Exercise 11-20 Cheyenne Drilling Company has leased property on which oil has be

Question

Exercise 11-20 Cheyenne Drilling Company has leased property on which oil has been discovered. Wells on this property produced 16,630 barrels of oil during the past year that sold at an average sales price of $67 per barrel. Total oil resources of this property are estimated to be 267,500 barrels. The lease provided for an outright payment of $605,000 to the lessor (owner) before drilling could be commenced and an annual rental of $38,115. A premium of 5% of the sales price of every barrel of oil removed is to be paid annually to the lessor. In addition, Cheyenne (lessee) is to clean up all the waste and debris from drilling and to bear the costs of reconditioning the land for farming when the wells are abandoned. The estimated fair value, at the time of the lease, of this clean-up and reconditioning is $36,300 From the provisions of the lease agreement, compute the cost per barrel for the past year, exclusive of operating costs, to Cheyenne Drilling Company. (Round answer to 2 decimal places, e.g. 4.89.) Total cost per barrel s LINK TO TEXT

Explanation / Answer

Cost per barrel of oil Initial payment (605,000/267,500)= 2.26 Rental (38,115/16,630)= 2.29 premium 5% of $67= 3.35 Reconditioning of land (36,300/267,500)= 0.14 total cost per barrel 8.04

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