Your oil company must decide whether to drill a well at a cost of $250,000 or to
ID: 1203584 • Letter: Y
Question
Your oil company must decide whether to drill a well at a cost of $250,000 or to sell the lease for $200,000. The lease was purchased in 1983 for $120,000 and is on a prospect in a fairly well established field Thus far, 65 wells have been drilled in the field. The results of drilling are 15 dry holes, 12 gas producers, 18 oil wells, and 20 wells producing both oil and gas. The present worth of all future production for each type of well is as follows: gas, $2,550,000; oil, $4,500,000; and both gas and oil, $3,600,000. If the decision is to be based on maximum expected value, what should be done?
Explanation / Answer
$250,000 to drill
$200,000 to sell the lease
Lease was purchased in 1983 for 120,000
65 wells are already drilled in the field,
15 dry holes and 12 gas producers and 18 oil wells and 20 produce both oil and gas
Gas is 2,550,000 is the worth
OIl is 4,500,000 is the worth
Gas and Oil is 3,600,000
The worth of the oil wells is very high and probability of failure is 15/65*100 = 23%
So if you are to drill a well you have 23% chance that you would get a dry well
The rate of return is atleast 2,550,000 which is 10 times of 1000%, So i think they must go ahead and drill the well rather than selling off the rights.
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