#5. (15 points) You own the mineral rights to develop a eld in South Texas. You still need to prove the oppounity and develop infrastructure to market the production. So, production will not begin until year two. You have the following additional information. Animal Operating and Maintenance Costs $ 80,000 per yearper we\" (once production begins) Initial Production Rate 1,200,000 cubic zet per day Annual Decline Rate 3 3% Capital Cost in Year 0 $ 300,000 per well Capital Cost in Year 1 $ 2,800,000 per well Required Rate of Return 12% a. (51215) Assume management only allows the project 20 years to recover costs plus earn a rate of return. Using the reference case price projections from the Energy Information Administration's (EIA) Annuai Energy Outlook made in 2001, 2011 and 2021 (given in real 2020$ in the table below), in which years would you develop the eld? Assume you make the initial capital outlay in Year 0. All prices in the table below are in dollars per thousand cubic feet ($lmcf). Year PNG (2001) P14190011) PM; (2021) 0 $2.72 $4.01 $2.07 1 $2.74 $4.06 $3.10 2 $2.29 $4.07 $3.23 3 $2.07 $4.13 $2.99 4 $1.99 $4.14 $2.80 5 $2.04 $4.22 $2.88 6 $2.09 $4.29 $2.98 7 $2.12 $4.31 $3.04 8 $2.16 $4.35 $3.18 9 $2.18 $4.41 $3.29 10 $2.20 $4.57 $3.34 11 $2.22 $4.74 $3.36 12 $2.24 $4.88 $3.42 13 $2.26 $5.05 $3.49 14 $2.29 $5.25 $3.52 15 $2.32 $5.41 $3.53 16 $2.36 $5.52 $3.54 17 $2.40 $5.65 $3.53 13 $2.44 $5.71 $3.55 19 $2.50 $5.75 $3.55 20 $2.57 $5.79 $3.55 I). (51215) Now assume there are natural gas liquids (NGL) that can be extracted from the production stream. To do so will require an additional $150,000 in capital expenditure in year 1. In addition, removal of the natural gas liquids will result in a 30% reduction in natural gas volume (meaning we now only produce 840.000 cf/d of gas, while we produce 360,000 cf/d equivalent of NGL's in the rst year of production). In addition, NGL extraction adds costs of $20,000 per year of operating expense. It is projected that we will be able to sell the NGLs at a price that is 2.25 times higher than natln'al gas on a $fmcf basis. When do we develop the eld? c. (5 p15) Given your answers, if every producer sees similar information, what do you think will happen to the demand for drilling equipment and personnel as prices lise? If so, what do you think will happen to development costs? How might this alter your analysis