OT30381 - Capital Gains

Valuation of Oil Assets (including shares). 31 March 1982. Cash Flow Assumptions.

Comparators

Cashflow analyses and valuations from Wood MacKenzie are held in the OTO library for fields in production and under development at the nearest available date to March 1982 (between November 1981 and September 1982).

Discount Rate

The discount rate used by Wood MacKenzie of 18.8% is based on an 8% forecast for inflation and 10% real discount (i.e. broadly representing the level of interest/yield required on a higher than average risk investment). Inflation had fallen from 17.8% in 1980 in 11.7% in 1981 and was expected to fall further, therefore 8% may not be unreasonable. The real discount rate was based on extensive and continuing discussions between Wood MacKenzie and the companies about the rates they used to value assets. This recognised that a potential bidder might apply a different rate. However, the Lasmo acquisition of a 15% interest in Beatrice in June 1982 was at a price reflecting an 8% real discount, very close to Wood MacKenzie figures — the difference was thought to reflect CT synergy within Lasmo.

Oil Price

The oil price used in the Wood MacKenzie analyses at November 1981 was $37 per barrel increasing at 8% per annum for inflation i.e. no real increase. The average price in 1982 was $34 per barrel but it had fallen from $39 in January to $31 in March. The companies’ own projections will need to be considered against that background.

Gas Price

In March 1982, all gas production still had to be sold to British Gas although legislation enacted in the middle of 1982 allowed some third party sales. British Gas was negotiating broadly on the basis of a specific field’s development costs plus a profit margin. Prices are therefore not generally comparable and were not influenced to the same degree as crude oil by international factors. Where volumes are small, Wood MacKenzie analyses will often ignore them either because they make little contribution to field economics or because no obvious and economic evacuation system existed in the Central and Northern North Sea - a proposed gas gathering scheme had been abandoned in 1981. In March 1982, any discoveries would have had to be sufficient to support their own pipelines, or to make it viable to tie-in to an existing system. The commerciality of such tie-ins would have had to be considered without regard to the benefits of the PRT tariffing legislation which was not enacted until OTA 1983.

Rate of Return

In 1982, companies were generally thought to be looking for a rate of return of about 15%.