2. You own the mineral rights to develop oil fields in South Texas. You still ne

Question

2. You own the mineral rights to develop oil fields in South Texas. You still need to prove the opportunity and develop infrastructure to market the production. So. production will not begin until year three. In your answers, if the analysis indicates you will develop, indicate if there is a year in which you would opt to abandon the tnpical" swell You have the following additional information. 140,000 p per year per e Annual Operating and Maintenance Costs (once production begins) Initial Production Rate Annual Decline Rate Capital Cost in Year 1 Capital Cost in Year 2 Required Rate of Return 1,150,000cubic feet per day 30% 250,000 per well 2,900,000 per well 15%

Explanation / Answer

a. The company will have to abandon the well in till 10th year, as the company will only earn $132,120 per well in year 11 if it continues to start producing. This is lower than the annual opearting and maintenance costs, so it will abandon well in the 11th year.

b. The company will continue to develop the field till 12th year as there will be lower revenues from year 13 than the expenses.

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