CHAPTER 11 PAYING WELL DETERMINATIONS

• Jurisdiction: United States

Federal Onshore Oil and Gas Pooling and Unitization II
(Jan 1990)
CHAPTER 11
PAYING WELL DETERMINATIONS
Darryl R. Watts
Bureau of Land Management
Warland, Wyoming

TABLE OF CONTENTS

SYNOPSIS

Page

INTRODUCTION

I. THE DISCOUNTED CASH FLOW ANALYSIS

A. Drilling and Completion Costs

B. Projected Rate of Production

C. The Value of Production

D. Operating Costs, Taxes and Royalty Payments

E. The Discount Factor

F. The General Form of the DCF Analysis

G. Commencement Time for the DCF Analysis

II. WHAT IS A REASONABLE PROFIT?

III. PAYING WELL DETERMINATIONS FOR RECOMPLETED OR REENTERED WELLS

IV. THE REEVALUATION OF PREVIOUS DETERMINATIONS

———————

[Page 11-1]

INTRODUCTION

Section 9 of the model form unit agreement defines a paying unit well as one that is capable of producing quantities sufficient to repay the costs of drilling, completing and producing operations with a reasonable profit.¹ The Bureau of Land Management has developed a procedure to analyze the results of drilling, completion and production activities to determine whether a well is paying for unit purposes. A well must be paying in unit quantities to cause the establishment or revision of a participating area.

Normally, the unit operator submits a paying well determination with the application to establish or revise a participating area.

THE DISCOUNTED CASH FLOW ANALYSIS

The BLM uses a discounted cash flow analysis (DCF) to confirm the paying status of a well. The annual cash flow is estimated over the assumed productive life of the well. A discount factor is applied to the cash flow to convert the future dollars into present dollars. If this stream of present dollars offsets the drilling and completion costs, the well is considered a paying unit well.

The components of a DCF analysis for a paying well determination are:

1. The cost of drilling and completing the well;

2. The projected production rate;

3. The value of the production;

4. Operating costs, taxes and royalty payments and

5. The discount factor.

[Page 11-2]

DRILLING AND COMPLETION COSTS

Generally, the drilling and completion costs considered in a paying well determination are the actual costs incurred. However, the BLM Manual Handbook 3180-1 states that other reasonable costs which a prudent operator could be expected to incur should be considered. Extraordinary costs such as loss of well control, extensive coring and testing prgrams or an extended fishing job should not be considered.²

PROJECTED RATE OF PRODUCTION

The rate of production is estimated using a variety of reservoir engineering techniques which are beyond the scope of this paper. The most common method of estimating the production rate is by use of decline curve analysis. Decline curves are generated by taking the initial production rate, assigning a decline rate and producing a curve which estimates...