804 Subsurface Geologic Methods 



value will be included for the gas. As the operators has a full seven- 

 eighths lease, he owns 1,966,224 barrels of oil and 1003 mmcf of gas. 



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

 recovered 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 S2.78 per barrel (March 1, 1950) . 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 execu- 

 tive 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 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. Examina- 

 tion of the books of the operator indicates that it now costs $0.28 per bar- 

 rel to produce and handle the oil, including 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. Therefore, the per-barrel cost becomes higher as the rate of produc- 

 tion becomes lower. What kind of allowables will these wells have in the 

 future? Will they be permitted 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 pay- 

 ments 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 



