Appraisal of Oil Properties

The term oil property, in this discussion, includes any type of easement orgrant under which petroleum might be produced; it ranges from the mere right todrill on undeveloped wildcat acreage up to a fully developed oil property. Thevalues of an oil property, as thus defined, vary widely according to the usefor which it is intended, whether it is from the viewpoint of the speculator, the fraudulent stock promoter, the refiner and pipe-line owner, or the oilproducer. The market value of a property is usually a combination of some two or more ofthese influences, and occasionally a combination of all of them, but we preferto treat each viewpoint as distinct from the others, allowing the reader tomake his own combination in such proportions as his inclination and propertyseem to require. This paper will treat the subject from the viewpoint of theoil producer. However, the other influences have such bearing on the cost ofproperty to the producer and on the price he might obtain by its sale as towarrant brief discussion of them. Speculation, particularly lease speculation, is a parasitic growth on the oilindustry, healthy enough, but of no economic value. The class of propertyusually dealt in for this purpose is the undeveloped lease. Its speculativevalue may have some relation to its probable productive value, but mostfrequently this value is the product of temporary excitement due to localdevelopment. The lease speculator, seeking out the trend of development orsecuring early information regarding a proposed test or a new discovery, immediately secures leases whose market value will be increased when theexistence of such development becomes more widely known. His profits are purelyunearned increment. Not proposing to spend money in exploration, he can affordto compete in purchase with the operator, who, in addition to bonus paid, mustspend large sums in testing out his own acreage and that of the nearbyspeculator as well. It has a tendency to compel unduly high bonuses. AIME 065–32