Module - 4 Decision Analysis & Economic Models: 01/18/2022 Prof. Oyinkepreye D. Orodu 1

MODULE – 4
Decision Analysis & Economic Models
01/18/2022 Prof. Oyinkepreye D. Orodu 1

Decision Tree: is merely a pictorial representation of a sequence
of events and possible outcomes

Introduction
• Purposes served by decision trees

• Helps in making decisions
• Decision or choice necessitated by possible outcomes and/or opportunities
• Economics of outcomes brought into play (to fore)
• Only a path will be followed through a decision-tree network
• Decision making essentially applies to government, industries and personal instances

P=0.75 Abandon
Lease
option
Buy options Conduct
On Seismic
leases Exploration
Drill
&
P=0.25 Develop

Variations in degree & kind
• Probability trees
• Branch end represents possible outcomes
• Concise map indicating chronological order of a series of actions
• Branches reduce to expected values
• Detailed maps with branches indicating range of possible outcomes
• Expanded tree with many branches indicating various degrees of success
• Tree designed with selected probability distribution at probability (chance)
nodes & decision rules

Symbols & layout
• See decision tree in next 2 slides
• Equivalent to road map
• Drawn chronologically beginning at the left
• Constructed with decision nodes & chance nodes
• Chance nodes in circles
• Decision nodes in square
• Can be deterministic or stochastic

P=? UK Job
P=?
Nig Job
P=?
Nig Acada
c UK
S Nig Oil Coy
M
Nig Bank
MSc Nig
Nig Business
No
M Nig Acada
Sc
Nig Oil Coy
Nig Bank
Decision
Node Nig Business
01/18/2022 Nig D.
Prof. Oyinkepreye Acada
Orodu 7
Chance Node
P=0.6 0
P=0.3
$2MM
P=0.1
ll
Dri
$4MM
Don’t drill

Analysis of a Probability Tree
Evaluating a development drilling venture

• Probability tree is a special case of a decision tree (provision for decision only at
the beginning)
Example “McCray, 1975”

Opportunity of buying a lease containing 4 locations where wells may be drilled.
Cost of lease, $2,000

7 5
-42 A B
4 3 00
-
C D
3 2 5
-4
Map of well location & Structural elevation contours
An offset well justifies a probability of 60% that A would be

successful. If A is successful, probability of success of B, 80%. B
successful, probability of success of C, 90%. C successful, 70% D is
successful.
Dry well cost $40,000
Success incurs additional $15,000 for completion
Terminal Unconditi Oil Dry
Event onal Well Wells
je ct Prob.
Re
Ac c a
a 0.4 0 1
0. 4
ept
b b 0.12 1 1
0. 2
c 0.048 2 1
Well A c
0.8 0.1
d 0.1296 3 1
Well B
d
0.9 0.3 e 0.3024 4 0
Well C
0.7
Well D e 1.000
01/18/2022 Probability tree for a development

Prof. Oyinkepreye D.drilling
Orodu venture 11
Calculation of Net Values of Terminal Events in the Probability
Tree
Terminal Total Net Costs($) Net Value

Event Operating Lease Producing Dry
Profits Bonus Wells Wells
a 0 20,000 0 40,000 -60,000
b 140,000 20,000 55,000 40,000 25,000
c 240,000 20,000 110,000 40,000 70,000
d 340,000 20,000 165,000 40,000 115,000
e 420,000 20,000 220,000 0 180,000

Example
“Newendorp & Schuyler, 2000”
To purchase leasehold drilling right with available geological
control giving a potential oil structure.
• Estimates
• Bonus required to secure drilling rights, $3MM
• No seismic in the area, a detailed survey estimated at $2MM
• Reserves possible
• Dry hole
• Large reserves worth estimated NPV of $40MM
• Marginal reserves worth estimated NPV of $15MM
The PVs are production revenues net of all operating expenses,

taxes, royalties & subsequent development drilling costs. Wildcat
discovery cost not included.

• Exploration Strategy
• Drill on geological control
• Drill test well based on present geological interpretations & explorations.
• Run seismic to obtain fact, a structure exits under the block of acreage. So, defer
drilling until reviewed seismic data.
• Carry out decision analysis on the way forward, to buy acreage or not to buy
acreage.

