An Oil Company Is Trying to Determine the Amount of Oil

question 16

Essay

An oil company is trying to determine the amount of oil that it can expect to recover from an oil field. The unknowns are: the area of the field (in acres), the thickness of the oil-sand layer, and the primary recovery factor (in barrels per acre per foot of thickness). Based on geological information, the following probability distributions have been estimated The amount of reserves that can be produced is then the product of the area, thickness, and recovery factor:
Number of barrels = Productive Area x Pay Thickness x Primary Recovery Factor
-(A) Use @RISK distributions to generate the three random variables and derive a distribution for the amount of reserves. What is the amount we can expect to recover from this field?
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(B) The production output is a product of three very different types of input distributions. What does the output distribution look like? What are the implications of the shape of this distribution?
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(C) What is the standard deviation of the recoverable reserves? What are the 5th and 95th percentiles of this distribution? What does this imply about the uncertainty in estimating the amount of recoverable reserves?
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(D) Suppose you think oil price is normally distributed with a mean of $65 per barrel and a standard deviation of $10. How much revenue do you expect the field to produce (ignore discounting)?
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(E) Finally, your engineer is uncertain about costs to drill wells to develop the field, but she thinks the most likely cost will be $1.7Bn, although it could be as much as $3Bn or as little as $1Bn. What is your expected profit from the field?
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(F) What is the chance that you will loose money? Is this a risky venture?

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Definitions:

Net Advantage

This term could be referring to various contexts and does not have a widely recognized specific financial definition without more context. NO.

Leasing

The process of renting an asset, such as equipment or property, for a specified period of time.

NPV

Net Present Value (NPV) is a method used to evaluate the profitability of an investment, calculating the difference between the present value of cash inflows and outflows.

Leveraged Lease

A financing arrangement where a lessor uses borrowed funds to purchase an asset, which is then leased to a third party, helping businesses acquire expensive equipment with less capital.