Oyster Oil Company has the option to pursue leases in the following two areas: A) An...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
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?
Expert Answer:
Answer rating: 100% (QA)
1 Decision tree A well B well Dry Produce Dry Produce 0 NPV NPV calc 0 NPV NPV c... View the full answer
Related Book For
Posted Date:
Students also viewed these economics questions
-
Youve just been hired onto ABC Company as the corporate controller. ABC Company is a manufacturing firm that specializes in making cedar roofing and siding shingles. The company currently has annual...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
Which is the most costly option (in terms of impact in other parts of the organization, not absolute dollars)? Which is the least costly?
-
Show the result of inserting 2, 1, 4, 5, 9, 3, 6, 7 into an initially empty AVL tree.
-
A vertical trapezoidal gate that is used as an automatic valve is held shut by two springs attached to hinges located along edge AB. Knowing that each spring exerts a couple of magnitude 8.50kN m,...
-
Missing data and profitability analysis Summary financial information for two independent companies is presented below. Required (a) Calculate the missing amounts. (b) Calculate the gross profit...
-
The following schedule indicates selected accounts from a citys preclosing 2015 and postclosing 2014 general fund trial balances: .:. All of the amounts shown relate only to supplies. All purchases...
-
16. Using the given data find value of resonance energy of benzene C6H6. AydgH of cyclohexene = -119 kJ/mole AhydgH of benzene = -206.5 kJ/mole (a) -150.5 kJ/mole (b) -325.5 kJ/mole (c) -87.5 kJ/mole...
-
Use the crime data from the previous exercise to perform association rule analysis. Make sure to read the data file using the readtransactions function first. a. Explore the data using an item...
-
1. Write a function in Scheme that accepts 3 parameters and counts the number of values in a specified range (low to high) which are divisible by a third parameter. Example: (count 1 12 3) would...
-
Which of the following is not considered constructive receipt of income? a. X was informed its check for services rendered was available on December 20, 2019, but it waited until January 21, 2020, to...
-
Hero Co, distributed equipment having a fair market value of $300,000 and an adjusted basis of $150,000 to James in exchange for 85 percent of his interest in Hero, The distribution was under a plan...
-
What hard evidence can you cite that indicates your companys management team is doing a better or worse job of achieving operating excellence and executing strategy than are the management teams at...
-
Courtney Vile and Kurt Barnett form Radical Inc. Courtney contributes a building that has a fair market value of $150,000 in exchange for 50 shares of Radical worth $50,000. The building has an...
-
Staton Inc. has four unrelated shareholders, Wayne, Judy, Erica, and Josh. Their respective bases in the shares are $15,000, $17,000, $19,000, and $21,000. Each shareholder owns 100 shares of Staton....
-
Two books are placed on a set of shelves. One is a 2-kg book that is placed on a 5-m high shelf, and the other is a 5-kg book placed on a 2-m high shelf. How do the books potential energies compare?...
-
Modify the CYK algorithm so that it applies to any CFG, not just those in CNF.
-
Enterprise Capital Leasing Company is in the business of leasing tractors to construction companies. The firm wants to set a three-year lease payment schedule for a tractor purchased at 53,000 from...
-
The pharmaceutical industry is composed of both large and small firms competing for new research, the introduction of new products, and the sales of existing products. Performing research and...
-
Compute the future worth of the cash flows with the different interest rates specified. The cash flows occur at the end of each year over four years $500 9% Interest compounded 9% Interest daily...
-
You are to enter up the necessary accounts for the month of October from the following information relating to a small printing firm. Then balance-off the accounts and extract a trial balance as at...
-
What would have been the balance on the account of C. De Freitas in MC17 on 19 May 2017? (A) A debit balance of 265 (B) A credit balance of 95 (C) A credit balance of 445 (D) A credit balance of 265
-
Enter the following transactions of an antiques shop in the accounts and extract a trial balance as at 31 March 2017. 2017 March 1 Started in business with 8,000 in the bank. 2 Bought goods on time...
Study smarter with the SolutionInn App