Oyster Oil Company has the option to pursue leases in the following two areas: A) An...

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Oyster Oil Company has the option to pursue leases in the following two areas: A) An onshore field, A, where: - A well costs $3.0 million to drill and complete. It costs $500,000 to connect the well to a pipeline. Operating expenses are $300k/year and royalty is 10%. Oil rate is given by Q[st]= 100000 exp(-0.2t) Where t is in years and Q is stb/day and, for simplicity, may be assumed constant for the whole year. Porosity, , is normally distributed, has an average value of 12% with a standard deviation of 3%. The well starts producing in year 1. A well is considered a dry hole if porosity is less than 10%. The formation is cored while drilling and the well is not connected to the pipeline if it considered a dry hole. B) An onshore field, B, where: A well costs $4.5 million to drill and complete, and an additional $1 million to connect to a pipeline. Operating expenses are $1 million per year and royalty is 20%. If oil is found, production will follow: [stb eli e = 30000p exp(-0.2t) Where t is in years and Q is stb/day and, for simplicity, may be assumed constant for the whole year. Porosity, p, is normally distrusted, has an average value of 20% with a standard deviation of 10%. The well starts producing in year 1. A well is considered a dry hole if porosity is less than 10%. The formation is cored while drilling and the well is not connected to the pipeline if it considered a dry hole. Oil price is $40 / stb and the discount rate is 10%. The well life is expected to be 10 years. 1) Draw a decision tree which includes both scenarios and label each node. 2) For the two scenarios, compute: a. The NPV of the expected production for each of the two scenarios for the first 10 years of production. b. The EMV of the two scenarios. c. The performance index (I) of the two scenarios. 3) Which scenario would you pick? Explain. 4) How much would you be willing to pay, as a lump sum in year 0, for a lease for each scenario? Oyster Oil Company has the option to pursue leases in the following two areas: A) An onshore field, A, where: - A well costs $3.0 million to drill and complete. It costs $500,000 to connect the well to a pipeline. Operating expenses are $300k/year and royalty is 10%. Oil rate is given by Q[st]= 100000 exp(-0.2t) Where t is in years and Q is stb/day and, for simplicity, may be assumed constant for the whole year. Porosity, , is normally distributed, has an average value of 12% with a standard deviation of 3%. The well starts producing in year 1. A well is considered a dry hole if porosity is less than 10%. The formation is cored while drilling and the well is not connected to the pipeline if it considered a dry hole. B) An onshore field, B, where: A well costs $4.5 million to drill and complete, and an additional $1 million to connect to a pipeline. Operating expenses are $1 million per year and royalty is 20%. If oil is found, production will follow: [stb eli e = 30000p exp(-0.2t) Where t is in years and Q is stb/day and, for simplicity, may be assumed constant for the whole year. Porosity, p, is normally distrusted, has an average value of 20% with a standard deviation of 10%. The well starts producing in year 1. A well is considered a dry hole if porosity is less than 10%. The formation is cored while drilling and the well is not connected to the pipeline if it considered a dry hole. Oil price is $40 / stb and the discount rate is 10%. The well life is expected to be 10 years. 1) Draw a decision tree which includes both scenarios and label each node. 2) For the two scenarios, compute: a. The NPV of the expected production for each of the two scenarios for the first 10 years of production. b. The EMV of the two scenarios. c. The performance index (I) of the two scenarios. 3) Which scenario would you pick? Explain. 4) How much would you be willing to pay, as a lump sum in year 0, for a lease for each scenario?

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1 Decision tree A well B well Dry Produce Dry Produce 0 NPV NPV calc 0 NPV NPV c... View the full answer