Assume your geologist brings you a project. In order to do this project you have to acquire the right to drill on 10,000 acres in Winkler, county f Texas. You can acquire 3000 acres by purchasing an existing shallow field producing at 2000 feet from 50 wells drilled on 60 acre spacing. 30 of these wells produce between 1/4 bbl and 1 bbl a day, 15 are used as injection wells and 5 are shut in. This lease calls for a 1/8 royalty and was written without a Pugh Clause. 5000 acres are unleased and you believe you can acquire this land for $1,500 an acre bonus with a 25% royalty. The other 2000 acres are held by production by three different producers on lease similar to the one you seek to acquire. The 3000 acre lease you believe you can purchase for $500,000.

While the ageing production is at 2000 feet you beleive you can go back in at 8000 feet and drill on e mile horizontal wells at a cost of $5,000,000 each. You will need to drilll 20 wells on every 640 acre section to fully drain this reservoir. You anticipate that each well will flow between 300 and 800 bbls a day with a decline of 20% a year. You also belive that your all in production cost will be 20 dollars a bbl. At this time there is no market fort the 1.5 million cubic feet a day of natural gas each well will produce, though it might be possible to develop markets in the future.

You believe that each horizontal well can be plugged abandoned and the sight reclaimed for $100,000 and the shallow wells can be plugged for $8.00 a foot.

Estimate the NPV of this project using any of the techniques used in class do not forget about multiple cases, and real options. You should also look at how a market in Wrinklier County might be developed. You should also explain how you would approach the companies that currently hold the other 2000 acres that you need.

Royalty payments are payments to a propertys owner based on well production. Mostly commonly, though, royalties are paid in cash as a percentage of total production. A bonus on the other hand is paid only once when aquiring land.

Estimate the NPV of this project