Recovery of Hidden Economic and State Variable Effects on Oil and Gas Asset Value and Risk Measures

Abstract

Commodity price shocks are shown to cause shifts in both the quantum and timing of risk in natural resource assets. We provide evidence that static risk measures understate the periodicity of price risk implicit in depleting assets. Risk measurement is demonstrated to be asset specific and to vary heterogeneously in response to the combined effects state and economic variables. We use a global sample of oilfield assets to demonstrate that oilfield participation terms cause corporate asset cash flows, volatility horizons and minimum variance hedge ratios to vary in response to oil price. We provide additional insights into movements in the timing of physical O&G asset risk, a hidden effect not recoverable from market oil prices. Temporal variance for physical assets is shown to be a hidden dimensional outcome of the effects of economic and state variables.