It is ascertained that the bottom-hole pressures do not decline in the 160- 

 acre lease and that water encroaches into the edge wells. It is concluded that 

 there is a fully effective water drive. The producing formation covers a vast 

 area and logically might contain an expanding water blanket. Other operators 

 in this field consider it to be water drive also. 



The oil is of 35° gravity, and the 500-millidarcy permeability is fair 

 One would expect water drive to be of the lower order of effectiveness and 

 tentatively estimate a recovery factor of 50 percent. The lease is half way up 

 the structure, so it will surely draw some of the oil out of the down-dip leases; 

 some of the oil will be lost to the up-dip leases. Consideration of the amount of 

 oil the reservoir has produced, how far the water has advanced, and how much 

 farther it must come to reach the lease being valued leads one to the conclusion 

 that about as much oil will be gained as will be lost by drainage. Therefore, the 

 recovery factor is left at 50 percent. 



Using a shrinkage factor of 78 percent and a recovery factor of 50 percent, 

 6,503,776 (reservoir oil in place) X 78 percent (shrinkage) X 50 percent 

 (recovery factor) = 2,536,472 barrels of original recoverable oil under the 

 lease. An examination of production records shows that the lease has already 

 produced a total of 289,336 barrels; this deduction leaves 2,247,136 barrels of 

 remaining reserve under the lease. There is also contained in this oil 1146 

 million cubic feet of gas (2,247,136 X 510) ; but, as there is no present means 

 of recompressing this gas (to raise it to pipe-line pressure) and no market for 

 the low-pressure gas, no value will be included for the gas. As the operator has 

 a full seven-eighths lease, he owns 1,966,224 barrels of oil and 1003 million cubic 

 feet of gas. 



Now that it has been concluded that 1,966,244 barrels of oil can be recover- 

 ed by primary recovery means, how many dollars will this oil sell for? Will the 

 price of oil go down, or will it go up? The usual procedure is to assume that 

 the price of oil will remain the same (of course it never has, but that is an easy 

 way out) . The operating costs are likely to go down and the value of dollars 

 to increase if oil declines in price; and if oil goes up in price, operating costs 

 will probably increase and the purchasing power of the dollar will decline. The 

 present price of 35° oil in the area of this lease is $2.78 per barrel. 

 So, multiplying 1,966,244 barrels X $2.78, one finds that the anticipated 

 sale price of the operator's oil from this lease is $5,466,158.32. It will be left 

 to the executive or operator who receives the report to predict the future price 

 of oil (since that is really a part of management's duties) , and the report 

 assumes that all this oil will be sold at $2.78 a barrel. 



When one attempts to estimate the future price of oil, he has left the field 

 of geology and entered economics. When he attempts to estimate the operating 

 costs of bringing this oil to the surface, he is in the field of accounting. But, 

 obviously, it will cost money to produce any oil (unless it is royalty oil) and 



804 



