Discussion of assessing risk in estimating hydrocarbon reserves and in evaluating hydrocarbon-producing properties

The petroleum industry has written extensively on the risk associated with exploration. Very little has been published, however, addressing the risks associated with acquisition and operation of producing properties. Because capital budgets usually depend on the income a company realizes from its producing properties, and because current conditions have been interpreted by many to favor the acquisition of existing oil reserves over exploring for new ones, the risk in estimating reserves and in estimating future cash flows for producing properties has taken on a new importance. The risks associated with estimating the reserves and value of a hydrocarbon-producing property are divided into three classifications: (1) the technical risk that the hydrocarbon values estimated by the geologists and engineers do exist in the ground and that the recoverable amounts can be recovered within the time frame projected by the engineers; (2) the economic risk that product prices, operating costs, equipment costs, inflation, and market conditions will be in reasonable agreement with the assumptions used in the economic analysis; and (3) the political risk that world economics, international political stability, taxation, and regulations will not be significantly different than projected in the evaluation. This paper focus on these risk categories and presentsmore » methods for implementing risk estimates in the evaluation of a producing property, taking into account the maturity of the technical data, the location, and the life of the property. A Glossary of important terms is included.« less