Sam owns an oil field with a number of producing wells. In the past, he has star

Question

Sam owns an oil field with a number of producing wells. In the past, he has started and stopped production of these wells as the price of oil fluctuated over time. Assume the government imposes additional requirements on non-producing wells that are still production capable. These requirements are expected to increase the cost of stopping well production by 30 percent. As a result, Sam should be:

closing wells only if he plans to keep them closed permanently.

keeping all wells open continuously.

opening wells at a lower popen price.

increasing the cost of capital he applies to his well evaluation analysis.

willing to keep wells operating at a lower level of profitability than he has in the past.

Explanation / Answer

Earlier Sam had no regulations over stopping and resuming the production in the wells but now he has requirement to be followed which is that the stopping of productive wells will cost him 30% more and thus more expenses or losses too.

So Sam should be:
closing wells only if he plans to keep them closed permanently

as this would cost only one time cost rather than expenses in starting and stopping wells. Also other options given to him here in the question doesnt make any sense as even operatin at lower level of profitability or keeping all the wells open can lead to huge losses which Sam might not want.

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