Large
0.07 field
l A 5 0.07
a
r gin 5
marginal
rge m
a
ld field
La ld fie B 0.85 Drill hole
fie Dr 0
o Drop
ac p
rea acreage
0.05 0.05 ge Large
le
0.15 field Large
ho
0.09 0.2 field
y
F 0.15 D
Dr
C marginal 0.2 marginal
Dr field
l l yh field
Ru r i 0.7 o
I Se n m ic G D le
rill 0.6
ism i s s Dr D
S e firm o
E nd cat Drill hole
ic o n ac p 2 ld
c ad0.5 re i Drop
e
a w
ag
e
ac y
l g
Bu
Dr rea
e
re
H
Se ows uct eag acreage
op ge
ac
is m
sh str acr
J
No rop
ic
Do 0.5
(D
ac n’t
re bu
ag y
ur
e
e
e)

+$35MM
0.075
A 0.075
+$10MM
+$36MM +$11MM 0.850
B -$5MM
0.05 0.05 +$34MM

0.09 0.15 +$33MM
-$4MM 0.2
F 0.15 D
C +$9MM 0.2
+$8MM
0.7
G 0.6
I
E
0.5 -$7MM
H
J
0.5 -$5MM
-$6MM
-$5MM

nd
2 EMVA=-$0.85MM
rill at
D ldc
Dry hole wi
B
Dro
acr p
eag -$4MM
e
EMVA=(0.075)(+$35MM)+(0.075)(+$10MM)+(0.85)(-$5MM)=
-$0.875MM
EMVC=(0.05)(+$36MM)+(0.075)(+$11MM)+(0.9)(-$0.875MM)=
+$1.5625MM
EMVD=(0.2)(+$33MM)+(0.2)(+$8MM)+(0.6)(-$7MM)=
+$4MM

EMVB=-
+$36MM +$11MM $0.875MM
+$35MM
EMVB=-$0.875MM 0.075
0.05 0.05 A
B 0.075
+$10MM
EMVC= 0.9 0.850

+
$1.5625M C
M -$5MM
Inferior -$4MM
strategy
l
tro
con
ical
Geo l on
log
l
Dri

+$34MM
EMVF= +$33MM
+$9.25MM +$9MM EMVD=
F +$4MM
+$8MM
EMVG=
G EMVE= D
+$9.25MM
+$4MM
H
E
EMVH= -$6MM
+$21.25MM
EMVF=(0.15)(+$34MM)+(0.15)(+$9MM)+(0.7)(+$4MM)=+$9.25MM
EMVH=(0.5)(+$9.25MM)+(0.5)(-$5MM)=+$2.125MM

trol
ll on cal con EMVC=+$1.5625MM
i
Dr logi
o
Ge
I Ru
n Se
i sm
EMVI=+$2.125MM ic
EMVH=+$2.125MM
EMVJ= EMVI=+$2.125MM
+$2.125MM e age
cr
Bu ya
Do
n ’t b
J uy
a cre
a ge
+$0
Rollback evaluation of a probability tree
• The procedure starts from the terminal events of the decision

tree
• Based on evaluating each branch leading from a decision node
• Helps to predict future decision
• Conventional procedure, only the branch with the highest
expected value is retained at the decision nodes.
• The method used to obtain expected values (expected
monetary value)
Expected position value=

∑Pb * (immediate reward on branch + EV of subsequent events on branch)
Pb=conditional probability of branch emanating from the node

• For a probability node, all branches would be included in the summation, & the
sum of the conditional Pb values would equal unity
• Note (decision rule), use only one path from a decision node, the path with the
highest expected value
• Another rule (for complete analysis), eliminate from among alternatives choices
having lower expectancy & greater variance.

Applying Rollback to 1st Example
• The process starts at the terminal ends of the branches, at the terminal even, &
works backwards to the present.

Position Outcome Conditional Immediate Expected NPV Expected
value Value
Prior to Event Prob. Reward Of Of the
Drilling Pb Subsequent position
Well Decision
D Dry 0.3 -40,000 0 -40,000 -12,000
Producer 0.7 +25,000 0 +25,000 17,500
5,500
C Dry 0.1 -40,000 0 -40,000 -4,000
Producer 0.9 +25,000 5,500 +50,000 45,450
41,450
B Dry 0.2 -40,000 0 -40,000 -8,000
Producer 0.8 +25,000 41,450 +86,450 69,160
61,160
A Dry 0.4 -40,000 0 -60,000 -24,000
Producer 0.6 +25,000 61,160 +126,160 75,696
51,696

