Oil price

The oil price per barrel is required to calculate the profit margin after production costs. The West Texas Intermediate (WTI) is a grade of crude oil used as a benchmark in oil pricing.

Barrel per day

A successful oil well will have an initial production rate (IP) which is stated in barrels-per-day. The higher the better. Some wells produce only 20 barrels per day, while some of the world's best wells produce over 20,000 barrels per day.

Decline rate

Oil reservoirs are pressurized, once they are penetrated by oil wells the pressure begins to drop. As pressure decreases, less oil is able to be pumped to the surface. This pressure drop is calculated as a percentage on a yearly basis. Some oil pools have low decline rates of 15%; others have decline rates as high as 75%. The calculation of the decline rate starts after the first year.

Production costs

Once a well begins producing oil there are ongoing costs that include water disposal, trucking, storage and other various operating necessities. These are calculated as a cost per barrel and can vary as low as $15 and as high as $80 depending on where the well is located and what type of oil is being produced.


Royalties are payments made to the government of wherever an oil well is located. Royalties are generally calculated as a percentage price of every barrel produced. Royalties in Western Canada range from 2.5% to 17.5%.

Drilling costs

The cost to drill an oil well can vary. A conventional vertical well in central Canada can cost as low as $350,000, a horizontal well with hydraulic fracturing in North Dakota can be as high as $5,000,000 and an off-shore well in the Gulf of Mexico or the North Sea can be a $20 or $30 million wells.