Valuation and Subsurface Geology 805 



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

 for oil evaluations vary from three to six percent. The $4,856,622.68 dis- 

 counted at five 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 valuations, 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 to 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 ganger on 

 the lease not only knows how each well performed last month or last year; 

 he knows how it performed yesterday afternoon and this morning. The pro- 

 duction of each of the wells should be carefully checked — gas-oil ratios, 

 pressures, and water percentages should be measured. Despite all the for- 

 mulas, maps, logs, etc., the value of the property is the ability of some 

 holes in the ground to produce material that will sell. If those wells quit 

 producing material that sells, there is nothing much to value. The writer 

 knows of wells that have declined as much as 75 percent while a valuation 

 was being prepared — if a last minute check-up had not been made, the 

 decline never would have been suspected. When valuing an oil or gas 

 well, always remember Mark Twain's definition of a mine, "A hole in the 

 ground owned by a liar." 



Gas Properties 



The geology of the structure and the intimate study of the reservoir 

 rock itself is the same for the valuation of gas property as for oil. But, 

 because gas is dealt with as a vapor and is so highly compressible, some 

 other considerations enter into gas valuations. 



In oil properties, the deeper the well, the greater the shrinkage fac- 

 tor: 1,000 barrels of reservoir oil at 5,000 feet is usually more stock-tank 

 oil than 1,000 barrels at 10,000 feet — or, to put it another way, 20 feet 

 of sand usually contains more recoverable oil at 5,000 feet than at 10,000 

 feet. But just the opposite is true for gas — 20 feet of sand at 10,000 feet 

 contains nearly twice as much recoverable gas as the same 20 feet of sand 

 would contain at 5,000 feet. Oil at greater depth is worth less because of 

 the excessive cost of drilling deep wells — gas values are affected less be- 

 cause gas wells are always so widely spaced, usually on 320- or 640-acre 

 units. By and large, oil decreases in value with depth, but gas increases 

 in value with depth. 



