Consider the following project:

1) The geologists have suggested that your company acquire 640 acres in Scurry County. They believe that on this 640 acres 8 wells can be drilled on 80 acre spacing. These wells will have a productive life of 25 years. These wells will decline by 55% a year for first five years, 33% a year for the next five years, 22% a year for the next five years, 19% a year for the next five years and finally 8% a year in the final five years of their productive lives. Each well is estimated to begin life producing 1700 bbls a day. You know your company can raise capital at an average cost of 11% a year. You know the 8 wells can be drilled at a cost of 2.5 million dollars each. You also know that at the end of the 25 years it will cost approximately $350,000 per well to abandon them. You can lease the wells for a 20% royalty. You estimate that 30% of what you make on the oil will be taken up by operational costs of the field. You estimate that you can lease the field and do the preliminary geophysical work for 5 million dollars. Estimate a high, low, and medium case for this field and estimate the NPV. Along with your calculations submit a recommendation for whether your company should complete the project explaining your reasons, and when you should exit the field.

2) Now one year later your land department was able to lease the entire section. The project cost 5.75 million rather than the projected five (does this matter going forward the money is spent) You drilled the first well and it came in a 900 bbls a day and the second well came in at 500 bbls a day. What is the NPV of the project going forward and should development continue? Turn in your calculations along with a written recommendation.

3) Whatever you recommended its now five years later all 8 wells a drilled one came in at 900 blls a day, one a 500, one at 250, one at 1500, and one at 450. The field is mature and developed. Assume all wells are now five years old. What is the NPN of holding the field until the end of its productive life? Should you operate the field until the end or sell and if you opt to sell at what year should you sell. Again turn in your calculations along with your written recommendation.

*** 19% a year for 5years