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A deep water-flood project has been online for two years. Engineering calculations indicate that the producing wells are each capable of 750 barrels of oil

A deep water-flood project has been online for two years. Engineering calculations indicate that the producing wells are each capable of 750 barrels of oil equivalent per year (BOE), but problems with the existing artificial lift system has limited production to 400 BOE per well. The project engineer has to decide whether to (1) reduce the injection rates to match the artificial lift capabilities, or (2) maintain injection and modify the artificial lift equipment to lift larger volume of fluid (750 BOE). Production for each alternative is provided in the following table.

Year

Reduced Injection

Production (MBOE)

Modified Lift

Production (MBOE)

1

1,200

1,500

2

1,300

1,700

3

1,500

2,200

4

1,700

2,150

5

1,400

1,700

6

1,300

1,500

7

1,200

1,300

8

1,100

750

9

1,000

350

10

750

100

11

400

0

The time zero cost of the upgraded artificial lift facility is estimated at $7 million, with operating costs of $2.5 million more per year relative to the present operation beginning in year 1. Working interest is 100%, net revenue interest is 80%, and oil price per barrel is $44. Assume escalation of incremental operating expenses exactly offsets escalation of incremental revenues. Determine whether is economically preferable to reduce the injection rates or to redesign and modify the lift system if the minimum acceptable before-tax ROR is 15%. M=1,000.

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