capex extends economic life at acceptable returns
- Calculating terminal/salvage value and asset retirement obligations (ARO) for finite-life assets
- Stress-testing resource investments against commodity price, decline rate, and cost escalation scenarios
Inputs To Gather
- Reserve estimates: Proved (1P), proved + probable (2P), and contingent resource volumes with classification basis (SEC, PRMS, NI 51-101) [VERIFY classification standard used]
- Current production rates: Recent monthly/quarterly production data (BOE/d, tons/month, MBF/year as applicable)
- Decline curve parameters: Initial decline rate (Di), b-factor (hyperbolic exponent), and minimum decline rate (Dmin) if using modified hyperbolic
- Commodity pricing: Strip pricing, flat-price assumptions, or escalation model; specify real vs. nominal terms
- Operating costs: LOE/per-unit lifting costs, royalties/overriding royalties, severance/ad valorem taxes [VERIFY applicable fiscal regime]
- Capital program: Maintenance capex, development capex schedule, and reserve replacement investment plan
- Discount rate / WACC: Risk-adjusted rate appropriate to resource type and jurisdiction
- ARO / reclamation costs: Plugging & abandonment, mine closure, or reforestation obligations with timing estimates
Workflow
Establish reserve base and production profile
- Classify reserves by category (PDP, PDNP, PUD, probable, possible)
- Fit decline curves to historical production; select decline model (exponential for mature assets, hyperbolic for unconventional, harmonic where warranted)
- Set economic limit — production rate at which net revenue equals operating cost
Build revenue forecast
- Apply production volumes to commodity price deck on a per-period basis
- Account for product mix (oil/gas/NGL ratios, ore grade variation over mine life)
- Incorporate hedging or contract pricing if applicable
Layer in cost structure
- Fixed vs. variable opex separation; apply per-unit variable costs to production schedule
- Schedule development capex tied to reserve category conversion (PUD → PDP)
- Include royalty burdens, production taxes, and income tax modeling [VERIFY royalty/tax rates by jurisdiction]
Model reserve replacement economics
- For each tranche of replacement capex, calculate incremental reserves added, F&D cost ($/BOE or $/ton), and recycle ratio (netback ÷ F&D)
- Compare recycle ratios against hurdle (typically >1.5× for conventional, >2.0× for unconventional) [VERIFY current market benchmarks]
- Determine whether reserve additions extend asset life beyond base decline or merely slow decline rate
Calculate terminal value and ARO
- Terminal value = salvage value of surface equipment + land residual − ARO obligation (discounted)
- For mining: include reclamation bonding costs and post-closure monitoring
- If perpetual tail production exists (e.g., low-rate stripper wells), capitalize at economic limit or apply a terminal multiple
Run depletion and valuation
- Compute unit-of-production depletion for each period: (period production ÷ remaining reserves) × depletable basis
- Generate PV-10 (undiscounted and at 10% per SEC convention) and NPV at project WACC
- Calculate reserve life index (RLI = reserves ÷ annual production) at each forecast point
Sensitivity and scenario analysis
- Vary commodity price (±20%, ±40%), decline rate (b-factor ±0.2), and opex escalation (CPI vs. oilfield-specific indices)
- Run breakeven analysis: minimum commodity price to achieve target IRR or positive NPV
- Tornado chart of top-5 value drivers ranked by impact on PV-10
Output
The completed model should include:
- Production forecast table: Annual volumes by reserve category with cumulative depletion percentage
- Cash flow waterfall: Revenue → royalties → opex → capex → taxes → net cash flow, per period
- Depletion schedule: Unit-of-production depletion by period with remaining depletable basis
- Reserve replacement summary: F&D cost, recycle ratio, and incremental RLI per capex tranche
- Valuation summary: PV-10, NPV at WACC, IRR, and payback period
- Sensitivity outputs: Tornado chart, breakeven price, and scenario comparison table
- Assumptions log: Every key input with source, date, and [VERIFY] flags where data is uncertain
Quality Checks
- Confirm cumulative production in forecast does not exceed total recoverable reserves (1P or 2P as specified)
- Verify decline curve fit against at least 12 months of historical production — flag assets with insufficient history
- Check that economic limit is correctly applied: no periods should show negative net operating income unless explicitly modeling pre-production or development phases
- Ensure depletion basis ties to acquisition/development cost less accumulated depletion and impairment
- Validate that PV-10 calculation uses pre-tax, pre-financing cash flows per SEC methodology when presented as PV-10 (vs. post-tax NPV)
- Cross-check RLI trajectory — if RLI is increasing while production declines, confirm reserve additions are the driver
- Confirm ARO timing is consistent with expected plug/abandonment or closure schedule, not artificially deferred