Barrel-day Values

Abstract

The measure of value of an oil property is approximated by the length oftime it takes to ?payout;? viz., the time required for it to return theoriginal investment. This time varies in different fields. In the Appalachianand Mid-Continent fields, a good investment pays out in about four years; inCalifornia, it requires a slightly longer time; and in the Gulf field about twoyears. The two principal methods for establishing these values are based on acreage, as in California, and on production, as in the Appalachian field. The method ofestablishing values based on production was worked out in the Appalachianfields and approximates the value remarkably well in some fields; but it is arule of thumb and should be used intelligently. Briefly, the method is asfollows: An arbitrary number of dollars (called the barrel-day price)multiplied by the number of barrels of settled daily production of the propertygives the value. In its crudest application, the barrel-day price is determinedby the ?$10 to $0.01? rule, which means that the barrel-day price is onethousand times the prevailing price of oil. For instance, with oil at $3.50 perbbl. the barrel-day price would be $3500 per bbl. This rule, however, is notstrictly applied, for the barrel price is varied according to whether or notthe wells ?hold up.? But when a barrel price for a district has been fixed itis quite general to raise or lower the price with the fluctuation in the priceof oil; here the ?$10 to $0.01? rule is used extensively. However, theprospective purchaser takes into account tangible equipment upon the property, the extent to which the drilling program has been carried out, whether or notthe wells are ‘shot’ or natural, depth of wells, spacing of wells, paraffintrouble, etc. The basis of this method is settled production. As soon as production isconsidered settled, a flat barrel-day price is generally applied to allproperties, no matter what their age. AIME 065–37