CHART 1

Relation of Oil Wells Drilled, Dry Holes, and Abandoned and Shut-In Wells to Average Price.

This production might be expanded enormously if it were possible to work deeper sands. The 1942 Oil Scout's and Landsmen's Handbook lists 526 oil pools in Oklahoma, of which the depth of the producing sand is given for only 219. These include about 100 pools whose sand is less than 3,000 feet deep, and whose total area is about 300,000 acres. Many of these pools have active natural water drives, and for this and other reasons not all of them will be susceptible to water flooding. However, if only 100,000 acres with a recoverable reserve of 3,000 barrels per acre were susceptible to secondary recovery, they would provide a reserve of 300,000,000 barrels. If production averaged 1 barrel per acre per day from 100,000 developed acres it would amount to 100,000 barrels per day, or more than one-quarter the present production of the State.

At the end of 1941 there were under water flood in eastern Kansas 1,563 acres with an average production of 2,750 barrels per day, or 1.75 barrels per acre developed. Practically all the oil is from sands less than 1,000 feet deep, although one flood is operating successfully at 2,000 feet. The American Institute of Mining Engineers', Petroleum Development and Technology, 1942, lists 139 fields in Kansas less than 3,000 feet deep with a combined area of 275,000 acres. The production of oil by secondary methods in Kansas could easily be increased tenfold.

That these figures are not fantastic is illustrated by the history of the Bradford field in Pennsylvania. This field had a peak production of about 60,000 barrels per day in 1881, and it had declined to 5,500 barrels per day in 1907. In 1937 production had increased to 50,000 barrels per day by water flooding from the same area. The primary production of the Bradford pool is estimated to have been about 200,000,000 barrels. To Jan. 1, 1942, about 186,000,000 barrels had been produced by water flooding, and at least another 100,000,000 remains to be recovered. It is hardly necessary to point out that the recovery of this oil would not have been possible at existing prices.

The time lag between the initiation of an exploration campaign and the development of production is at least two years. Any increase in incentive to wildcatters can therefore not be expected to result in increased reserves for a rather long time. On the other hand, encouragement of secondary recovery operations should result in increased production in about a year.

Of course the wider use of secondary recovery methods will not provide enough additional production to offset the decline in the discovery rate. However, if this decline continues, as it seems likely to do, we will inevitably be forced to place more dependence on secondary recovery as a supplemental source of oil.

EFFECT OF PRICE ON SECONDARY RECOVERY OF OIL

The effect of price in determining the amount of oil available from secondary recovery operations is much more definite and predictable than the effect of price on the discovery of new reserves. With the improvements in coring technique and experience in secondary recovery operations, it is possible to predict, not accurately, but with some assurance, the amount of recoverable oil per acre and the approximate cost of development. For each increment in a price increase there will be a corresponding increment in available reserves. For example, in

Pennsylvania where the price of oil is $3.00 it is possible to operate a property yielding 2,500 barrels per acre at a depth of 1,500 feet. In Oklahoma, where the price is $1.15 it is possible to operate a property yielding 2,500 barrels per acre only if it is less than 800 feet deep. A price increase in either state would at once make it profitable to operate deeper or poorer sands.

It is very difficult to use the cost of producing a barrel of oil in attempting to determine a fair market price. As is well known, the cost of producing oil varies widely from district to district, lease to lease, and even from well to well, ranging from a few cents to several dollars per barrel.

In secondary, as in primary recovery of oil, the development and operating costs in any one district from sands of the same depth will be approximately the same on a per-acre basis, regardless of how much they may vary on a per-barrel basis. The cost of producing the oil thus depends, almost entirely, on the amount recovered per acre.

This is illustrated by the cost and recovery figures on four projects in Pennsylvania and three in Oklahoma, which are presented herewith (table 2, below). These data were taken at random from the books of the operating company. They are presented purely for illustration, and not as an attempt to determine an average cost of production, which, as stated above, is an elusive and often misleading figure. They do show very clearly that the total recoverable oil and the depth of the sand determine the cost of production, and that the price received limits the pools that can be operated.

Cumulative recovery with one-eighth royalty subtracted.

Gross cumulative recovery to Nov. 1942. Production from these floods is continuing, although it is now quite low.

In four Bradford operations the total development and operating cost ran surprisingly close to $10,000 per acre. The oil recovered on these properties ranged: between 2,640 and 9,600 barrels per acre. Consequently the total cost per barrel. (less depletion and amortization) ranged between $1.11 and $3.90. One develop-. ment produced 600,000 barrels of oil at $3.90 per barrel and lost $1,000,000 in doing so. Before the fact become apparent that the recovery was going to be poor, the development money had been spent. It was impossible to withdraw, and production had to be carried through to the bitter end in order to regain as much as possible of the invested money. The money that this company lost on this project was in part recovered by profits on other properties. It would be very misleading, for example, to point to the lease that produced oil at $1.11 per barrel, and conclude that most well-operated companies in the Bradford pool are making substantial profits. About the only definite conclusion that can be drawn from the Bradford data in the table is that that particular company will never again knowingly attempt to develop a property that contains only 2,600 barrels of recoverable oil per acre at the present price of oil. About 34,000 acres, or roughly. 40 percent, of the Bradford pool consists of territory which is estimated to contain less than 2,500 barrels of recoverable oil per acre. Much of this territory has been developed and some more probably will be, at considerable loss to the producers. At the present time the active companies have little of the better acreage left to develop, and as a consequence, drilling and production in the field are falling off. The Oklahoma figures show that the total development and operating cost per acre increases directly as the depth of the sand, ranging from $780 per acre for a 400-foot sand to $1,460 per acre for a 600-foot sand. The company barely broke even with a recovery of 1,000 barrels per acre from a 400-foot sand, and made some profit on a recovery of 3,200 barrels per acre on a 600-foot sand. It lost heavily on a 900 barrels per acre recovery from a 500-foot stand. Clearly water flooding in Oklahoma at present prices is confined to sands less than 1,000 feet deep, and development at that depth is attended by a great deal of risk because of the impossibility of making an accurate estimate beforehand of the recoverable oil. There can be no question that very large reserves of oil are available at a depth of 1,000 feet and deeper, which would become available with a higher price.

