Chapter 16: Acquisitions and Divestments Available to Purchase

So far when I’ve pointed to real situations in oil companies involving petroleum economics, I’ve used drilling an exploratory well or developing and producing a new discovery as examples. But another application of petroleum economics is when a company acquires (buys) another company’s oil field(s) or divests (sells) one or more of its own. Or even when it acquires or divests a whole company, which I’ll talk more specifically about later on.

Whatever the application, however, petroleum economics is petroleum economics and the same laws apply. So everything discussed so far regarding relevant cash flows, net cash flows, and discounting applies in exactly the same way here. If we buy an oil field that’s already producing, that new production will provide new relevant cash flow into the company; or if it’s only a discovery, the cost of developing it will mean a new relevant cash flow out of the company. If we sell an oil field that’s already producing, the relevant cash flow that that production provides will go away, be lost; or if it’s only a discovery, the relevant cash flow relating to its development costs that would have gone out of the company now won’t.