gfafrten 40 



VALUATION AND 



SUBSURFACE 



GEOLOGY 



John D. Todd 



The art of valuing producing petroleum properties (and it is more of an 

 art than a science) has grown up in the oil business contemporaneously with 

 the maturing of subsurface geological knowledge. Of course, both started in 

 Colonel Drake's time from zero, and during the past 98 years, valuation has at 

 times out-distanced geology. In other decades geological knowledge has grown 

 faster than knowledge of valuation. 



When Professor Wright investigated the oil business at the close of the 

 Civil War, he found that subsurface geology was a maze of superstitions and 

 that valuation attempts were dominated by promotion. As thousands of wells 

 were drilled and millions of barrels of oil were yearly produced, many things 

 were learned about oil reservoirs — both in the drilling of new wells and in the 

 performance of the old wells. Wright found that the average life of a well was 

 18 months in 1865, whereas shortly thereafter wells were being sold on twice 

 that payout period. 



One of the earliest standards of valuation was the "days of payout," on 

 which much Allegheny production was sold. It was common custom in early 

 Pennsylvanian days to value net daily barrels of settled-oil production at one 

 thousand times the price of oil. For instance, a property producing 1000 net 

 barrels per day would be worth $3,000,000 if oil was selling at $3.00 per barrel. 

 Although this method gave no consideration to subsurface geology (and properly 



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