The Cost of Maintaining Production in California Oil Fields

Abstract

Published in Petroleum Transactions, AIME, Volume 52, 1916, pages 218–224. The cost of maintaining the production of an operating oil company is one of the most important, as well as one of the most difficult to estimate, of the various items which go to make up the total cost of producing oil. In the opinion of many operators the cost of drilling and developing new wells, whose, production takes the place of the loss in production through decreased yield of the old wells, is considered an operating expense, for the reason that the total income-producing power of the property is not increased. The cost of these new wells may be added directly to production expense, or it may be charged to capital account, and this account depreciated to the same extent. In either case, after an oil company is on a satisfactory income-producing basis, the money for drilling new wells to maintain production must be taken from the income of the company. Three factors determine the cost of maintaining production: First, the rate of decline in yield of the wells; second, the cost of drilling and equipping new wells in terms of their production; third, the decrease in initial production of new wells as the property is drilled and gas pressure taken off the sands, etc. In order to check theoretical figures for the cost of maintaining production the writer, with the assistance of Reed Bush and Fred Tough, has compiled the following figures. It is necessary first of all to choose a period of time during which production for the field or territory studied remains fairly constant. The longer the period of time over which this condition prevails, the better. It is also necessary to eliminate or allow for any extraneous condition which may have affected the production returns, such as the shutting down of a large number of wells, the bringing in of a well of exceptionally large yield, the opening up of virgin territory where the flush yield is greater than will be had from new wells in after years, etc. All these conditions are exemplified most simply in the case of the Coalinga field and perhaps these figures are more truly prophetic than the two other cases given. T.P. 052–17