Question

An oil company is drilling a series of new wells on the perimeter of a producing oil field. About 17% of the new wells will be dry holes. Even if a new well strikes oil, there is still uncertainty about the amount of oil produced: 40% of new wells that strike oil produce only 2,200 barrels a day; 60% produce 6,200 barrels per day.

a. Forecast the annual cash revenues from a new perimeter well. Use a future oil price of $97 per barrel. (Use 365 days a year. Enter your answer in dollars not in millions and round your answer to the nearest whole dollar amount.)

Expected annual cash revenues $

Answer 1

Price of one barrel of oil = $97

If oil is produced 2200 barrels a day, then revenue of a day = 97*2200 = $213,400

Number of days in a year = 365

Therefore, Annual revenue = 365*213400 = $77,891,000

If oil is produced 6200 barrels a day, then revenue of a day = 97*6200 = $601,400

Therefore, Annual revenue = 365*601400 = $219,511,000

Dry holes = 17% of new wells

wells with oil = 100-17 = 83% of wells

If new wells strikes oil, then chances of wells producing 2200 barrels a day = 40% of 83% of wells i.e 0.4*0.83 = 33.20%

If new wells strikes oil, then chances of wells producing 6200 barrels a day = 60% of 83% of wells i.e. 0.6*0.83 = 49.80%

Expected revenue = (chances of wells producing 2200 barrels a day*annual revenue if 2200 barrels a day oil is produced) + (chances of wells producing 6200 barrels a day*annual revenue if 6200 barrels a day oil is produced) = (0.332*77891000) + (0.498*219511000) = $135,176,290

Expected annual cash revenue = $135,176,290