Valuation of Oil Properties

Abstract

Introduction Those of the oil industry, who are concerned with the earning power of oilproducing properties, visualize a valuation report as a rather stereotypedpresentation of data in a form that engineers use to present the results of ananalysical engineering appraisal. Specifically an engineering appraisal is anestimate of future recoverable oil and the cash profit to be derived from theproduction and sale of that oil. It should present with clarity the differencebetween factual material and the opinions formed from the analysis of thatmaterial. In presentation the engineer should keep in mind the purpose of theappraisal and the background of the people to whom the report is addressed. Factors Considered The fundamental features of an engineering appraisal for oil producingproperties are: The type of interest in oil production that is being appraised and thecontents of the documents which create the interest. The acquisition of data on the physical aspects of the oil reservoir and theincome and expenses that are connected with the removal and marketing of theoil and its associated hydrocarbons and the use of such information to forecastthe probable future earnings of the property. There are many types of interest that may exist in a piece of oil producingland. There is a mineral interest; a landowner's interest, an overridingroyalty interest, an operating or lessee interest, sometimes called the workinginterest, a carried working interest, and a participating interest. Each has a distinctive character determined by the wording of the legaldocument or contracts which create and transfer its ownership from party toparty. Careful consideration of all the terms of a lease and their effect onthe earning power of an oil property from a lessor and lessee's point of viewis not feasible. Nor is it proper to attempt a review of the effect manyfeatures of operating agreements and assignments may have on the worth ofvarious interests in oil production. A brief examination of some of the termscommonly found in various contracts concerning oil properties might be ofinterest to engineers.