PETR 3310 Petroleum Production Economics

Homework 2
January 31, 2017
Due on February 7, 2017

Name: ___Solution____________________________________________________ (Underline your last name)

Download from Blackboard this document and print it. Develop the Excel spreadsheets
required to solve the problems in this homework. Scan the finished paper copy with your
answers and a printout of your Excel spreadsheets and graphs and upload them as a single
pdf file to Blackboard under the Homework 02 Submission Folder under Week 3. Also
upload your Excel workbook to Blackboard. Hand-in a paper copy of your answers and
printout of Excel spreadsheets and graphs at the beginning of the class on the due date.

Problem 1. (25%)
Develop an Excel spreadsheet to generate the table to solve Problem 1-1 from the textbook
and generate the requested graph.
Problem 1-1. An oil field transfer pump having a useful life of five years is purchased for
$10,000. Use of the pump will generate an incremental $15,000 in the first year. However,
the incremental revenue will decrease $1,000 per year in each of the following four years.
Operating costs of the pump will be $5,000 in the first year but will increase $1,000 per
year in each of the following four years.
a) Calculate net cash flow BFIT each year for this investment (15%).
b) Generate the corresponding net cash flow BFIT diagram for this investment (10%).

Problem 2. (25%)
Develop an Excel spreadsheet to generate the table to solve Problem 1-2 from the textbook
and generate the requested graph.
Problem 1-2. A used pumping unit is purchased to replace a smaller unit. It has a useful life
of five years and costs $20,000. The pump will generate an incremental $20,000 in the first
year. However, the incremental revenue will decrease $2,000 per year in each of the next
four years. Operating costs will be $4,000 in the first year but will increase $500 per year in
each of the following four years.
a) Calculate net cash flow BFIT each year for this investment (15%).
b) Generate the corresponding net cash flow BFIT diagram for this investment (10%).
 PETR 3310 – Homework 02
Problem 3. (25%)
Develop an Excel spreadsheet to generate the table to solve Problem 1-3 from the textbook.
Problem 1-3. Calculate the Net Cash Flow after tax (NCF AFIT) using the Royalty/Tax
Regime for an oil-producing property with the following information:
 Time Period: 1 year
 Gross Production: 50,000 bbl
 Shrinkage: 5%
 Sales price of oil: $90/bbl
 Net Revenue Interest: 0.80
 Your share of state and local taxes: $270,000
 Your share of investments during the year: $500,000
 Your share of operating costs: $75,000
 Your share of federal income taxes: $200,000

Problem 4. (25%)
Develop an Excel spreadsheet to generate the table to solve Problem 1-4 from the textbook.
Problem 1-4. Calculate the Net Cash Flow after tax (NCF AFIT) using the Royalty/Tax
Regime for an oil-producing property with the following information:
 Time Period: 1 year
 Gross Production: 45,000 bbl
 Shrinkage: 3% (2% in book)
 Sales price of oil: $65/bbl ($85 in book)
 Net Revenue Interest: 0.875
 Your share of state and local taxes: $250,000
 Your share of investments during the year: $600,000
 Your share of operating costs: $100,000
 Your share of federal income taxes: $275,000

Solution with 3% and $65/bbl or with 2% and $85/bbl (as book) gets full credit.

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 PETR 3310 – Homework 02

Prob. 1-1. Solution

Inc. Rev. Inc. Exp. Inc. Inv. Inc. NCF BFIT
Incremental Incremental Incremental Incremental Net Cash
Year Revenues Expenses Investment Flow BFIT
0 0 0 10,000 -10,000
1 15,000 5,000 0 10,000
2 14,000 6,000 0 8,000
3 13,000 7,000 0 6,000
4 12,000 8,000 0 4,000
5 11,000 9,000 0 2,000
Total 65,000 35,000 10,000 20,000

Prob. 1-1. Incremental NCF BFIT Timing Diagram

15,000
Inc. Cum. NCF BFIT
10,000
10,000 8,000
6,000
Net Cash Flow [M$]

5,000 4,000
2,000

0
0 1 2 3 4 5

-5,000

-10,000
-10,000

-15,000
Year

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 PETR 3310 – Homework 02

Prob. 1-2. Solution

Inc. Rev. Inc. Exp. Inc. Inv. Inc. NCF BFIT
Incremental Incremental Incremental Incremental Net Cash
Year Revenues Expenses Investment Flow BFIT
0 0 0 20,000 -20,000
1 20,000 4,000 0 16,000
2 18,000 4,500 0 13,500
3 16,000 5,000 0 11,000
4 14,000 5,500 0 8,500
5 12,000 6,000 0 6,000
Total 80,000 25,000 20,000 35,000

Prob. 1-2. Incremental NCF BFIT Timing Diagram

20,000
16,000
Inc. Cum. NCF BFIT
15,000 13,500
11,000
10,000 8,500
6,000
Net Cash Flow [M$]

5,000

0
0 1 2 3 4 5
-5,000

-10,000

-15,000

-20,000
-20,000
-25,000
Year

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 PETR 3310 – Homework 02
Prob. 1-3. Solution
Gross Production: 50,000 bbl
Shrinkage: 5%
Gross Sales: 47,500 bbl
Net Revenue Interest: 80%
Net Sales: 38,000 bbl
Sales price of oil: 90 $/bbl
Your Revenue: 3,420 M$
Your share of state and local taxes: 270 M$
Your share of operating costs: 75 M$
Operating Income BFIT: 3,075 M$
Your share of federal income taxes: 200 M$
Operating Income AFIT: 2,875 M$
Your share of investments during the year: 500 M$
Net Cash Flow AFIT: 2,375 M$

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 PETR 3310 – Homework 02

Prob. 1-4. Solution with 2% and $85/bbl (as book).

Gross Production: 45,000 bbl
Shrinkage: 2%
Gross Sales: 44,100 bbl
Net Revenue Interest: 87.5%
Net Sales: 38,588 bbl
Sales price of oil: 85 $/bbl
Your Revenue: 3,280 M$
Your share of state and local taxes: 250 M$
Your share of operating costs: 100 M$
Operating Income BFIT: 2,930 M$
Your share of federal income taxes: 275 M$
Operating Income AFIT: 2,655 M$
Your share of investments during the year: 600 M$
Net Cash Flow AFIT: 2,055 M$

Prob. 1-4. Solution with 3% and $65/bbl (as homework).

Gross Production: 45,000 bbl
Shrinkage: 3%
Gross Sales: 43,650 bbl
Net Revenue Interest: 87.5%
Net Sales: 38,194 bbl
Sales price of oil: 65 $/bbl
Your Revenue: 2,483 M$
Your share of state and local taxes: 250 M$
Your share of operating costs: 100 M$
Operating Income BFIT: 2,133 M$
Your share of federal income taxes: 275 M$
Operating Income AFIT: 1,858 M$
Your share of investments during the year: 600 M$
Net Cash Flow AFIT: 1,258 M$