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Valuing Barrels of Oil Equivalent

By convention, the petroleum industry relies on thermal equivalence to summarize the results of upstream oil and gas operations - measuring outputs in terms of barrels of "oil equivalent." This despite the fact that the two commodities trade at nothing like thermal parity. Drawing on a well-known exponential production model of petroleum reserves, we demonstrate the potential for thermal equivalence to substantially distort common measures of exploration and development success. Drawing on a recent survey of actual upstream results, and relative to a proposed measure based on economic equivalence, we show that the extent of bias in estimates of value, cost, and profitability is indeed large.

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JEL Codes: Q41: Energy: Demand and Supply; Prices, Q40: Energy: General, Q35: Hydrocarbon Resources, Q31: Nonrenewable Resources and Conservation: Demand and Supply; Prices, L71: Mining, Extraction, and Refining: Hydrocarbon Fuels

Keywords: Barrels of oil equivalent, Petroleum valuation, Performance benchmarking, Finding and development cost

DOI: 10.5547/01956574.36.SI1.jsmi

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Published in Volume 36, Adelman Special Issue of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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