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Valuing Barrels of Oil Equivalent

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  • James L. Smith

Abstract

By convention, the petroleum industry relies on thermal equivalence to summarize the results of upstream oil and gas operations—measuring outputs in terms of barrels of “oil equivalent.†This despite the fact that the two commodities trade at nothing like thermal parity. Drawing on a well-known exponential production model of petroleum reserves, we demonstrate the potential for thermal equivalence to substantially distort common measures of exploration and development success. Drawing on a recent survey of actual upstream results, and relative to a proposed measure based on economic equivalence, we show that the extent of bias in estimates of value, cost, and profitability is indeed large.

Suggested Citation

  • James L. Smith, 2015. "Valuing Barrels of Oil Equivalent," The Energy Journal, , vol. 36(1_suppl), pages 179-194, June.
    • Handle: RePEc:sae:enejou:v:36:y:2015:i:1_suppl:p:179-194
    DOI: 10.5547/01956574.36.SI1.jsmi
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