Statistical Evaluation of a Probability Tree
• Evaluation of a decision tree by the determination of

• Mean or
• Expected value or “most common”
• Variance or
• Standard deviation

Comparing alternatives: retaining partial working interest versus overriding royalty
interest “”McCray, 1975”
Economic Description
A company (Company-A) owns lease on 120 acres. An adjoining
lease by another company (Company-B) is on 520 acres.
Company-B has proposed a test well. Well spacing is 640 acres
& combined leases make up one drilling unit, in which one well
can be drilled. Company-A has its choice of either participating
in the working interest on an acreage basis, or it can farm-out
its interest, for
1/16 of 7/8 overriding royalty interest under its 120 acres

Ownership interests as a fraction on the total gas produced
are based on 5% state tax
120acres/640 acres = 3/16 of acreage

1/8 land owner’s royalty
For partial working interest

(3/16)(7/8)(0.95)=0.1559 of total
For overriding royalty interest

(3/16)(1/16 ORI × 7/8)(0.95)=0.009741 of total

Probable reserves of a successful well; estimates
Maximum 5,300 mmscf(30% of productive wells)

average 3,750 mmscf(50% of productive wells)
minimum 2,500 mmscf(20% of productive wells)
Regional wildcat success ratio 35%
Regional development ratio 85%
Spacing 640 acre/wells
Dry hole costs $40,000
Completion costs $32,000
Operating costs $150 per well per month
Gas price $150 per mmscf
Producing life 18 years

• Constructing the decision tree
• Management decision, based on PV at 15% yearly discount
rate
• PV used throughout the decision tree
• Estimate PV-factor
• Production assumed uniform for 18 years
Note: using mid-year discounting & considering delay from the

date of well completion until gas sales commences, which
averages 2 years, an additional factor is applied.
Present value factor = (1+i)-2 * Discount factor = 0.277 (see next

page)

(1 + 𝑖)𝑛 − 1 (1 + 𝑖) 𝑛
−1
𝑃 = 𝐴൤ 𝑛
൨ 𝑃 = 𝐴ሺ1 + 𝑖 ሻ ൤
0.5 ൨
𝑖(1 + 𝑖) 𝑖(1 + 𝑖) 𝑛
Mid-year discounting applied to
Equal future payments
0 1 2 n
𝑛
(1 + 𝑖) −1
𝑃 = 𝐴ሺ1 + 𝑖 ሻ ൤
0.5
𝑛
൨
𝑖(1 + 𝑖)
0 1 2 n
𝑛
(1 + 𝑖) − 1
𝑃 = 𝐴ሺ1 + 𝑖 ሻ0.5 ൤ ൨ሺ1 + 𝑖 ሻ−2
0 1 2
𝑖(1 + 𝑖)𝑛

𝑛
(1 + 𝑖) −1
𝑃 = 𝐴ሺ1 + 𝑖 ሻ ൤
0.5 ൨ሺ1 + 𝑖 ሻ−2
𝑖(1 + 𝑖)𝑛
A = equal yearly amount

E = sum of equal yearly amount
for this case E= 18 * A; A = E/ 18

𝑛
𝐸 (1 + 𝑖) −1
𝑃= ሺ1 + 𝑖 ሻ ൤
0.5 ൨ሺ1 + 𝑖 ሻ−2
18 𝑖(1 + 𝑖)𝑛
for
i=0.15
n=18
P=0.276056 E
Operating costs
Total operating costs:
($150 per month)(12 months/yrs)(18yrs)=$32,400
Net share of operating costs:

(3/16)($32,400)=$6,080
Investment
Net additional investment for the 3/16 working interest
Completed well:
(3/16)($40,000+$32,000)=$13,500
Dry hole:
(3/16)($40,000)=$7,500

Calculation of net PV of possible terminal events for partial
working interest
Total Operating Operating Undiscounted PV Investment NPV
Reserves Income Cost Value 15%
MMscf $ $ $ $ $ $
5300 123940 6080 117860 32600 13500 19100
3750 87690 6080 81610 22610 13500 9110
2500 58460 6080 52380 14510 13500 1010
0 0 0 0 0 7500 -7500
Operating income calculation on net interest of a 0.1559 fraction for Company-A to

participate in the working interest

Calculation of net PV of possible terminal events for overriding
royalty interest
Total Overriding royalty NPV @

