Question

Exercise 2 (6 marks) ENOV Oil has the following data in connection with lease Oud Maitha: $200,000 600,000 650,000 75 35 596 1/8 Proved Drilling cost Estimated completion cost Estimated selling price per barrel Estimated lifting cot per barrel State severance tax rate cost Royalty interest The company is sole owner of the working interest Required ed to be 2000 barels,is the well profitable? Explain. tal production would it take to cover completion costs? 1) If reserves are determin 2) How many barrels of to

Answer 1

1)

Fig in $ 1450000 20000 barrels Fixed Cost (2lakh+6lakh+6.5lakh 8 Variable Cost (35*20000) C (A+B) Total Cost 2150000 TARKKK) RAKKK) C) 187500 837500 Total Revenue(75 *20000) D Total Revenue (75 E-(D-C Gross Profit/loss Tax @5% (E*5% ) F G Royalty Interest (D*1/8) H (E-F-G) Net Los:s Not Profitable as the net loss is $ 8.4lakh

2) To solve the second part of the question, we will form an equation taking the required no. of barrels as x.

Now,

(40x - 14,50,000) * 0.95 - (1/8)* 75x = 0

Solving this equation,

x = 48,122,27 barrels.

Thus, 48,122,27 barrels are required to cover all the costs and start earning profits.

Note: A no. of assumptions were required for solving this question. Some of these are as follows:

• Proved Property Cost, Drilling Cost and Estimated completion Cost are considered as fixed costs at the initiation.
• Royalty interest is calculated on Total revenue considering that the percentage given is on revenue.