Reservoir Financial Management

Build the map in this order:

1. Set the production line. Enter expected oil and gas sales by month, using the reservoir’s latest production forecast. Separate oil, gas, and other products when they receive different prices or payment terms. Record volumes in the same units used by your sales statements, such as barrels and thousand cubic feet.

2. Set the price and revenue lines. Apply the assumed sales price to each product. If the oil forecast shows 10,000 barrels at $72 per barrel, calculate gross oil revenue as $720,000 before deductions. Add gas revenue separately rather than blending products into one price.

3. Set the operating-cost lines. Record costs required to keep production running: labor, electricity, chemicals, water handling, gathering, repairs, field services, and insurance. Separate fixed costs from volume-driven costs. A $90,000 monthly field crew contract behaves differently from a water-disposal charge that rises with produced water.

4. Set capital spending. Enter workovers, artificial-lift replacements, facility upgrades, drilling, and abandonment spending in the month when the cash leaves the account. Do not spread a $240,000 pump replacement evenly across a year simply because the equipment may last a year. The cashflow map measures cash movement, not accounting depreciation.

5. Set taxes and government payments. Record severance taxes, production taxes, property taxes, royalties, and other required payments according to their actual due dates. A tax based on January production may leave the bank account in February. Keep the production month and payment month visible so the delay does not disappear.

6. Set collection and payment timing. Add the expected receipt date for sales and the expected payment date for costs. If the buyer pays January oil on March 15, place the receipt in March. If a contractor requires payment 30 days after a January job, place the cash outflow in February.

7. Calculate net reservoir cashflow. Subtract cash operating costs, capital spending, taxes, and other cash payments from cash receipts. Then add the opening cash balance to calculate the closing balance. A positive monthly margin does not guarantee a positive cash balance if payment timing creates a gap.

Use a table that keeps physical assumptions beside financial results:

| Month | Oil sales | Oil price | Cash receipts | Operating costs paid | Capital paid | Taxes paid | Net cashflow | |---|---:|---:|---:|---:|---:|---:|---:| | January | 10,000 bbl | $72 | $0 | $145,000 | $0 | $0 | -$145,000 | | February | 9,700 bbl | $70 | $0 | $150,000 | $240,000 | $38,000 | -$428,000 | | March | 9,400 bbl | $68 | $680,000 | $152,000 | $0 | $36,000 | $492,000 |

This example shows why a production report cannot replace a cashflow schedule. January and February production may look healthy, but the buyer’s payment delay and February pump replacement create a cash shortage before March receipts arrive.

Use clear assumptions at the top of the file. State the forecast date, product prices, production source, tax basis, payment terms, cost escalation, and whether the figures include royalties or working-interest adjustments. A reviewer should understand what drives the result without searching through formulas. In a spreadsheet, keep inputs on one tab, calculations on another, and a monthly cash summary on a third. Protect formula cells and label every manual input.

The map becomes useful when you compare forecast cashflow with actual cashflow each month. Replace January’s estimated receipts and costs with bank and accounting records, then explain the difference. If actual water handling costs exceed the forecast, update the cost driver rather than quietly changing the final cash balance.

Apply the Map to a Reservoir Decision

Consider a reservoir with a 100% working interest, 10,000 barrels of January production, and a buyer that pays 45 days after the sale. Assume an oil price of $72 per barrel, monthly operating costs of $145,000, a $240,000 pump replacement paid in February, and production tax paid one month after production. Assume the tax equals $3.80 per barrel for this planning example. The figures illustrate the method; replace them with the rates and terms that govern your reservoir.

1. Enter January production and revenue. January production creates $720,000 of gross sales value: 10,000 barrels multiplied by $72. Because the buyer pays after 45 days, the map records no January receipt. The reservoir still incurs $145,000 of January operating payments.

2. Enter January tax. The January tax equals $38,000: 10,000 barrels multiplied by $3.80. The payment occurs in February, so the map records the liability in January if you track accruals, but records the cash payment in February.

3. Enter February operating and capital payments. February operating costs total $150,000. The pump replacement adds $240,000. The February tax payment adds $38,000 for January production. February cash outflow therefore reaches $428,000 before any sales receipt arrives.

4. Enter March receipts. The buyer pays January sales in March, so March cash receipts equal $720,000. If February production totals 9,700 barrels at $70, the map records $679,000 of February sales value, but its receipt may arrive in April. Keep sales value separate from cash received.

5. Calculate the cash balance. With no opening reserve, January ends at negative $145,000 and February ends at negative $573,000 after the February outflow. March adds $720,000 and produces a closing balance of $147,000 before March costs and taxes. The reservoir may be profitable across the period, but it needs funding before March receipts arrive.

6. Test the decision. Run the map once with the pump replacement in February and once with the replacement in April. The later date may improve near-term cash, but it could reduce production or increase failure risk. Compare the cash balance, expected barrels, repair cost, and tax payments. Choose the date that fits both field reliability and available cash.

A useful test asks whether the lowest projected closing balance remains above the reserve required for payroll, contractors, taxes, and emergency work. If the answer is no, identify the exact month and cause. You can then negotiate a payment schedule, delay noncritical work, arrange funding, or revise the production plan. The map turns a vague concern about “cash pressure” into a dated amount with a known cause.

Quick checklist

• Confirm the production forecast by product and month. - Record the price assumption and sales deductions. - Match each cost to the month when cash leaves the account. - Enter capital work in its actual payment month. - Separate tax accruals from tax payment dates. - Confirm buyer collection terms with sales or accounting records. - Confirm contractor terms with purchase orders and invoices. - Calculate opening cash, monthly net cashflow, and closing cash. - Mark the lowest projected cash balance. - Replace forecasts with actual results each month and explain variances.

Prevent Timing and Classification Errors

Treating revenue as cash received

A sales report may show $720,000 of January revenue while the bank receives nothing until March. If you use revenue as cash, you may approve spending that the reservoir cannot fund.

Do this: Keep a sales-value column and a cash-receipt column. Add the buyer’s payment terms and test the receipt month against actual remittance records.

Not this: Put January revenue into January cash simply because the oil left the lease that month.

Spreading capital spending across the year

A $240,000 pump replacement paid in February creates a February cash event. Spreading it across 12 months makes February look stronger and hides the funding requirement.

Do this: Record the full payment in the expected payment month. If the vendor offers installments, enter each installment on its real due date.

Not this: Divide the invoice by 12 because the equipment will serve the reservoir for 12 months.

Mixing reservoir cash with field-wide costs

A shared compressor, road crew, or water system may serve several reservoirs. Assigning the full cost to one reservoir distorts that reservoir’s cashflow and leads to poor operating decisions.

Do this: Define an allocation rule before building the forecast. For example, assign compressor electricity by measured throughput, water disposal by produced-water volume, and shared field supervision by an agreed operating basis. Review the rule when production patterns change.

Not this: Charge the full shared invoice to whichever reservoir manager receives it first.

Ignoring ownership and payment responsibility

A reservoir may produce 10,000 barrels, but your working interest may cover only part of the costs and revenue. Royalty owners may receive their share before the remaining cash reaches your account.

Do this: Apply working-interest, royalty, tax, and operator-billing terms before calculating cash available to your business. Label whether each figure represents gross reservoir activity or net owner cash.

Not this: Treat gross production value as cash available for spending.

A reliable Reservoir Cashflow Map does more than total dollars. It shows which barrels create cash, which invoices consume it, and when the account feels each decision. Once the monthly map matches actual receipts and payments, you can judge reservoir work by both production value and cash survival - the foundation for stronger financial decisions across the field.

End of chapter one. 7 more chapters in the full book.