438 R. ARNOLD OIL GEOLOGY IN RELATION TO VALUATION 



ance of wells, immediately dispenses with many of the uncertainties, as 

 it deals directly with recoverable oil, and if based on sufficient data can 

 be counted as fairly reliable in most instances and remarkably so in some. 

 The utilization of production statistics for the method involves the plot- 

 ting of decline or cumulative production curves, the horizontal line 

 usually denoting the time factor, while the vertical refers to the produc- 

 tion. In the case of the decline curve, the production figures are plotted 

 direct for each time unit, while in the cumulative curve, as its name im- 

 plies, cumulative figures for each time unit are employed. The important 

 feature in both cases and the one requiring care and experience is the 

 projection of the curves to show the probable future production of the 

 well or tract, as it is this estimate on which the valuation of the property 

 depends. The method involving the use of production statistics is appli- 

 cable only to producing fields, except indirectly ; it is the method in com- 

 monest use for appraisal purposes and within the past two or three years 

 has been the subject of much discussion and of ingenious modifications 

 for practical use. 



COST OF PRODUCTION 



The cost of production is one of the items directly related to valuation 

 that is intimately affected by both natural and artificial factors. The 

 most important among the former are depth of the deposit from the sur- 

 face and character of the overlying rocks. These two geologic factors, 

 the one structural and the other lithologic, practically determine the cost 

 of the well and the operations of recovery, and by so doing fix the cost of 

 production and greatly influence the commercial value of the deposit. 

 Other items, such as the character of the reservoir rock — whether it be a 

 soft sand which flows into the well with the oil and has to be removed 

 from time to time to permit of the recovery of the oil, or whether it be 

 so hard and fine grained that it has to be "shof ^ to insure the migration 

 of the oil into the well, and other factors — have a direct bearing on the 

 quantity of production and its cost, and hence affect valuations. 



CERTAINTY OF PREDICTING FACTORS 



The certainty with which predictions as to the various natural factors 

 enumerated above may be made has a profound influence on valuation, 

 especially of prospective oil land. It is not at all unusual to be able to 

 accurately predict the depth to the oil sand, its thickness and character, 

 and even the quality of the oil. This makes it possible in such instances 

 to accurately estimate the cost of wells and production. But to predict 

 the quantity of oil to be produced is not so easy, though in many fields. 



