Based on a survey of investment practices of U.S. oil and gas companies, this paper assesses investment techniques in current use and the impact of environmental and tax regulations. Questionnaires sent to selected oil and gas companies, professional consultants, and bank engineers concentrated on seven major areas: capital availability, investment analysis techniques, cost of capital, risk analysis, impact of environmental regulations, valuation of property acquisitions and miscellaneous investment considerations. Replies were analyzed to obtain the distribution of responses for each question, and cross-correlations between size of capital budget and responses in the major areas.

In the areas of capital rationing, impact of environmental regulations and investment evaluation methods, significant differences in the responses across firm size or between firms and consultants are not apparent. Differences are apparent for determination of discount rates, causes of capital limitations, value of nominal discount rates and effect of AMT.

The average nominal aftertax discount rates reported by firms and consultants are 14% and 13%, respectively. A little over half of our responding firms report that AMT has had a negative impact on investment. Results are compared to those of a similar study [1], showing the trend in investment analysis and the broadening scope of concerns in picking good investments.

You can access this article if you purchase or spend a download.