24-Pet-B3 Petroleum Geology, May 2016, Q20

Question 20 of 22

Nivaar worked solution (AI-drafted; not reviewed by a licensed engineer)

Notes on this paper

National Exams, May 2016 — 98-Pet-B3, Oil and Gas Evaluation and Economics (3 hours, closed book, approved non-programmable calculator only). The exam's own cover page is titled "Oil and Gas Evaluation and Economics" and every question is property valuation / reserves & production economics / DCF-NPV screening content — no geology anywhere.

Reference texts: Thompson & Wright, Oil Property Evaluation; Canadian Oil and Gas Evaluation Handbook (COGEH), Vol. 1 (Society of Petroleum Evaluation Engineers, Calgary Chapter); National Instrument 51-101, Standards of Disclosure for Oil and Gas Activities (Canadian Securities Administrators); SPE/WPC/AAPG/SPEE Petroleum Resources Management System (PRMS); Economides & Nolte, Reservoir Stimulation; Ahmed, Reservoir Engineering Handbook.

The exam's own instructions ask for only 7 of the 10 short-answer questions and note the Cash-Flow/Future-Value tables are graded by column; for "choose N of M" exams, every item below is answered in full as a study resource. Questions 1–10 correspond to the exam's printed Short-Answer items 1–10; Questions 11–20 correspond to the printed Multiple-Choice items 1–10; Question 21 is the Future Value table; Question 22 is the Cash Flow table.

Question 20

Question text not reproduced: the examination questions are © Engineers and Geoscientists BC. Open the official past paper (linked at the top of this page) to read the question, then follow the worked solution below.

a. Lease facility costs
b. Land acquisition costs
c. Central gas plant processing fees ← correct
d. Drilling and completion costs
e. Flowline and gathering system costs

Answer: (c). Central gas plant PROCESSING FEES are a fee-for-service charge paid per unit of throughput on an ongoing basis — an OPERATING cost, not a capital cost. Lease facilities, land/lease acquisition, drilling & completion, and flowline/gathering systems are all one-time (or asset-building) capital expenditures that create a durable asset on the producer's books.

Topic: Capital vs. operating cost classification

Key relations: Capital cost creates a durable, owned asset (well, facility, land, pipeline); operating cost is a recurring, per-period or per-unit expense (fees, fuel, labour, chemicals).

Why this works: A producer who pays a third party a per-unit processing fee is not building or owning that gas plant — they are purchasing a recurring SERVICE, which is definitionally an operating expense, unlike drilling a well or laying a pipeline the producer itself owns.

Common pitfall: Assuming any large, project-level cost must be capital — the CLASSIFICATION depends on whether an owned asset is created (capital) or a recurring service is purchased (operating), not on the dollar size of the cost.

Source: Thompson & Wright, Oil Property Evaluation, Ch. on cost classification.