In California heavy oil for fuel is badly needed by the Navy. There is a large number of shallow pools from which primary recovery appears to have been inefficient, and from which it might be possible to obtain large amounts of this heavy oil quickly and cheaply by water flooding. However, the price is the same as it was when heavy oil was a drug on the market. No one can contemplate secondary recovery for a price of $0.75 per barrel. If the price of heavy oil could be raised adequately, secondary recovery might be possible.

PROFITS AND THE PRICE OF OIL

There is a strong feeling on the part of everyone that no company should make more than a very small profit during this emergency. This feeling is entirely justified, and shared by the oil industry. In the attempt to limit profits by holding the price of crude oil while that of nearly all other commodities has risen, the fact appears to have been lost sight of that most successful oil companies reinvest the profit on any one operation in new development work. This is true even in, normal times, and it is particularly true under the present system of taxation. Any profits made by companies specializing in secondary recovery would be immediately spent in expanding their productive facilities. This expansion, especially in the Midcontinent and the eastern United States, is as essential to the war as the expansion of the aircraft or munitions industries.

LEAN OR MARGINAL SOURCES OF SUPPLY

There are many areas where the reserves that can be developed are what might be termed a "lean or marginal" class. Many of these areas will produce from thin sands an oil of a low gravity and are so located as to be available to existing transportation facilities. At the present price of oil, however, the amount of money that it would be necessary to expend in acquiring properties and in developing and producing oil therefrom would be so great that the income at the present low prices for crude petroleum would not provide any margin of profit or a sufficient margin of profit to justify the hazard involved. It must be recognized that even in pool completions, during the year 1942, approximately 30 percent of the wells were dry. In the development of lean or marginal reserves it is also necessary

to figure on dry-hole costs in connection therewith. In many of these areas, on account of the low gravity of the crude oil, the price is exceedingly low, running somewhere between 60 cents and $1.00 per barrel. As the price of oil increases, more and more of the reserves of this type will be developed.

REPLACEMENT COST

It must be recognized that prices based on historical costs will not provide the necessary incentive for venture money to enter into exploratory effort. To accomplish that purpose it is essential that prices be based on replacement cost.

It is known that there has been a rapid decline in the discovery of new petroleum reserves in recent years. To substantiate this statement there is reproduced here Chart 2, which is a copy of a chart prepared by Mr. E. DeGolyer and included in his article in Volume 26, Number 7, July 1942, issue of the Bulletin of the American Association of Petroleum Geologists and shown on page 1215 thereof, indicating the actual rate of discovery. A similar chart was prepared by H. J. Struth, Petroleum Economist of Dallas, Texas, and is shown in his article in the January 1943 issue of the Petroleum Engineer, entitled "Study Reveals Imperative Need for Increasing Oil Reserves." In the same article under Table 9 are shown the data on which this chart is based. It is significant to note that the figure shown and the trends indicated in both charts referred to are practically the same. From Table 9 in Mr. Struth's article, it will be noted that during the four year period 1935 to 1938 the new reserves discovered exceeded the crude oil produced by 2,736,000,000 barrels while during the four-year period 1939 to 1943, the crude oil produced exceeded the new reserves discovered by 3,227,000,000 barrels, so that during that period only .4 as many barrels of new reserves were discovered as the amount of oil produced.

CHART 2

By E. DeGolyer, Director of Conservation, Office of Petroleum Administrator for War, Showing Actual Rate of Discovery of Oil Reserves by Years with Extensions and Rdvisions Reverted back to Year of Discovery.

15

From Vol. 26 No. 7 July 1942 Bulletin of the American Association of Petroleum Geologists.

During the year 1942, it is estimated that the new discoveries including extensions to old discoveries amounted to only 64 percent of the amount of oil produced.

In Chart 4 on page 30 is shown the relationship of the price of crude petroleum and dry holes drilled. On the basis that dry holes drilled are an index of explora tory effort this chart indicates that price has a definite relationship to exploratory effort. When price is fixed and costs increase, this relationship is reflected in exploratory drilling.

Some statistics as to discovery released by the Division of Production of the Office of Petroleum Administrator for War during the first half of 1942, show that for the five year period 1934 to 1938, inclusive, an average of 121 new fields was found each year with an average of 1.8 billion barrels of oil annually. The