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Abstract

With today's turmoil in the oil and gas industry, assessing the costs of replacing domestic reserves has become increasingly complex. The recent changes in drilling costs, oil and gas prices, and tax laws have created a premium for quick and clear analysis of this complex problem. This paper presents the methodology, design, and implementation of a microcomputer-based system for assessing oil and gas reserves replacement. The main components of this model are a supply analysis model, a capital formation model, a reserve additions and production forecasting model and an integrating model that relates each of the components to overall domestic oil and gas supply and demand. Finally, the paper discusses several possible scenarios for future oil and gas reserves replacement.

II.

Introduction

Today's energy markets are experiencing yet another period of turbulence and uncertainty. After a decade of increased capital outlays and growth, the oil and gas industry is now passing through a period of retrenchment and readjustment.

During the 1970s and continuing into the early 1980s, rising oil prices and the threat of diminishing domestic reserves led to rapid increases in domestic drilling, and the pursuit of more remote and challenging resources. This increased drilling and activity stabilized the domestic oil reserve base and created the "gas bubble."

The more recent price erosion, followed by the price collapse of 1986, has led industry to slow the pace of development of the high-cost, alternative resources. Also, there is growing concern that as a mature, high-cost hydrocarbon province, the U.S. rates below many areas of the world in terms of economic viability.

The primary driving force for industry's ability and willingness to pursue new oil and gas resources is the capital available for resource development. Revenues from the sale of oil and gas, after subtracting other obligations on these funds — such as royalties, interest payments, taxes, and dividends — have been historically reinvested into new drilling and production. Significant reductions in oil and gas wellhead prices in 1986 has severely reduced the cash flow available for reinvestment. Recent corporate takeovers and restructuring has further decreased the capital available for drilling and developing new reserves.

Finally, other non-market factors have added yet further uncertainty in the domestic oil and gas industry. These factors include the potential impact of future environmental controls on drilling mud and produced brine treatment and disposal, the deletion of areas from oil and gas leasing (such as those in the outer Continental Shelf and the Alaska Natural Wildlife Refuge), the impact of the 1986 tax reform legislation, and the impact of emerging oil and gas extraction technologies.

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