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730 17th St, Suite 410Denver, CO 80202
01 303 277 0270 officewww.mhausa.com
ASSET VALUATION – DO YOU KNOWWHAT YOU ARE PAYING FOR?
Denver Association of Petroleum LandmenFall Land Institute 2016
Julianna SipekiSenior Reservoir Engineer
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Who is willing to pay me $1000 for this box?
What if I told you the following….• 95% certainty that the value of
this box is at least $500.• 50% certainty that the value is
at least $1,000.• 10% certainty that the value is
at least $15,000.
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AGENDA
• Background in Reserves and Resources• Components of Valuations• Examples
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BACKGROUND IN RESERVES AND RESOURCES
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WHAT ARE RESERVES?
RESERVES are those quantities ofpetroleum anticipated to be commerciallyrecoverable by application of developmentprojects to known accumulations from agiven date forward under definedconditions. Reserves must further satisfyfour criteria: they must be discovered,recoverable, commercial, and remaining(as of the evaluation date) based on thedevelopment project(s) applied.
Reserves are further categorized inaccordance with the level of certaintyassociated with the estimates and may besub‐classified based on project maturityand/or characterized by development andproduction status.‐SPE Petroleum Resources ManagementSystem (“PRMS”)
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WHAT ARE CONTINGENT RESOURCES?
CONTINGENT RESOURCES are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations, but the applied project(s) are not yet considered mature enough for commercial development due to one or more contingencies. Contingent Resources may include, for example, projects for which there are currently no viable markets, or where commercial recovery is dependent on technology under development, or where evaluation of the accumulation is insufficient to clearly assess commerciality. Contingent Resources are further categorized in accordance with the level of certainty associated with the estimates and may be subclassified based on project maturity and/or characterized by their economic status. –SPE PRMS
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WHAT ARE PROSPECTIVE RESOURCES?
PROSPECTIVE RESOURCES are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from undiscovered accumulations by application of future development projects. Prospective Resources have both an associated chance of discovery and a chance of development. Prospective Resources are further subdivided in accordance with the level of certainty associated with recoverable estimates assuming their discovery and development and may be sub‐classified based on project maturity. –SPE PRMS
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RESOURCES TO RESERVES: TAKE‐AWAY
RESERVES
CONTINGENT RESOURCES
PROSPECTIVE RESOURCES
Hurdle = Commerciality
Hurdle = Discovery
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NOTE ON RESERVES / PROBABILITY
Incremental vs. Cumulative:• 1P = Proved: includes Proved Developed Producing (PDP), Proved Developed
Non‐Producing (PDNP), Proved Undeveloped (PUD)• 2P = 1P + Probable• 3P = 2P + Possible• There is no incremental component in Contingent Resources. It’s 1C, 2C, or 3C.
What is PROBABILITY:• There should be at least a 90% probability (P90) that the quantities actually
recovered will equal or exceed the low estimate.• There should be at least a 50% probability (P50) that the quantities actually
recovered will equal or exceed the best estimate.• There should be at least a 10% probability (P10) that the quantities actually
recovered will equal or exceed the high estimate.
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RESERVES AND RESOURCES – RISKINGGENERAL RESERVE ADJUSTMENT FACTORS (RAFS)
Reserve/Resource Category P90 Mean P50 P10
Proved Producing 90.0 95.6 100.0 100.0Proved Shut-In 55.0 82.0 85.0 100.0Proved Behind-Pipe 50.0 74.7 75.0 95.0Proved Undeveloped 29.0 58.6 50.0 90.0
Probable Undeveloped 0.0 32.1 30.0 56.0
Possible Undeveloped 0.0 12.6 10.0 30.0
Contingent Undeveloped 0.0 4.8 0.0 21.5
Prospective Undeveloped 0.0 2.5 0.0 10.0
SPEE – 35th Annual Survey of Parameters Used in Property Evaluation
Many people use these factors as adjustments to the “value”
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IN WHAT TYPES OF EVALUATION DO YOU USE RAFS?
SPEE – 35th Annual Survey of Parameters Used in Property Evaluation
*People surveyed could pick more than one answer.
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VALUATION
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ASSUMPTIONS INCLUDED IN ASSET VALUATION
ValueHydrocarbons
in Place (Recovery Factor)
Existing Production & Forecast
Future Price
Operating and Capital Expenses
Scheduling
Upside
Discounting / Risking
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RESERVOIR VOLUMEORIGINAL VS. TECHNICAL VS. ECONOMICALLY RECOVERABLE
Discovered Original Hydrocarbons in Place
Technically Recoverable HC in Place
RemainingTechnically
Recoverable HC
Economically Recoverable
HC
=At time zero
* Recovery Factor
=volume you can recover today, irrespective of cost
+ Economics (pricing, opex, capex)
‐ Volumes already produced
=volume you can economically recover
=recoverable volumes at time zero
Which of these “in‐place” calculations changes with price?
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EXISTING PRODUCTIONFORECASTING CURRENT AND FUTURE WELLS
Golden Rule: The basic assumption in this procedure is that whatever factors controlled the trend of a curve in the past will continue to govern its trend in the future in a similar manner.
Exponential Decline
Hyperbolic Decline
Difference in EUR = Difference in $$$
Don’t assign more volumes to existing and future wells than you are calculating to be technically recoverable in your reservoir!
