Methods of Valuing Oil Lands

Abstract

This paper is abstracted from the report of the ‘Appraisement Committee ofthe Independent Oil Producers’ Agency, of which the writer was Chairman. Theother members of the committee were M. V. McQuigg and R. S. Haseltine. ToThomas Cox, engineer in charge of the investigation, and to his efficient staffof assistants, is due the credit for the detail work necessary in carrying outthe plan of the Committee. It treats only of the valuation of the lands, wells, and piping, without going into details of equipment and other features. It was recognized, early in the operation, that the value of oil lands was thevalue of oil to be extracted and marketed, less the costs attendant thereon.Referring this back to the costs in cents per barrel, it became obvious thatsurface improvements, absolutely necessary in the production of oil, from wellsthen drilled, had no separate and independent value aside from the value of theland, but that any excess equipment, not necessary for the production of oilfrom present wells, such as drilling tools, well casing, etc., should be givena present condition value. In valuing the properties of the Independent Oil Producers' Agency, theCommittee has considered the following facts:That from each property there will ultimately be produced a certain totalquantity of oil.That in the production of that oil a certain total quantity of money will beexpended.That a certain total amount of money will be received from the oil.That the total net receipts will be the total gross receipts less the costof development and production.That the present value of the net receipts must be such an amount that wheninvested by a purchaser it will be returned with 8 per cent. interestadditional during the life of the property. The initial procedure consisted in making a general reconnaissance of theentire district in which the property was located and determining thelithological and structural conditions underlying the area. AIME 059–49