Petroleum Property Evaluation Evaluations are necessary for all normal expenditures, including: development wells, equipment installations, lease purchases, choice of secondary recovery processes, and choice of well spacing. We will look at a situation for evaluating an existing well. First we will use production decline curves to predict future production. Second we will predict profits or tosses due to taxes with an Excel spreadsheet, Evaluating oil properties involves two major parts. 1. Evaluate the oil and gas that will be produced in the coming years using material balance computer programs or production decline curves. In our example we will be using production decline curves. 2. Evaluate the present net worth of the oil and gas produced. Including deduction of operating expenses, local, state, and federal taxes. I will not be discussing Book Value. Book profit declarations or financial accounting statements are used in bigger companies for credit ranking. I will start with some definitions. I. Before Tax Cash Flow H. Then We will look at our sample problem. Ill, The Given Data IV. A Description of How Arps Type Production Decline Curves Work V. The Arps Type Production Decline Curves VL. The Tracing Production Curve for our Example VIL. A JavaScript Computer Program for Creating Arps Curves Coordinates Vill. A Spreadsheet with Detailed Analysis of Each Column IX. The Excel Spreadsheet Your Income Tax 2066 by J.K. Lasser Decline Curve Analysis Using Type Curves by M.P. Fetkovich in SPE, 4629. Predicting production performance using 2 simplified model by Khaled Abdel Fattah in World Oil, Oil Property Evaluation by R.S, Thompson and J.D. WrightI. Before Tax Cash Flow BFIT = Before Federal Income Tax BEIT Cash Flow = Net Revenue — Net Costs Net Revenue = (Net Interest) (Gross Oil Production) (Price) + (Net Interest) (Gross Gas Sales) (Price) Net Costs = Production taxes + Net Operating Cost + Net Overhead + Net Intangibles + Net Tangibles + Net Risk Production Taxes = (Net Oil Revenue) (Oil Severance Tax) + (Net Gas Revenue) (Gas Severance Tax) + (Total Net Revenue) (Ad Valorem Tax) Severance Tax is usually a state tax. Ad Valorem Tax in usually a local tax. Net Operating Cost = (Working Interest) (Gross Operating Cost) ‘Net Overhead = (Working Interest) (Administrative + District Overhead) Net Intangibles = (Working Interest) (Investments Expensed For Income Tax Purposes) ‘Net Tangibles = (Working Interest) (Investments Capitalized For Income Tax Purposes) Net Risk = (Working Interest) ((1 - CF)/CF) (Dry Hole)Il. After Tax Cash Flow AFIT = After Federal Income Tax BE Before Federal Income Tax AFIT Cash Flow = BFIT Cash Flow — Income Tax Income Tax = State Tax + Federal Tax State Tax = 0.1 (Taxable Income) Federal Tax = 0.35 (Taxable Income ~ State Tax) Taxable Income = Net Revenue ~ Expensed Costs ~ Depreciation — Depletion Expensed Costs ~ Production Tax + Net Operating Cost +Net Overhead + Net Intangibles + Net Risk Depreciation = (Depreciation Rate) (Tangible Investments) Depletion = (Net Oil and Gas Revenue) (.15) Depletion is a federal tax deductionIIL The Given Data Gross oil reserves = 1100 MBLS Gross gas reserves = 900 MMCF ‘Chance factor for success = 95% Our working interest = 85% (Our mineral rights with obligations towards drilling costs.) Royalty = 15% (Mineral rights with no obligation towards drilling costs.) Net interest = 72.25% (100% - 15%) * 85% = 72.25% (Our interest.) Federal tax ~35% State income tax rate = 10% Tangible investment = 250 M$ (A depreciated equipment cost.) Intangible investment = 1S00MS (An immediately deducted expense.) Dry hole cost = 700MS Oil severance tax = 5.5% of net revenue (Usually a state tax.) Gas severance tax = 6.0% of net revenue (Usually a state tax.) Ad valorem tax 1% of net revenue (Usually a local tax.) ‘The list of production, operating costs, and prices are as follows: Oil Gas Operating Overhead Oil Gas Production Production Costs Costs Price Price Year MBO MMCE MS MS S/BBL S/MCE 2006 250 200 16 3 69.0 6.00 2007 200 180 50 6925) 6.10 2008 140 110 50 8 69.50 20 2009 100 5 30 8 69.75 6.30 2010 75 60 50 8 70.00 6.40 2011 55 52 50 8 70.25 6.50IV. A Description of How Arps Type Production Decline Curves Work In reservoir evaluation we can use type curve analysis to predict the future oil production ofan oil well. Simply speaking we plot the rate vs. time on a piece of tracing paper and overlay it on known curves on another sheet of paper. We can use the traced curve to predict the amount of oil a well will produce. The basic steps used in type curve matching of declining rate-time data are as follows. 1, Plot the actual rate vs. time data in any convenient units on log-log tracing paper of the same size cycle as the type curve to be used. (For convenience all type curves should be plotted on the same log-log scale so that various solutions can be tried.) 2. The tracing paper data curve is placed over a type curve, the coordinate axes of the two curves being kept parallel! and shifted to a position that represents the best fit of the data toa type curve, 3. Draw a line on the tracing paper through and extending beyond the rate-time data overlain along the uniquely matched type curve. Future rates are then simply read from the time scale on the tracing paper. In addition to reading the rates directly from the tracing paper, you can also evaluate the constants in the hyperbolic decline equation from which the Arps curves are developed. This equation is used in more advanced analysis. Use the following method if you wish to determine qi and Di for the decline curve equation: q(t) / qi=1/ {1 + b*Di*t}expl/> 1. Fitst we select a match point of 4 years, 100 BOPY on the tracing paper which corresponds to 7.5, .04 on the Arps Type Decline Curve. 2. Then we calculate qi as follows: qDd = 0.04 = q(t) / gi = 100 BOPY/qi qi = 100 BOPY / 0.04 = 2500 BOPY. 3. Then we calculate Dias follows: tDd = 7.5 =Di* t=Di* 4 years Di=7.5/4 years = 1.87 years -1/ 1 — = [y+éae]® VV. ABPS TYE CuRvEs ti V. Arps Type Production Decline Curves AN 3 A fal? 601 =Dit togVI. Tracing Production Curve From Tracewer “ wt: Fame} t where tes = 04 ez 100 sory gt me: 2500 BoPY tar7s t24 Be bal. BE. L8F yeart / ' v 2 3, YEARS SsVIL. JavaScript Computer Program Decline-curvel. html PROGRAM TO CREATE ARP TYPE CURVES

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