Reserves Income 15%
mmscf $ $
5300 7710 2140
3750 5450 1520
2500 3640 1010
0 0 0

Calculating position values by Rollback
0.3
0.5
5 0.2
0.3
n g 0.65 Dry hole
i
o rk
a lw
a rti rest
P te
in
0.3
0.5
Ov 5 Prod. well
Ro errid 0.3 0.2
ya
lty ing
int 0.65 Dry hole
ere
st
Decision tree for choosing between a partial working interest and an overriding
royalty interest
Outcome Event Conditional Pro. PV, $ Expected PV, $
For partial working interest, producing well
5300mmscf 0.3 19100 5730
3750mmscf 0.5 9110 4560
2500mmscf 0.2 1010 200
10490
For partial working interest, prior to drilling
Producing well 0.35 10490 3670
Dry hole 0.65 -7500 -4880
-1210
For overriding royalty interest, producing well
5300mmscf 0.3 2140 640
3750mmscf 0.5 1520 760
2500mmscf 0.2 1010 200
1600
For overriding interest, prior to drilling
Producing well 0.35 1600 560
Dry well 0.65 0 0
560

Evaluating acceptance of a farm-out
Example “McCray, 1975”
• Economic description
• Company must decide to farm-out or not (8,000 acres)
• Subject to royalties and overriding royalties amounting to 20%
• Farm-out acceptance under obligation of drilling minimum 3 wells
• Horizon, gas sand at depth ≈2,800ft
• 15% annual discounting, neglecting income tax
• The 8,000 acres is north of adjoining gas field
• Prospect of discovering gas, 25%
• 25% exploratory success average for the area
• Regional average for development wells is 70% successful
• Well spacing, 640 acres , so, 12 possible drilling locations on the property

Data:
Wildcat success ratio 25%
Development success ratio 70%
Well spacing 640 acres
Dry hole cost $15,000
Completion cost $$7,500
Gas price $150 per mmscf
State tax 5%
Probable reserves of a successful well:

Maximum 2,000mmscf (20% of wells)
Average 1,500mmscf (60% of wells)
Minimum 750 mmscf(20% of wells)
Operating cost $150 per well per month

Producing life 10 years
Present values of individual wells
• PV-factor based on 10years producing life
• Assumption, production evenly distributed over the 10years
• 15% discounting using mid-year convention
• Discount factor=0.53874
• 2 years delay between well completion and gas sales
• Discount factor used = 0.53874 (1+i)-2

Ave. Producing well
(0.2)(2000mmscf) 400mmscf
(0.6)(15000mmscf) 900mmscf
(0.2)(750mmscf) 150mmscf
Expected prod. 1450mmscf
Income, Ave. prod. well:

(1450mmscf)($150/mmscf)(0,95)(0.8)=$165,300
Operating expenses:
(10yr)(12months/yr)($150/month) = $18,000
Net operating income:

=$165,300-$18,000 = $147,300
Present-value net operating income:

(0.407)($147,300) = $59,950

Drilling & Completion
$22,750
Net present value:

$59,950-$22,750 = $37,200 per well
For, Dry Hole:

Net loss = $15,000 per well

Constructing a Decision Tree
Likelihood development plan clustered around three test wells

Outcome Test wells Fill-in wells Total wells PV
Case Dry Good Dry Good Dry Good $
a 0 3 3 6 3 9 289.800
b 1 2 2 4 3 6 178,200
c 2 1 1 2 3 3 66,600
d 3 0 0 0 3 0 -45,000

0.33 Dry Producer Dollar
3 9 289,800
0.33 3 6 178,200
$178,200
0.33
4 3 66,600
0.25
$10,800 0.75 5 0 -45,000

pt
ce
Ac
Reject
No Change

Expected value if Gas Production is Obtained
Conditional Event Expected
Case
Probability Value Value
a 0.333 289,800 96,000
b 0.333 178,200 59,400
c 0.333 66,500 22,200
178,200

Expected Value at The Decision to Accept the Farm-out
Event Expected
Event Probability Expected Value
Value
Gas 0.25 178,000 44,550
discovered
No discovery 0.75 -45,000 -33,750
10,800

Evaluation of Well Re-completion or Side-track “Primary Recovery”
Example: Lerche & Mudford (2001), SPE 71418
Zone-A
Zone-B
A PA,S=probability , side-track A is successful
(1-PB,S)=probability, production From Zone B is killed (failure)
tB tB tB
CB    e  it qB e  Dt dt    e  it dt  Po  e it q B e  Dt dt 
0 0 0
PA,S PB,S s s
t
s
tA
s
t
C A e  it   e  it  e  it q A e  Dt dt   e it  e  it dt  Po e  it  e it q A e  Dt dt
A A
0 0 0
-CAPEX-Variable OPEX- Fixed OPEX + REVENUE

