The XYZ oil company owns several natural gas wells and is negotiating a 10-year

Question

The XYZ oil company owns several natural gas wells and is negotiating a 10-year contract to sell the gas from these wells to another company. They are negotiating on the price of the gas in the first year, in dollars per thousand cubic feel ($/MCF), including a 4% escalation clause. XYZ expects the wells to produce 33,000 MCF the first year and to decline at the rate of 15% every year thereafter . Operating costs are estimated to be $2/MCF and escalate at 3% per year. XYZ has agreed to spend $500,000 now to lay pipelines from each well to the second company's processing plant. What should the minimum price be the first year for this to be acceptable to XYZ? Assume an end-of-year concention and an MARR of 15%.

Explanation / Answer

So the minimum cost they will agree to for year one should be 66000+(500000/10) = 71000 excluding MARR

Adding MARR Minimum price XYZ will charge = $81,650

Year No of units produced Operating costs/unit cost pipeline cost 1 33000 2 66000 500000 2 28050 2.06 3 23842.5 2.1218 4 20266.125 2.185454 5 17226.20625 2.25101762 6 14642.27531 2.318548149 7 12445.93402 2.388104593 8 10579.04391 2.459747731 9 8992.187326 2.533540163 10 7643.359227 2.609546368

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.