Make sure you understand whether your upside is additional volumes recovered, rate acceleration, or both.
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PRICING, OPERATING, AND CAPITAL EXPENSE ASSUMPTIONS
PRICE• What type of evaluation are you going to do?
SEC vs. PRMS vs. International vs. Internal• Flat price vs. NYMEX (or other available price forecast)• Calculate appropriate price differentials for specific region• If escalating price then need to escalate costs as wellCOST• Be careful of assessment where all costs are in terms of volumes
produced ($/bbl or $/Mcf) There is always a fixed component of operating cost
• Will you need to include regular workover costs?• Have you accounted for abandonment liability?• Have you appropriately accounted for drilling costs?
The cost right now may not be the same when oil/gas prices increase
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VALUING UPSIDE – DIFFERENT TYPES
1. Increasing efficiencies2. Workovers3. Refracs4. Behind‐Pipe opportunities5. Compression6. Infill drilling7. Enhanced Recovery
1. Waterflood2. Steam flooding / polymer flooding
Are these opportunities commercial???
Increasing time, money, and risk
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DRAINAGE AREASWHY DOES IT MATTER?• Primary reason: protection of correlative rights (set backs)• Secondary reason: well spacing (optimize recovery / prevent waste)
Drainage Calculation:1. Estimate the EUR of the well2. Estimate the “Original
Hydrocarbons in Place” per acre
3. Estimate Ultimate Recovery Factor
4. Drainage Area calculation:
D. A.EUR
OHIPperAcre ∗ RF
Applicability to horizontal wells?
Horizontal wells when drainage height does not equal the reservoir thickness
Is this your drainage area?
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EXAMPLES
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EXAMPLEBAKKEN – DSU WITH 1 HORIZONTAL WELL
• Value existing well• Add in upside – what is your
confidence level? Well 1 Well 2 Well 3
• Are you going to be assigning adifferent risk to each well? What if there is no production to the
east of this DSU? What if the existing well was the first
horizontal well in the field?
• Under what scenarios would youchoose to drill Well 3 first? To prove up acreage for lending or
selling purposesExisting producer
W1 W2 W3
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EXAMPLEDSU WITH VERTICAL PRODUCERS & HORIZONTAL POTENTIAL• Would you pay for horizontal well
potential if only vertical wells weredrilled in this area? Heavily dependent on activity around you. Can you call the horizontal reserves
• How do you estimate the productionfrom the Hz well? Industry experience shows that we typically
overestimate horizontal well potential in anew area.
• Will you be outbid if you don’t value theHz potential?
• Have you taken into account depletion(pressure and volume) from the existingproducers? Will this change the productivity of your
horizontal wells?
W1 W2
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EXAMPLEUPSIDE ‐ REFRACBefore Refrac After Refrac
Must include potential increases in cost!
Estimated upside of Refrac.How will you risk it?Has a refrac been successful in the field you are evaluating? Will there be a negative impact on production in offset wells?
Oil production rate
Water production rate
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EXAMPLEWATERFLOOD POTENTIAL
What strategies should you implement? Secondary recovery?What are the key areas to evaluate?
• Feasibility of waterflood (reservoir modeling)
• Cost vs. recovery (is it economic?)• Do the water sources exist?• Is unitization necessary
This project was a huge success, but if you were purchasing this field before the waterflood, how do you evaluate upside potential?
Water injectionOil production
Water production
Horizontal Development
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EXAMPLEDRAINAGE AREA – WELL SPACING
W1 Can you drill the horizontal well with the shown lateral length where you planned it?
What are your options?1. Shorten the lateral length?2. Move the well further into the DSU?
Q: What are the potential impacts?A: Less hydrocarbon recovery and potential negative impact on economics
Q: When do you not have to do this?A: When the interest holders are the same on the north, south, and east of the DSU.
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EXAMPLEWHY DO YOU PAY FOR CONTINGENT RESOURCES?
CONTINGENT RESOURCES• known accumulations, but not yet considered mature enough for commercial development
due to one or more contingencies• chance of discovery is 100%
chance of commerciality = chance of development
What is the contingency?Example:non‐technical contingencies (e.g. environmental approvals) will most likely not impact uncertainty in recoverable volume estimates
technical contingencies (e.g. completion technology) will most likely have an impact on recoverable volumes.
The commercial risk associated with Contingent Resources projects can vary:• “Almost there” – 80% chance of proceeding to development• “Long way to go” – 30% chance of proceeding to development
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EXAMPLEACQUISITION OF A CONTINGENT RESOURCE ASSET
Key Questions:• How do you value the CR opportunity
which has substantial commercial risk? Would you value it differently if it was a
single CR Opportunity vs. a portfolio ofCR opportunities with widely varyingamount of commercial risk?
• If you assign zero value to the CRprojects, your bid may not becompetitive.
In August, Shell engaged JP Morgan to assist with the sale of their NewZealand oil and gas assets. One of these assets is the Kapuni field, whichis New Zealand’s oldest natural gas field.That same month, the operator of the field, Shell Todd Oil Services,completed New Zealand’s and Shell Global’s largest onshore 3D seismicsurvey.
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So, who is willing to pay me $1000 for this box now?
• 95% certainty that the value of this box is at least $500.
• 50% certainty that the value is at least $1,000.
• 10% certainty that the value is at least $15,000.
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THANK YOU!
QUESTIONS?