Capital Budgeting Report and Analysis
Summary:-
In that situation, Primitive energy owns several coal seam gas reserves in southwest Queensland, but
Primitive does not have the capacity to transfer and process gas for sale domestically. Instead, Primitive
merely extracts the gas and sells the gas from one of its stocks at a fixed price of $4.45 per GJ for the
existence of the plant.
The management is therefore trying to decide if the gas is extracted by a vertical or horizontal drilling
process. In the Vertical Drilling process, there would be lower capital outlays and more wells need to be
drilled due to smaller drainage areas. According to the situation, 100 wells are expected to be drilled.
Higher capital investment is needed in the Horizontal Drilling process and higher technology is needed to
plan for this. Since horizontal exploration is taking place, it is difficult to find the way from where the gas is
extracted. According to the situation, there must be 50 wells to be built in order to receive supplies.
Methodology:-
Most horizontal wells begin at the surface as a vertical well. Drilling continues until the drill bit is a few
hundred feet above the target rock unit. At that point, the pipe is pulled out of the well and the hydraulic
motor is attached between the drill bit and the drill pipe.
Horizontal drilling is very expensive. When combined with hydraulic fracturing, a well can cost up to three
times as much per foot as a vertical well. The additional cost is usually recovered through increased well
production. These methods may multiply the yield of natural gas or oil from a well. Without this method,
many well profitable would be failures.
From the analysis, we have come to the solution that the Primitive should use the Vertical Drilling Method
to extract gas for supply. As if using the Horizontal Drilling Method, if the rate of return is 11% and the life
of the reserve is 6 years, then we get a net present value (NPV) of $100,497,648.50, whereas if we use the
Vertical Drilling Method, considering the rate of return is 11% and the life of the reserve is 17 years, we
have an NPV of $463,827,295.80.
Recommendations:-
After evaluation, we find that somehow the Vertical Drilling approach is better than the Horizontal Drilling
approach, as it produces more cash flows than the horizontal approach. So we personally prefer Vertical
Drilling Approach to Horizontal Approach.
Why we choose Vertical drilling method?
1. The Vertical Drilling Approach is considered to be a conventional method for extracting oil and gas from
the earth.
2. It is generally cheaper than a horizontal approach.
3. It does not require higher technology compared to a horizontal approach.
4. After so many years, too many new technologies have also been discovered, but it's still the most
common method of extracting gas.
5. This method does not require any advanced tools and technology.
From the calculation, it has been shown that the Vertical Drilling method produces more value than the
Horizontal Approach, as the vertical NPV approach is $363,329,647.30 higher than the horizontal NPV
approach.
Limitations:-
From the given problem we have classified the following information
Particulars Vertical Drilling Approach Horizontal Drilling Approach
Reserve Size (in GJs) 250,000,000 250,000,000
Price per GJs of Production $ 4.45 $ 4.45
Required rate of return 11% 11%
Capital expenditure 3,00,000 5,00,000
Well capped and rehabilitation 3,00,000 3,00,000
expenses
Life of well 10 years 17 years
Net present value (NPV) $ 463, 827, 295.80 $ 100,497,648.50
As we aware from the above analysis that somewhere Horizontal approach is also good. But from the
above analysis, there is more NPV in the Vertical approach, so we should prefer this approach to extract
gas.
But there is also some limitations with the Vertical approach, which are as follows:-
1. While vertical wells may be less complicated to bring on line than horizontal wells, their limited angles
make them less able to reach a wider section of underground territory.
2. A vertical well can only access oil and natural gas reserves directly below, so making a large field
productive often requires the drilling of many vertical wells at various points along with the formation.
According to my opinion there are some recommendations that can alleviate these limitations.
1. In the last hundred years, the drilling technology has advanced from cable tool drilling to the use of
advanced and automated rotary drilling. The advanced techniques and tools are the motive force of the
development.
2. Most of the current oil and gas wells have been drilled more than 6000m in depth and 2000-4000m in
horizontal displacement. The ultimate extended ability has reached 10,000m not only in horizontal
approach but also in vertical approach.
3. The Vertical approach has advanced from real-timized to digitized, visual, automated, integrated and
intelligentized.
4. The approach of vertical drilling is very successful in petroleum extraction, such as oil and gas
extraction. They are still very promising field in the drilling approach.
