Explanation of Table 20.—Column 1 gives the age. The production in ratios of the first years is presented in Column 2. This table is for an average well making 100 bbls. flush for a typical field; and other production of new wells in the field should follow the same general history. Column 9 shows the production of each year compared to the preceding year. Coluthn 4 shows the relation which the operating cost bears to the market price which is $3.50. This cost varies with the age of the well. Column 4 shows the future profit after deducting operating cost. This is obtained by subtracting the figures in 3 from those in 2. Column 5 shows the factor which divided into the future profit in Column.5 will give the present value of a profit as shown in Column 6. Column 7 shows the cumulative profit which is obtained by adding the figures in Column 6. Column 8 gives the cumulative production.
Such a table can be readily made for any field. The decline figures can be obtained in the usual manner from the decline chart, and then extended. The factor of operating cost, Column 3, is found by taking average costs for wells of various sizes and determining the cost per barrel, allowing for overhead, taxes, etc. For new wells the cost is low and increases as the well grows older. The proportion for a new well may be 0.024 of the production, say 10˘ a barrel for a 25-bbl. well on a lease.
For a well 10 years old making 2 bbl. the cost per barrel will be as high as $1.25 to $1.75 per barrel. These figures have been averaged and based on the ratio of the first year's production to bring out the principle more clearly. To find the proportion the cost in later years bears to the production, divide the figures in Column 3 by those in Column 2. For the first year the pro portion is 0.024, the fifth year 0.18, the tenth year 0.40, the fifteenth year 0.51, the twentieth year 0.70, the twenty-fifth year 0.93. Such figures vary from field to field, and the relative costs in each field must be studied, but the comparisons are valuable.
The value of reducing all future profits to a present value basis .furnishes means of discounting the future as far as possible. One can allow factors of safety later. It is too often forgotten that a dollar running for 20 to 25 years at 6 per cent amounts to a large sum at the end of that period.
Production is often bought at figures that leave a very small margin of profit. The buyer usually pays too much for his production. He will make a profit but unless the market price increases he will many times get less than 6 per cent on his money when he should get 15 per cent or 20 per cent.
Table 20 brings out some interesting points. It will be noticed that in the twenty-sixth year the production has decreased to factor 0.042. At that point the lifting cost is 0.042 and equals the amount of oil received so that the profit is 0, and the well would be abandoned. If, however, the market price of oil is increased, the profit will increase, and the production will not be abandoned.
Discussion of Example 1.—From Column 7, Table 20, the total present value of the cumulative profit is 2.242 for a 25-year life. The average pumping time on a property is 300 days per year. If a barrel of production averages 1 bbl. per day for 300 days, the first year's production is 300 bbl. The price of oil is $3.50a The total present value of the cumulative profit is 300 X $3.50 X 2.242 = $2354.10 The total present value of a barrel of new production is then $2354.10. If the well's production averages 25 bbl. per day at present the production will be worth 2354.10 X 25 = $58,852.50 for a 25-year life.
In buying a barrel of this production one would want to figure at least a 100 per cent return on the investment in 10 years with interest. A different set of figures would be used in this case.
The total present value of cumulative profits for the first 10 years would be the sum of the profits or 2.07. The present value in dollars would be 300 X 350 X 2.07 = $2173.50. An operator in buying would want 100 per cent profit, and would pay 2173.50 2 = $1086.75 per barrel, for the new production.
It is interesting to note that the cumulative present value of the profit for 25 years is 2.242 and for 10 years is 2.07. The total residual profit for the remaining'15 years is 0.172 or a little over 1 per cent average per year. However, the well will be pumped no matter how small the profit especially if there area number of wells on one Unit. An increase in the price of oil may continue the life of a well far beyond the point indicated.
It will be noted in these discussions that the factor of cumula tive profit was sought mainly instead of the factor of cumulative production. Profit is the ultimate aim in valuing a property.
The production in barrels could have been obtained and then reduced to dollars. Instead, however, the profit factor for each year has been determined and then reduced to dollars at the very end. This plan will vary with each engineer.