New Developments In The Determination Of The Costs Of Oil And Gas Reserves
Authors: Schantz Radford L. 
Published: December 2007

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Increased interest is being shown by industry, government and other institutions the cost associated with the domestic oil production industry.

The interest of management is primarily in ascertaining and minimizing the cost at a company level. These inquiries by the management of producing companies have led to surveys and studies by industry associations.

The Federal Government and other institutional groups are primarily interested in the cost of oil and gas at an industry level. Endless streams of cost studies continue to be submitted in FPC proceedings, and other cost studies are being undertaken by different departments and bureaus of the Federal Government, and by foundations and university groups. In spite of these efforts, the Oil Policy Report, released this year by the Administration, suggests oil and gas cost data "are seriously lacking".

The composite of these studies have led to new data and new techniques of analysis. They have also raised new questions and renewed old questions. This article will primarily focus on recent developments in FPC proceedings.

I. DIFFERENT MEASUREMENTS OF COST

Measurement of the costs associated with oil and gas exploration and production is very complex and it is always necessary to carefully define the type of cost which is the subject of measurement. There are at least six basic variables which must be recognized and defined.

First, The cost measurement could be concerned with any of five major categories of costs (1) exploration and development (2) production (3) processing in the field (4) overhead and (5) return on capital. Major attention has traditionally been given to the exploration and development expenditures since they represent the cost of finding and developing oil and gas reserves. In recent years, however, specialized attention has been given to well drilling costs, to production costs, and to alternate measures of the return on capital. Many studies presented at the FPC are concerned with the total cost.

Second, the cost study could be based on accounting or expenditure data. For the oil and gas industry, any analysis based on accounting data is fraught with problems, created in large part by the fact that, unlike most industries, there is no predictable correlation between investment in the production industry and the physical productivity of the investment. This problem is compounded by the fact that several important capital expenditures are typically expensed in the production industry.

Third, should the costs be related to total reserves, to new reserves or to production? The answer to this question depends on the conceptual framework of the study.