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Upstream Petroleum

fhukPetroleum economics is a vital tool for companies, investors and governments whether the oil price is US$37/bbl (end 2015) or US$110/bbl (when this book was published). Economic modelling is used by companies to assist in or determine investment decisions. On the other side of the contractual fence, modelling is used by governments to determine the fine balance between extracting enough ‘rent’ from companies and still make their country an attractive investment opportunity.

The third use of economics is for the benefit of investors in oil and gas companies to determine the value of the assets owned by the company (conducted by the company or a contracted third party). This is one area the industry could improve. How often do companies claim their assets are worth billions of dollars and a concomitant volume of oil. Part of the problem lies with the role of the independent contractor - supplied with data and guided by the company - used to determine the worth of assets in a competent person’s report. The authors recognise this issue, urging readers to be nascent economists in the treatment of abandonment and income tax towards the end of field life.

The authors have adopted a practical approach to the subject. Much of the book is about cell formulation within spreadsheets to correctly reflect contractual arrangements. This approach does not make for good reading, as warned by the authors.  The book takes on the appearance of the transcription from a taught course comprising abundant bullet pointed text.

Getting the spreadsheet cells functioning correctly to reflect contract terms is one aspect of the book that is very thorough. However, even if the model works correctly the results might be meaningless unless the assumptions are based on some reality. The authors hammer home the point of ensuring that all input is properly audited and checked by the relevant expert. Optimistic production profiles, low costs and a positive oil or gas price outlook can do wonders for the valuations of assets.

This book bears resemblance in style to a Haynes Manual rather than an academic treatise, but just as a Haynes manual does not make the user a mechanic, this book will not make the reader a petroleum economist. Recently, I needed some help on a model and plunged into the book seeking solutions – I could not find the solution. The book is expensive and needs heavily discounting to reflect what is required in the industry – severe cost reduction!

Reviewed by Stephen Crabtree

UPSTREAM PETROLEUM FISCAL AND VALUATION MODELING IN EXCEL: A WORKED EXAMPLES APPROACH by KEN KASRIEL & DAVID WOOD, 2013. Published by John Wiley & Sons, 344pp (plus CD with supporting EXCEL models) (hbk) ISBN 9780470686829 List Price £100