OT30383 - Capital Gains

Valuation of Oil Assets (including shares). 31 March 1982. Prospects.

These areas produce a number of problems for valuation.

Firstly, the Wood MacKenzie analyses provided cashflow information only about fields in, or close to, production. Written analyses and estimated NPVs were provided for certain prospects along with lists of discoveries, but the information is not comprehensive. The possible presence of oil may range from prospects, not drilled and no known oil, to discoveries with possible reserves, but still to be fully evaluated and those where development was in pending, but for which firm decisions had yet to be taken. While it may be reasonable for companies to predicate cashflows and NPVs on the basis of the available data, there is no independent source of information available for these areas to test its accuracy.

Where the reserves were fairly well known but no development had started, companies have argued that cashflow projections at 31 March 1982 should be drawn on the basis that a buyer would proceed with development immediately - this reduces the effect of discount rates etc in deriving NPV. If they held only a minority interest in the licence and the major participants hold differing views on whether and when to proceed with development, it is difficult to see that a buyer would be any better able to bring pressure to bear. Where the minority stake would be sufficient to give another existing participant a majority interest in the licence, we would need to be convinced that such a buyer was in the market to acquire a further interest in that field and had the financial and technical resources to proceed with immediate development.

There is no information on the level of discount rates to be applied at the various stages of prospectivity. However, in relation to the valuation of probable as opposed to proven reserves, it may be worth bearing in mind the views of a valuation expert given in one case. He commented that, in evaluating any prospect, asset values could be expressed only when discussing proven reserves, unless a large number of prospects allowed the use of probable reserves on a "swings and roundabouts" premise.