those costs must be deducted from receipts before the profit will be known. 

 Again the usual procedure is to assume that the costs of labor, materials, and 

 other items will remain the same. Examination of the books of the operator 

 indicates that it now costs $0.28 per barrel to produce and handle the oil, in- 

 cluding advalorem and severance taxes. The wells are all flowing and with good 

 water drive will flow all their oil — but as they grow older reworks will come 

 oftener. So, for the future an increased cost is assumed to be $0.31 per barrel. 

 Deducting this, one finds that the future net profit from oil will be $4,856,622.68. 

 The salvage value at abandonment, estimated to be $40,000.00, may be added 

 to the value of the oil. 



Actually, it will cost more to produce the oil if the producing rates are 

 small, as more years of operation are required. Operating costs, aside from 

 taxes, are fairly uniform for a given well regardless of producing rate. There- 

 fore the per-barrel cost becomes higher as the rate of production becomes lower. 

 What kind of allowables will these wells have in the future? Will they be per- 

 mitted to produce more, or will they be required to produce less? Much depends 

 on economic trends. But again, in this case, it is assumed the status quo will 

 continue. The lease now has an allowable of 65 barrels of oil per day per well, 

 which amounts to 15,600 barrels per month. At that rate the lease will produce 

 for 144 months, or 12 years, and will produce a monthly income of equal 

 monthly payments for that period. 



Now, what is such a future income worth at the present time? What is 

 money worth? Money is loaned at different rates, depending on who the 

 borrower is and of what his security consists. Normal discount rates used for 

 oil evaluations vary from 3 to 6 percent. The $4,856,622.68 discounted at 5 

 percent per year yields a present value of $3,587,101.51. To this amount is 

 added the present worth of the $40,000 salvage 12 years hence, which is 

 $22,289.48. This gives a total present worth of $3,609,390.99. In some valu- 

 ations, no discount is figured. In such cases, the recipient of the valuation report 

 is left to make his own estimate of what that future income is worth now. 



A valuation report on oil should also mention the amount of gas to be 

 produced — as some market may be developed for this gas. Also, the report 

 should mention any geology pointing to deeper possibilities under the lease, but 

 no value should be accorded unless the deeper sands have been drilled and tested. 



In conclusion a word of warning: The latest production data on the lease 

 should always be obtained — an actual trip to the property should be made by 

 the appraiser just before he signs the report. The gauger on the lease not only 

 knows how each well performed last month or last year; he knows how it per- 

 formed yesterday afternoon and this morning. The production of each of the 

 wells should be carefully checked — gas-oil ratios, pressures, and water percent- 

 ages should be measured. Despite all the formulas, maps, logs, etc., the value 

 of the property is the ability of some holes in the ground to produce material 



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