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Determining the Value of a Barrel - Oil & Gas

Determining the Value of a Barrel - Oil & Gas

The decision to complete a well should be based upon comparison between incremental costs and projected net cash flow from sales of Oil & Gas.

The comparison should be made based on the following estimates:

• Amount of Oil & Gas in the reservoir

• Expected time period for production to commence

• Forecasted selling price

• Production costs of Oil & Gas in the future, including severance taxes

• Completion costs

• Cost of capital

The well would be completed only if the projected net revenue is more than the expected completion costs.

A critical factor to be considered before completing a well is estimating the expected product price and the cost of production.

The price of Oil & Gas is extremely volatile and is determined by various factors - supply & demand, government regulations, geopolitical contingencies.

Hence, it would be difficult to predict the price accurately.

Revenue Accounting

Before commencing production, the volume and quality of oil, condensate and natural gas must be determined to facilitate revenue accounting.

Though the physical functions of taking readings, testing and measuring are conducted by field personnel, the actual procedures to be followed must be provided by the revenue accounting department.

This is vital for internal control and to avoid revenue loss.

Value of Oil & Gas

Once the volume of Oil & Gas has been calculated, the value must be ascertained in line with the contractual agreement and relevant government regulations.

(The accounting centers that are used in valuing oil are leases, while gas processing plants are used as accounting centers to establish receivables, determine taxes and facilitate efficient allocation of proceeds to the working interest and royalty interest owners.)

Oil Pricing

The price of oil varies for each delivery, and is based on factors – volumes, the API gravity and grade (physical attributes of the oil).

- Jess Potts
Published on:
September 11, 2014
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