ELEMENTS OF VALUATION—BUYING OIL PROPERTIES It is an evident fact that the measure of success of any oil-pro ducing operation is the profit obtained. A large producing com pany in making profits must possess: I. An assured supply of crude oil.
2. A refining capacity.
3. Transportation facilities.
4. An assured market.
5. Good management.
Oil operators who are planning for the future realize fully the importance of all these elements in their business. Large con cerns continually seek new properties, both proven and unproven. It is likewise essential for any large concern to know as nearly as possible the potential reserves of its properties, if an intelligent operating plan is to be followed.
At present the United States Treasury requires estimates for depreciation and oil depletion in making out income tax reports. This forces many oil operators to a study and estimation of their underground reserves that otherwise would not be undertaken. For these reasons any method that will give a minimum estimate or a fair average of future production is well worth while.
The valuation of the oil properties of any company, whether for its own information, to guide in operating campaigns, for purchase, sale, or for taxation purposes falls into two divisions: 1. The valuation of the physical property.
2. The estimate and valuation of the future recoverable oil. Estimates of Oil of underground re serves have become more systematic in the past few years. There Oil wells may produce oil indefinitely in small quantities, as shown in the Pennsylvania field. The measure of their life is the amount of profit obtained above the 'actual pumping or lifting cost. As long as the oil obtained from a well pays a profit above its lifting and overhead expense, the well will be allowed to produce. In times of low prices small wells will be abandoned or shut down. In times of high prices these small wells will pro duce. In other words, the final limit to the productive life of a well is the economic level, where the cost of operating is equal to the market value of the oil produced. This holds for any class
of well. Column 3, Table 20, page 253, shows the ratio of the Cost per barrel at a set market price. The market price is $3.50; the lifting cost varies as shown in Column 3. Column 4 shows the profit. When the quantity of oil equals 42 per cent of a barrel the profit is 0. This is shown in Table 20 at the twenty sixth year, and in Table 21 is not in sight, though it will be at the fortieth year. Costs of production fluctuate and the price of oil fluctuates, and in making estimates allowances must be made for both cost and price.
Early estimates of the lives of oil wells have generally proven low. Six or seven years was considered the average life of wells in the California, Gulf Coast and Mid-Continent fields, 10 years ago. All these estimates have been revised. The high price of oil and the proved life of wells have shown the fallacy of the early estimates, which were based on low market prices.
Pennsylvania, Ohio, and West Virginia show numerous records of wells pumping 30 to 40 years. The old Drake well which was drilled in 1859 is still producing oil. Illinois shows a steady life in its wells, as numerous properties are over 15 years old. In the Mid-Continent fields, wells 12 to 15 years old are good producers to-day, and have some years ahead of them. In the Gulf Coast area, Spindletop is producing oil from the early wells, now 18 to 19 years old. The Caddo, Louisiana, field is still producing, though wells there are 15 years old.
In California, the Coalinga, Maricopa, and McKittrick oil fields show numerous wells 12 to 15 years old. In the Midway field wells from 10 to 14 years old are plentiful and good for 10 years additional life. The Kern River field near Bakersfield has numerous wells 15 years old, and should produce at least 10 years more. The Old Salt Lake field in California has produced oil for 20 years. The Olinda field is over 22 years old, and still has a long life ahead of it.