B B1
PA,S (1-PB,S)
PA,S
Decision analysis problem
solved by production
B2
optimization (NPV), PB,S (1-PA,S)
thereby optimizing the
time to sidetrack to Zone-
B3 (1-PA,S) (1-PB,S) (1-PB,S) PA,S
A or recomplete to B4
(1-PA,S) PB,S Dependency (1-PA,S)
produce from Zone-A
EMVB=NPVB1×PA,S PB,S + NPVB2×PA,S (1-PB,S) + NPVB3×(1-PA,S)(1-PB,S) + NPVB4×(1-PA,S) PB,S
B1
e-i•ts 0
Zone A
tA
0 Zone B
tS tB
B2 e-i•ts 0 Zone A
tA
0 Zone B
tS
B3 e-i•ts B4
0 Zone A e-i•ts 0 Zone A
0 Zone B
tS Zone B 0 tS tB

Evaluation of Well Recompletion or Sidetrack “Secondary Recovery”
Example
Orodu et al. (2011), JPSE 78(3-4): 705-718
Orodu & Tang (2011), E E E 29(3): 234-250
Production Well Sidetrack Injection Well Sidetrack
B1 P’A P’B
No-Sidetrack B2
(1-P’A) (1-P’B)
PA PB B3
A P’A (1-P’B)
A1 B
B4
(1-P’A) P’B
A2 C (1-PA) PB
B
P’A
D E1
PA (1-PB)
Sidetrack (1-P’A)
F E2
(1-PA) (1-PB)
Simultaneous or Sequential Sidetrack time optimization under (1) CAPEX &

POS (2) including reservoir parameters uncertainty; production prediction by
reservoir simulation, empirical and semi-empirical methods
Evaluation of Well Recompletion or Sidetrack “Secondary Recovery”
Example
Orodu et al. (2011), JPSE 78(3-4): 705-718
Orodu & Tang (2011), E E E 29(3): 234-250
(a) B E1
D E2
Production timeline for Zone-B
t=0 tBT,B tR tRR
indicating production well
sidetrack time (tR) and
injection well sidetrack time B1
B2
(tRR) scheme adopted for all
A2 B3
branches (a) Post water B4
breakthrough time (tBT,B) (b) B E1
sidetrack of Zone-B (b) Pre D E2
water breakthrough time (tBT,B) t=0
sidetrack of Zone-B with the tR tBT,B tRR
possibility of injection well
sidetrack occurring before and B1
after water breakthrough time B2
A2 B3
01/18/2022
of Zone-B. Prof. Oyinkepreye D. Orodu B4 49
Well Spacing Optimization – Analytical Approach
Corrie (2001), SPE 71431; John & Onyekonwu (2010) SPE 140674
Optimization of Field
Development to maximize N  t 365Wq dt N p   365Wqo e  Dt dt
t 365𝑊 𝑁 𝑝 𝑞 𝑜
returns on investment.
p 0 t 0 𝑃𝑉𝑁 𝑝=
𝑁 𝑝 𝑙𝑛 ( 1+𝑖 )+365𝑊 𝑞 𝑜
{ }
Approach-optimal well 365W  qo  qt  365Wqo
Np  
spacing (optimal well D D NPV  ( PVN p )V  CW  Z
number) by maximizing NPV
365Wqo 365WN pVqo
of investment analytical D NPV   CW  Z
(differentiation) or/and non-
Np  p
N ln  1  i   365Wqo
 Dt
qt qo e
Linear programming (e.g. PVqt  
 1 i  1 i d ( NPV )
t t
Excel-Based Solver). 0
Sensitivity analysis and a t dW
PVN p   W 365PVqt dt
0
stochastic approach is W=# wells; D=continuous decline rate
x
a d=constant percentage decline rate
possible 𝑒
− 𝐷𝑡
= (1 − 𝑑 )
𝑡
 a x

