However, it is only fair to state that not one well organized and financed oil company under good management has failed in the oil business. This is remarkable when the hazards of the business are understood.
Future Price.—In making valuations the future price is important. The elements affecting the market are 1. The future supply of oil: (A) Domestic, (B) Foreign countries.
2. The consumption of oil: (A) Domestic, (B) Foreign.
I. The future supply depends upon (A) The maintenance of present production, (B) The development of old fields, (C) The opening of new fields, (D) The improvements in recovery methods.
II. The consumption of oil depends upon (A) The maintenance of the present markets, (B) Finding new markets, (C) Increased demand in the present market, (D) Check on present demand, (E) Actual decrease in present demands.
To answer intelligently the various points brought fic knowledge of future possibilities must be information is at present fragmentary so far as foreiR bilities are concerned. More is known in a qualitative rather than a quantitative way about such possibilities.
Domestic (United States) future supply is easier to analyse. The records of the United States Geological Survey, of State and private surveys furnish some ground for a general answer to the future supply in the United States. This information checked by actual drilling operations and development gives some good indices that cannot be disregarded.
It is a self-evident fact that to maintain present production requires a great deal of new drilling. The old fields fall off at an average rate of 15 to 20 per cent year. This loss in production must be maintained by new drilling.
The increase in demand for all the past ten years has shown an average of 7 per cent per year. There seems no reason to doubt that this general rate of increase of demand will hold or even increase if the supply of oil holds out. The price of oil will increase unless checked. Such a check must come from (A) excess of production over demand, (B) stabilization of demand, (C) cost of oil so high that substitutes will compete.
In making valuations future price and market should be taken into consideration. Much of the information given in pages 6
and 7, Chap. I, is directly applicable to the discussion of price.
land in the Eastern fields is purchased on the barrel basis. In buying a producing property, the average daily production for a stated period, usually ten days, or a study of the pipe-line returns for a steady producer, is taken as a starting point. The price is quoted at so much per barrel, for the daily production. The price asked varies for the age of the wells, and the character of the oil. Originally the Standard Oil system of buying regulated the price, and the present system is largely the result of this.
The owner asks $4000 per barrel and $100 more for each 10˘ increase in market price of oil. If an owner sells 100 bbl. of production and asks $4000 per barrel and overnight the market price per bbl. increases 100, he will ask $4100 the next day, if the original deal was not closed. These methods of purchasing oil property are based on experience.
Values of this kind often bear little relation to the amount of oil under a property. In general such methods give prices that are too high for safe investment, unless there is undeveloped acreage or a much higher market price in mind.
A general formula of value used by the Standard Oil Company is to multiply the average daily production into the present market price of the property by 1000. For example, suppose the price of light oil in Oklahoma is $3.50 per barrel. If the settled net production on a lease is 100 barrels, the value of the pro duction will be 100 X $3.50 X = $350,000.
Valuing—Flush or New Production.—Production when "flush" or new is harder to value than "settled" production with a known decline.
Example: A well comes in making 100 bbls. flush. Such a well will average 25 bbls. per day per year of 300 days. What is it worth per barrel? To obtain its value the history of neighboring wells or fields must be worked out. To simplify the method the decline curve shown in Fig. 103, page 252, is employed as a typical average for wells of 100 bbls. size in this field. Table 20 presents the history in ratios of an average well.