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XII-3
million.
The E(NPV) for oil production within the additional area is $47 million at 10%.
The E(NPV) at 10% for gas exploration in the combined area is $133 million. See
Figure 8.
The E(NPV) for gas production within the boundaries of the WIPP site is $67
million.
The E(NPV) for gas production within the additional area is about $69 million.
Taxes and potentially foregone tax revenues were also srudied via the simulation.
Values for severance, state and corporate taxes, as well as royalty payments were
simulated. Expected present values (E(PV)s) are presented in Tables 2 and 3 for oil and
gas at a 15 % discount rate. Because these figures are from separate simulations, values
from the additional and WIPP areas may not exactly sum to reported combined area
values. Values associated with a 10% rate are in the appendix.
SIMULATION METHOD
Oil and gas reserve estimates for the WIPP site, additional area, and combined
area were provided by specialists at the New Mexico Bureau of Mines & Mineral
Resources. A simulation model was constructed for both oil and gas in each of the three
zones of interest. Key model inputs, in addition to reserve data, included the price of the
commodity, the unit cost of extraction, severance tax rates, state and federal corporate
taxes, the depreciation schedule assumed for capital investments, and the discount rate.
Development of a method to anticipate future market prices for oil and gas was a key
issue. Time units were years, and the time frame simulated was 1995-2030.
Forecasting is as much an inexact art as a science, particularly when the
forecasting horizon is 35 years. Thus, although historical prices for Eddy County oil and
gas were modeled using time-series methods, a simulation approach was used to value
these resources. Annual market prices were simulated using a random-walk methodology
(an excellent reference is Karlin and Taylor, 1975), which is discussed below. Depletion
was calculated using the standard methodology, which may be found in Stermole and
Stermole (1993).
The time frame considered was 1995-2030. Market prices and extraction and wellmaintenance
costs were considered on an annual basis, and anticipated productivity data
were provided on an annual basis. A sample (this sample does not include actual data
used in the srudy for both investment and operating costs) simulation run for the years
1995-2001 is provided in Table I.
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