Petroleum Property Valuation

James Smith

Working Papers from Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research

Abstract: The term “petroleum property valuation” refers to the analytical procedure by which the commercial value of oil and gas fields is assessed. This assessment provides to prospective buyers and sellers, and other interested parties such as lenders and tax assessors, an estimate of the fair market value of underground deposits of oil and gas— the amount for which they might be bought or sold. The value of an underground deposit is directly related to the ultimate value of whatever petroleum may be extracted in the future, but because the future is uncertain, the value of the property is subject to various sources of risk that stem from geological as well as economic factors. To be useful, the valuation procedure must take proper account of the unpredictable fluctuations that would cause field development, operations, and performance to deviate from the expected outcome. This task represents a complex analytical problem that has challenged traditional valuation methods. To meet the challenge, new and highly innovative techniques have been developed in recent years, and are now finding increasingly widespread use.

Date: 2003-06
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