The value of long life reserves is greatly reduced by conventional discounted cash flow approaches due to the present worth effect. However, the prices often paid for such reserves indicate that some buyers use alternate evaluation techniques and/or give considerable weight to nonquantifiable aspects. The impact of various evaluation methods is investigated. While some methods are more representative than others, all fail to express the strategic considerations involved in the business decision to buy reserves. Some buyers are better positioned by virtue of their orientation and capital source to acquire long life reserves.

Keywords:
evaluation technique, base case, profitability, escalation, project valuation, payout, upstream oil & gas, reserve base, cash flow, acquisition
Subjects:
Asset and Portfolio Management, Project economics/valuation
Copyright 1990, Society of Petroleum Engineers
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