ln a C=PV capital investment per well ATAX
i=interest rate ; V=oil price ATAX
365 𝑊 𝑞𝑜 Z=PV investments independent of
𝑃𝑉𝑁 𝑝=
{𝑙𝑛 (1+𝑖 ) + 𝐷 } wells
Np= cumulative oil prod.
substituting decline rate into PVq=PV production rate
the above equation PVNq=PV of Nq or reserves
NPV= net present value; t=time
01/18/2022 Corrie (2001) SPE 71431 Prof. Oyinkepreye D. Orodu 50
Questions from McCray (1975)
Question
An independent operator has paid $6,000 for a lease on an 80-acre drilling
unit. The landowner retained 1/8 royalty on all oil and gas produced. Drilling
and completing a well cost an additional $130,000. After state severance
taxes, it is estimated that $3.95 per barrel will remain to be divided among all
interests. Operating costs will remain to be divided among all interests.
Operating costs will amount to $2,400 per year for an estimated 14-year
producing life. 10% annual interest is to be applied to both future income from
production and operating
Probability
expenses
Recovery, barrels
0.2 360,000
0.4 80,000
Drill with 50% WI

0.4 0
Accept 1/16 of 7/8 0.2 360,000

overriding royalty
0.4 80,000
0.4 0

Question (Con’d)
(a)
A second operator has offered to go in as a partner and pay the first $10,000
drilling costs, with the remaining costs to be equally divided. Each would
then have a 50% working interest, as shown on the diagram. Probability is
0.2 of 360,000 bbl recovery, probability is 0.4 of 80,000 bbl recovery, and
probability is 0.4 of zero recovery. The first operator has a total of $400,000
venture capital. If he accepted this offer, what would be his expected
present-value profit?
(b)
A larger operator has offered to drill and produce the well with the first
operator retaining 1/16 of 7/8 overriding royalty. What would be the
present-value profit under this arrangement?

Question
The decision tree concerns the purchase of a lease and the drilling of a test well. The
lease may be purchased and drilling proceed immediately. Or, after the lease is
purchased, a geophysical survey may be made to better delineate the prospects of
discovering oil, before drilling the expensive test well.
The data are as follows:

Maximum ultimate discovery size 8MM bbl
Present value of operating profit, per barrel $1.40
Cost of additional wells, if successful $1.35 MM
Cost of test well $500,000
Cost of lease $150,000 0 bbl
Cost of additional surface information $200,000
p=0.7

Drill on present information
Calculate the expected value p=0.3
of each branch that leaves the 8 MM bbl
decision node
0 bbl
Obtain p=0.4
additional
subsurface p=0.5
information p=0.6 8 MM bbl
p=0.5
01/18/2022 Prof. Oyinkepreye D. Orodu 0 bbl 53
Question
Calculate the mean, variance and standard deviation of each
branch that leaves the decision node. Branches that have a lower
expected value and greater variance are often trimmed from the
decision trees. On this basis, can the tree be simplified?
Probability Net Value

0.3 120
0.3 80
0.4 -40
0.2 150
0.4 60
0.4 -50

Module - 4 Decision Analysis & Economic Models: 01/18/2022 Prof. Oyinkepreye D. Orodu 1

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Module - 4 Decision Analysis & Economic Models: 01/18/2022 Prof. Oyinkepreye D. Orodu 1

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MODULE – 4

Decision Analysis & Economic Models

01/18/2022 Prof. Oyinkepreye D. Orodu 1

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• Purposes served by decision trees

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Evaluating a development drilling venture

Example “McCray, 1975”

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An offset well justifies a probability of 60% that A would be

01/18/2022 Probability tree for a development

Terminal Total Net Costs($) Net Value

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The PVs are production revenues net of all operating expenses,

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0.05 0.05 +$34MM

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EMVC= 0.9 0.850

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• The procedure starts from the terminal events of the decision

Expected position value=

Pb=conditional probability of branch emanating from the node

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• Evaluation of a decision tree by the determination of

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120acres/640 acres = 3/16 of acreage

For partial working interest

For overriding royalty interest

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Maximum 5,300 mmscf(30% of productive wells)

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Note: using mid-year discounting & considering delay from the

Present value factor = (1+i)-2 * Discount factor = 0.277 (see next

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A = equal yearly amount

for this case E= 18 * A; A = E/ 18

Net share of operating costs:

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Operating income calculation on net interest of a 0.1559 fraction for Company-A to

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Total Overriding royalty NPV @

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Probable reserves of a successful well:

Operating cost $150 per well per month

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Income, Ave. prod. well:

Net operating income:

Present-value net operating income:

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