THE VALUE OF OIL LAND The value of oil land depends upon the prospective profit to be obtained by extracting the oil.
In order to perform most efficiently special duties involved in the production of oil, each person in a producing organization should have a clear understanding of the ultimate purpose, profitable operation. The work of an oil producing organization should be divided among individuals who specialize upon certain features, but their specialization must not be carried so far that the individual workers will fail to co-ordinate their efforts with the general plan. Consideration of the elementary principles set forth in this chapter should assist in determining when to use and when to discard the details presented in the preceding chapters.
The three most important factors contributing to profit in producing oil are: (1) amount of oil available, (2) cost of extrac tion, and (3) market price. None of these factors are constant and therefore the value of a tract of oil land will change from time to time. The actual amount of oil under the surface may change owing to its migratory nature, and the amount of oil which can be extracted depends upon the degree of perfection of the operating methods employed. The cost of extraction will vary with changing prices of material and labor. Changes in the market price of oil are frequent.
Amount of Oil Available.—The amount of oil available in a tract of land can not be accurately estimated from facts which are observable before wells are drilled. Many factors which vary in different places enter into the determination of the oil content of land, such as thickness and porosity of the oil-bearing formation, viscosity of the oil and gas pressure, all of which undoubtedly affect the amount of oil which can be extracted. These factors have not yet been systematically recorded and compared by operators to the extent necessary to the formula tion of specific and satisfactory rules. Some or perhaps all of these factors have been observed in a general way, however by experienced oil men, and since they may serve as rough guides in estimating the amount of available oil they must not be ignored.
Business foresight demands not only an estimate of the total amount of oil available to extraction from a tract of land, but also the rate at which it can probably be extracted.
The constantly increasing magnitude of the oil industry has made it impossible to rely merely upon the judgment of experi enced observers for estimates of oil content. An estimate of the amount of available oil is frequently used as the basis for many other calculations by different persons, and therefore it becomes necessary to present a foundation of definite and recorded facts upon which the estimate rests.
In the absence of any other definite index to future production it has been natural to turn to past records and use them as a guide. The features of past performance which have been most regularly recorded are gross productions from certain tracts of land during a series of years, or possibly even by months. These records may frequently be reduced to an average figure of production per acre, but such a figure is subject to some variation because it is impossible to determine exactly the area which has been drained. The number of wells from which the recorded
amount of oil was obtained from time to time, has frequently been recorded and in some cases continuous records are found which show the production from each individual well. There fore, the study of past performance can be narrowed to the consideration of production from single wells, or groups of wells.
It has been found generally that an oil well, after its very early stages, yields less and less oil as time passes. Comparison of many records shows that, within a certain locality or field, the rate of decline in production follows some fairly definite rule.' The rapidity of decline in production and the importance of considering and allowing for it is illustrated by the two curves shown in Fig. 45. Both curves represent wells in one of the California fields. Curve is constructed to show the actual amounts of oil that a well may be expected to produce in any year, after the production of any given year is known. Curve is constructed to show the amounts of oil, expressed in percentage of the first year's production, that a well may be expected to produce each year after the first.
It will be noted that the two curves, A and B, are based upon different assumptions and give somewhat different results. The first curve (A) assumes that two wells producing equal amounts of oil, under similar conditions, will thereafter yield equal amounts of oil regardless of their respective ages. This assump tion is in accordance with the fundamental principles governing the flow of liquids through orifices, and is therefore probably a correct basis for the compilation of such curves. However, it is important to note the limitation fixed by the words "similar conditions." Wells producing under exactly the same conditions are rare, and similarity of conditions may frequently be difficult to determine.
The conditions affecting the flow of oil from a well are numer ous, and require detailed attention as set forth in the preceding chapters of this book.
In addition to the fact that the yield of an oil well constantly decreases, it has also been found that each additional well drilled into the common reservoir lowers the productiveness of its nearest neighbors. Furthermore, when completed wells become numerous enough, the later wells will have smaller initial yields than the earlier wells. Therefore, the study of performance of wells by neighborhood groups becomes necessary because the records of only a few wells might be exceptional and therefore misleading.
The average yield per well per day over a long period of time is a most significant basis kir an estimate of future yield of oil. These figures can frequently be obtained from a study of records which show only the total production each year, month or day, from a given number of wells.' The average production per well per day is obtained directly from these figures. Its signif icance is easily recognized in the following diagrams which show gradual and regular decline.