Find the Net Present Value (NPV) for the two methods using Excel: Vertical and Horizontal drilling

Primitive Energy owns several coal seam gas reserves in south-west Queensland. As a relatively minor player in the Queensland Liquefied Natural Gas (LNG) market, Primitive does not have the capacity to transfer and process the gas for sale to domestic or international buyers. Instead, Primitive simply extracts the gas and then sells it immediately (at the well-head, which is at the surface) to one of the major gas companies operating in the area. Recently, Primitive entered into a contract to sell gas from one of its reserves for the fixed price of $10.45 per gigajoule (GJ) for the life of the reserve.

With this contract in place, Primitives management are currently trying to determine whether they should extract the gas through conventional Vertical drilling or the recently developed Horizontal drilling. The Vertical drilling approach drills to the coal seam while the Horizontal approach drills down to and then across the coal seam.

Table 1: Summary Points for Vertical and Horizontal Drilling

Vertical:	Smaller capital outlay, however, more wells are generally required due to smaller drainage area (the portion of the reserve that a well can access). Preliminary designs indicate project requires 100 Vertical wells.
Horizontal:	Higher capital outlay given length of drilling, technology and difficulty. Greater access to gas reserves and larger spacing between wells, which means fewer wells required. Preliminary designs indicate that project requires 50 Horizontal wells.

Notes A1 Contract specifies that this is a fixed price of gas at the wellhead over the life of project. 2 in a given year, State Royalties (S)= State Royalties (%) (Revenue - Allowed Extraction Costs) . Allowable Exaraction Costs include operating expenses and depreciation but exicudes the well capping and rehibifitaton expense