Investors formulate strategies about their future ownership of oil and gas reserves based on perceptions about future economic Conditions, Particularly oil and gas price. If a major change in the economic environment is perceived, then the strategies are rethought.
The basic decision faced by all oil field investors is whether to increase or decrease their reserve position since there is usually no neutral position. Reserves are either being depleted through production or added through drilling, enhancement or acquisition. The data available on finding costs indicate it has usually been cheaper to buy rather than drill for reserves in recent years. This comparison may be distorted since the true finding cost is not known until the discovery is fully developed, which usually takes years. However, it is obvious from Figures 1 and 2 that the current decision is normally to buy, not drill. The drastic drop in rig count continues even though oil prices have strengthened in 1989. In contrast, the number of acquisition transactions tracked quarterly by Strevig and Associates has scared since mid-1986.
Formulating a strategy for the acquisition of reserves involves consideration of (1) the availability, amount and source of capital, (2) minimum economic return, (3) geographic area of interest, (4) ability to operate and (5) minimum size and exposure per transaction. A decrease in reserves can occur automatically through production depletion or by a deliberate decision to sell. A seller must decide (1) what is to be sold, (2) how it will be sold (bid or negotiation), (3) who will sell it (in-house or outside expertise) and (4) selling price. Unlike acquisitions which are made for profit motives, the decision to sell can result from changing business objectives, a deteriorating financial position, legal action or the death or retirement of a principle.
Once the decision to buy or sell reserves has been finalized, the implementation of resulting strategy creates the buyers and sellers necessary for a market in producing interests. The actual marketing vehicles that create trades include bid packages, auctions, brokers, advertisement, listing services, mergers and unsolicited offers. The driving force behind the oil and gas reserve market is the same as in any market. The buyer is after a profit whether it be short term or the buying of long life reserves to supply refineries after the year 2000. The seller is hoping to either turn a profit on a previous investment or minimize losses.
In the last ten years oil and gas prices and more importantly the perception of prices and more importantly the perception of future prices have gone from the peak of optimism to the depths of despair. This made it possible to witness several fundamental strategy changes by many owners of hydrocarbon reserves. At the height of the boom, thousands of non-oil related investors and companies rushed into the market to obtain ownership in oil and gas reserves.