Question:

A company is considering drilling an outpost well. Wellsite preparation, drilling and testing of the well is expected to cost $2 million. Completion of the well and the field equipment necessary to get the well ready for production (wellhead, tubing, flowline, etc.) would cost $1.2 million. Company geologists have suggested that there is a 40% probability that the well will be dry. If that is the case, abandonment and reclamation costs would be $120,000. In the event the well is successful (60% probability), it is anticipated that it would have an initial production rate of 75 barrels/day with production declining by 20% per year and an economic life of 11 years. A $120,000 abandonment and reclamation cost would have to be incurred at the end of the well's economic life. Operating costs are expected to start at $200,000 per year and rise by 6% annually thereafter. Oil prices in the first year of production are expected to be $88/barrel and are expected to rise by 4% annually thereafter. Given a marginal opportunity cost of investment for the company of 15%, use the expected monetary value (EMV) criterion to determine whether this well should be drilled. Assume all capital costs occur in the present period (time 0) and production and operating costs begin in year 1.

Answer rating: 100% (QA)

Computation of NPV of the project Year Event production quantity per DayBarrels Rate per Barrel Annu... View the full answer