TOTAL VALUE OF A PROPERTY The sum of the oil and land values plus the value of the physical property such as tools, casing, machine shops, tankage, and im provements, and salvage make up the total value of the property.
In these discussions the value of the oil alone has been con sidered. The value of the natural gas and of the casing-head gas must be taken into account. The natural gas from a property might pay all operating expenses and a handsome return on the investment. Likewise, the value of the casing-head 'gasoline possibilities enters into the price paid for a property. Such possi bilities must, however, be studied as separate units although they later appear in the value of the property.
Another element to be considered is the fact that a company which can buy the oil for its refineries can afford to pay a higher price for oil property than a company which has no refinery. An assured supply of oil is essential to a refinery. The profit derived1 from the refined products will largely affect the higher price a company might pay to obtain an assured supply of oil.
Valuation Where a New Field of One Producing Well Only Has Been Opened.—One is often faced with the problem of valuing a new field of a single producing well. This presents some diffil culties. However, some idea of value may be gained if a well defined geological structure has been determined. Figure 105, page 261, shows a dome. The discovery well on the 1000-ft. con tour line is making 200 bbl. at a depth of 2500 ft. The pay sand is 50 ft. thick and carries no water. From this latter fact one can safely assume that the oil will carry down to the 950 contour line. There will be an area within that contour limit of at least 400 acres. Assume that this 400 acres has a sand body at least 25 ft. thick and a recovery of 200 bbl. per acre feet of sand, the following computations will determine the amount of oil that is likely to be recovered in 10 years.
400 (acres) by 25 ft. (thickness) by 200 bbl. (recovery per acre-foot) = 2,000,000 bbl. of recoverable oil. Two hundred
bbl. per acre-foot holds only in areas that average that amount. For California some areas show 300 bbl.; for some Eastern fields the recovery is as low as 75 to 100 bbl. per acre-foot. Assume that all this oil will be recovered in 10 years at an aver age cost of $1 per barrel. Assume the average price received is $3.50 per barrel. The maximum income in 10 years would then be 2,000,000 X 3.50 = $7,000,000.
The cost of operating at $1 would then be 2,000,000 X $1 or $2,000,000. The total value of the oil at $3.50 would be 2,000,000 X $3.50 or $7,000,000. The total income would be $7,000,000 less $2,000,000 or $5,000,000. The present value would be 0.77' X 5,000,000 = $3,850,000. The highest price an operator could afford to pay with a 100 per cent profit would then $3,850,000 be = $1,925,000 in round numbers. The price one 2 couldpay per acre would be $1,925,000 = $4,812.50 400 per acre.
Such figures are rough approximations only, but furnish some bases for calculations.
Compare this method with the appraisal curve method below. Suppose a well makes 200 bbl. per day initial. In another field of the same general character other wells show approximately 15,000 bbl. the first year. If the total ultimate factor of such a well were 2.87 the total production in 10 years would be 43,050.
There is room on this 400 acres fOr 50 wells at 8 acres to a well. The total production would then be 43,000 X 50 or 2,150,000 bbl.; as against 2,000,000 by the acre-foot method.
Figuring on new properties is difficult under any circumstances, but the writer has found the two methods outlined above of value. The per foot figures based on the saturation method and on sand thickness would seem preferable in some cases, especially in new areas like Homer, Louisiana, where large initial produc tions were the rule. The average saturation figure for North Louisiana is, however, around 400 bbl. per foot instead of 200 bbl. per foot.