toobad41

Will Oil Be the Last Asset Standing?

People generally don't know why oil should be in the $70 per barrel range. Let me explain why oil should be $70 and as an independent oil operator. Drilling a well 4,800 feet, running casing and putting it on production (assuming it is not a dry hole) costs me about $1,000,000. Let's say the well is pretty good and produces at a daily rate of 250 barrels per day. And it continues to produce for 60 days at that rate. Conventional thinking is you just multiply $70 x 60 days x 250 barrels and you get $1,050,000. Thus you have $50,000 profit, right. Wrong. You forgot to deduct royalties(as much as 25%!), lease operating costs, employee salaries, production taxes, general and adminstrative costs, transportation costs, tangible and intangible costs, rentals of equipment, etc. The list is very long and the amount of time needed to payout the $1,000,000 well usually runs into 2 to 3 years. Not only that the well is declining in production and may only be making a few barrels a day after 3 years. Lease operating costs can run as much as $3000 a month. So now you have a well that produces say 2 barrels per day and you get $70 (again assuming it stays at $70) that would be $140 per day or $4200 per month. But you have to deduct the $3000 lease operating expense and you are left with $1200. But that is not correct either because 25% royalty is taken off the top. You are left with $52.50 not $70. So $52.50 x 2 barrels x 30 days is now $3,150 not $4200. So you are left with $150 to pay employees, pay taxes, transportation costs, etc. Now do you see where this is going? The well is no longer profitable. Maybe I should spend $250,000 to re-stimulate the well to get production back up to 35 barrels per day. The killer, of course, is the overhead expenses that eat you alive. In order to be in the oil business you have to have a lot of production and a lot of nerve to stay afloat. And you have to have oil above $70 per barrel to make it worth the trouble of getting it out of the ground and into the market.