Pros, cons of techniques used to calculate oil, gas finding costs.

A major problem facing the U.S. petroleum industry is the higher average finding costs that now exist within the U.S. compared with the average finding costs outside the U.S.

It has been argued that federal lands and offshore areas need to be open for drilling in order to reduce average finding costs in the U.S.

Certainly, the development of a national energy policy must acknowledge the importance of finding costs.

Financial analysts for some time have acknowledged the importance of finding costs in evaluating individual energy firms. Analysts expect mergers when it is cheaper for companies to purchase reserves than find them. [1]

Just as industry average finding costs are a key determinant of long term market prices for oil and gas, relative finding costs are a key determinant of a company's stock market value. Division managers are now judged regularly by top management on the basis of relative finding costs.

The heavy use of finding costs data is causing its own problems, however, because there is as yet no standard for calculating and reporting those costs.

This article analyzes the strengths and weaknesses of conventional techniques for determining finding costs. Our goal is a finding costs measure that is a reliable indicator of future profitability.

Finding cost per BOE

Conceptually, a finding cost figure is a measurement of how much it costs a company to find a barrel of oil or 1,000 cu ft of gas.

The figure is determined by dividing the costs incurred during a specified period by the volume (barrels or Mcfs) of reserves added during the same period.

For example, if the incurred costs were $100,000 and the reserves added were 20,000 bbl, the finding cost would be $5/bbl.

In order to arrive at a uniform oil and gas measure, the incurred costs of oil and gas are generally combined, the volume (mcf) of gas reserves found is converted into equivalent barrels of oil (BOE) and the ratio expressed as "finding costs per BOE."

The finding cost per barrel …