Engineering Appraisals

Abstract

CARTER, D.V., MEMBER AIME, PETROLEUMCONSULTANT, DALLAS, TEX. Editor's Note: D. V. Carter, Dallas petroleum consultant, submitted the following short report to the SPE Board ofDirectors last fall in fulfillment of his duties as chairmanof a special SPE Committee appointed in Sept., 1965, tostudy the feasibility of developing a Society-recommendedformat for petroleum engineering valuation reports. Thedual assignment of the Committee was as follows.Todevelop an evaluation format suitable for the bulk ofevaluations, whether or not third parties are involved, for the purposes of: financing the purchase of oil andgas properties which are wholly or partially proved;financing installation of some method of improvedrecovery; borrowing money; or any other purpose such asestate valuations, trading of properties or mergerpurposes, as well as field-wide unit or reservoir unitizationor relatively simple drilling unit evaluations with theobjective of achieving acceptable equities to all interestedparties concerned.To write a "Code of Ethics" or alist of admonishments which might be called the "TenCommandments" to guide the valuation. Serving withCarter on the Committee were Tom G. Calhoun, II, PeteW. Cawthon, Jr., R. J. Dobson, C. R. Dodson, Robert B. Gilmore and Harold Vance. Standard Impractical The type of work performed by an appraisal engineerfor a client is determined by the requirements of the clientand by the possible requirements of third parties to whomthe client or his successors may make the results available. The client's requirements may range from verbal discussionthrough a summary letter to a formal report, or mayinvolve merely having a representative of a financialinstitution examine the appraiser's work data. Requirementsof third parties, whether financial institutions or potentialbuyers, may be and frequently are different from those ofthe client who pays for the investigation. It seemsimpractical to recommend that an appraiser furnish moredetailed information than a client is willing to pay forunless the absence of such detail could be construed to bemisleading to a user of the appraiser's work who is reasonablysophisticated in methods of estimating reserves andevaluating properties. The Committee believes it would be presumptious torecommend the adoption of any format or even scope offormats to cover the spectrum of conditions giving rise tothe desirability of an engineering appraisal in terms of oiland gas reserves or dollars. For the convenience of thosewho would seek a model, a possible format is includedwith the report of this committee (see Table 1 and Fig. 1). This committee does not approbate this model with suchterminology as "standardized", "accepted", or "recommended"for the obvious reason that no format or series of formatscan cover all of the circumstances in an appraiser-clientrelationship and certainly not in the more complexappraiser-client-third party relationship. Code of Ethics However, it does appear appropriate to prepare a partiallist of steps which can be taken to prevent the misuseof an appraisal engineer's work.The appraiser is entitled to know the use to whichhis work will be put and to amplify or qualify his workso as to make it appropriate to that usage. Obviously areport to secure a loan of a fraction of the value of theproperties will not require the detail of a report which hasfor its purpose the formation of a basis for the sale of theproperties.An appraisal engineer will not undertake to prepareat his client's request a report which is based upon onemethod of reserve estimating when alternate methodsavailable to him may provide a more accurate appraisal. Examples: Sole reliance on volumetric calculations whenperformance calculations are possible; use of projectionsincluding harmonic or hyperbolic declines whenperformance or analogy suggests exponential decline.Where there are valid alternate methods of computingreserves and the results of these methods are significantlydifferent, reasons should be given for the choice ofmethod. An appraiser should not be required to accept asa starting point interpretative work furnished by his client, but may accept such work either partially or wholly, provided he is satisfied that such acceptance will not resultin conclusions which will be misleading or substantiallydifferent than if the appraiser had made (or caused to bemade) an independent investigation. P. 193ˆ