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How much is that raffle ticket worth if you don't have any idea what the prize is? But you do know that it is possible that the prize is $0.
Actually the value of that raffle ticket is the same whether you win or you don't win. For instance, if there are 1000 tickets and the value of the prize is 4000 dollars then the value of your ticket is 4 dollars.
I would not be surprised if these leases are valued in a similar fashion in order to increase the companies books. Its not as if there is ever any creative accounting that goes on in corporate america! HA.
How much is that raffle ticket worth if you don't have any idea what the prize is? But you do know that it is possible that the prize is $0.
Yeah that was a pretty terrible analogy. Just try to convince the guy with the winning ticket it's only worth $4.
The possibility of the prize is always zero for anything of that nature but it still gets an assigned value based on the probability of making money and how much money is going to be made.
That raffle ticket is most likely going to net you nothing, but thats besides the point. If the value of the ticket is $4 and the cost of the ticket is 2 dollars, you would be a fool not to purchase as many of those tickets as you can. Do you see why?
Yes, because the expected value of the future cash flows from the ticket is far greater (double) than the cost of entry.
Its actually a perfect analogy in any risk/reward scenario. That is the exact line of reasoning I used when I played poker for a living.
Exactly. Expected Value is such a beautiful thing. In a cut and dry scenario like the raffle tickets then its incredibly easy to draw out the exact value of each item but obviously with something far more nebulous like oil leases its much harder to put an exactly value on each lease due to the uncertainties in both the market price of any possible oil and the variables in costs assoociated with extracting it but the core principle still holds.
That's all well and good when you know there's a prize, you know how much that prize is worth and you know what your odds of winning it are.
If you don't know whether or not there is a prize, let alone how much it might be worth, and you don't know how many tickets got sold, can you still tell me what the value of your ticket is?
The oil companies aren't just buying up leases anywhere, CG. They're obviously doing cost benefit analysis that led them to believe the lease is a worthwhile purchase otherwise why are they buying them?
Obviously lacking information makes it much harder to discern what the expected value of any decision is but thats a strawman in this situation. As I pointed up in a previous point you do not know the exact expected value of many real world situations because of so many variables and incomplete information but I can promise you that the oil companies are purchasing these leases with the understanding they will make them money in the long run.
In other words, each one of those leases has an expected value to the corporations that purchase them and in order for that purchase to be a good one that expected value MUST be higher than the purchase price.
We have some idea how much oil is probably out there, and what kinds of oil it will be.
In the aggregate, exactly.
With quite literally trillions of dollars in revenue at stake, there is plenty of money there to hire experts to get a good sense of how much any particular chunk is worth.
There's a difference between the financial justification an oil company goes through to determine whether or not to buy a lease and what they can claim on their financial statements. Unless the goal posts moved, I thought we were talking about whether or not oil companies could claim leases as assets. The answer to that question is no. An oil company can not take a collection of leases, go through a probabilities scenario and then claim whatever quan y of oil they come up with as an asset. They're limited to claiming "proven reserves". What qualifies as "proven reserves" and what doesn't is a whole other conversation, but it involves the act of having physically drilled at least one well and actually having found oil.
An unexplored lease is a quantifiable liability and an unquantifiable asset. Accounting-wise, that equates to just being a liability.
Are you sure about that?
http://money.msn.com/business-news/a...18&id=13186706Mr. Joe Wallen, CEO and Director of Quest Oil commented, "The potential acquisition of this oil and gas lease, which is in its final stage, will add substantial reserves to the Company's assets of approximately 1.6 million barrels of recoverable oil. We have initiated imaging by Hydrocarbon Imaging, Inc. to be conducted on acreage adjacent to the current acreage we are finalizing."
Thats just a quick google search that I did.
In fact this PDF seems to completely contradict what you said, CG.
http://www.hfbe.com/wp-content/uploa...ion-Review.pdf
Since I know little about the accounting of majors, I'm not by any means an expert. However, it would seem to me that PUDs (proven drillsites) are reflected in share price. Prospects are valued much lower. Leases become more valuable the more interest there is in an area. (there may or may not be compe ion for individual government leases depending on different interpretations of different companies)
Shale plays (onshore) are popular right now because they cover much larger areas than conventional reservoirs so a company can just add a PUD per every so many acres to their sheet.
Conventional reservoirs (like are being drilled in the gulf) usually take up a very tiny percentage o a lease block. Companies then have to spend vast amounts of money to drill an exploration well (that is usually abandoned) which could cost north of 100 million JUST TO SEE if their idea is correct and there is oil there... If it's not... Imagine opening Alamo quarry... And no one shows up... Ever...
As a royalty owner of federal lands due to my citizenship... I find great fault with the president not wanting to open more acreage to exploration... What's the deal with... "drill what you have before we 'give' you more"... Oil co's PAID for what they leased... They want to PAY you more for MORE leases!!! In addition to that the US gov gets 25% of all hydrocarbons produced AND they get to tax the pofit of the oil companies on the oil that is produced!!!
The government has expressed an interest in keeping oil prices high to make alternative fuels competative.
Onshore/offshore drilling may not make a huge difference... But there is a divergence in the price if Brent crude and WTI right now... With Brent being about 8% higher... The more oil we can deliver here... With less associated transport costs... The lower our gas prices will be.
Proved reserves are the only type the U.S. Securities and Exchange Commission allows oil companies to report to investors.
http://en.wikipedia.org/wiki/Oil_reserves
You can also dig up an oil co's 10-k. They have to do ent all their proved reserves.
So if I'm an investor I can't get any information on probable reserves from an oilco? That seems really bizzare.
because "probable" is too easily manipulated and the shareholder could be (and would be) taken advantage of.
Interpretation of their prospects is also proprietary, though much is shared after the fact.
They can give you EUR's (Estimated Ultimate Recoveries) of their producing properties, but they cannot with any degree of accuracy (whether they wanted to be accurate or not) tell you how much oil will be produced from a prospect that does not have a wellbore through it.
Well I completely agree that it is open to manipulation which why I brought it up above. I am glad to see that in theory that practice is regulated although I'm not completely sold on the extent to which thats the case.
Call me skeptical but after seeing what corporations and creative accountants are capable of I am leery of just this sort of thing.
Hey just cause I'm paranoid doesn't mean theirs NOT a conspiracy out to get me!
Even for EUR's...
A reservoir engineer will be able to tell you with confidence and accuracy how much oil can be produced from a feature right after the last barrel is produced...
That's just the nature of the oilfield... there is a lot of uncertainty... it is risky as ... weird ass things happen...
You can't from anything that company files with the SEC. Is there some other way to get that information? Wouldn't be surprised, but caveat emptor.
It's still possible for companies to "fudge" their proven reserves, but it doesn't come without risk. El Paso Energy is one company I can think of whose shareprice got hammered in the early 2000's after having to writedown their reserves a couple of times.
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