Hi mate You need to be careful you don’t equate a BOE of gas or...

Hi mate

You need to be careful you don’t equate a BOE of gas or NGL to the oil price. BOE is an energy conversion, not a price conversation.

Roughly, 6 mcf ( or 6 thousand cubic feet gas ) is equivalent to 1 BOE… So if gas sells at US$ 3 per MCF, it sells for US$ 18 per BOE…. The BOE gas all in cost is $ 7.2 per BOE

So if at US $ 85, the all in cost including royalties for a barrel of oil is US $ 20, then the profit per barrel is $ 65…. And for gas, if when gas sells at US $ 3 per mcf or US $ 18 per BOE, then the profit is US $ 1.8 per mcf or US $ 10.8 per BOE

You need to know the % makeup of the production stream of each component to work out revenue , cost and therefore net cashflow.

Personally I don’t like it when a company uses royalties in the BOE cost base because that creates a large error in the calculation and should be separated . This is because at US$ 40 , a 20 % royalty will “cost “ the producer US $ 8 per barrel, and at $ 100, the producer “pays “ $ 20 per barrel

For your calculation given by DD at an all in cost of US $ 20, if that is based on oil at US $ 80, for example, the royalty cost would be $ 16, much means the other costs ( transport, processing, field op ex and marketing ) are US $ 4 per barrel. These will not change much with the price of the commodity, but more with the production rate .

So if the POO fell to US $ 60 per barrel, and you want to include the royalty in the all in cost, them the cal would be $ 4 + royalty ( $12) or $ 16 per barrel…. And profit per barrel produced would be $ 44, not the $ 40 other wise calculated.

The best way to deal with the royalty payment is to subtract the royalty volumes before making any calculations because royalties are a volume payment.

When royalties are to be paid, a 100 % WI owner has to pay 100 % of the royalties ( obviously)… which means if the royalty load is 20 %, they receive 80 % of the revenue after royalties. The royalty owner had all the other costs( transport, op ex etc) subtracted from the gross revenue so they pay their share of operating costs. Since the royalty recipient usually “ pays” the op costs for their royalty, you can just net out the royalty, if you know the rate, and just use the ex royalty costs as expenses.

So, if SHE has a net WI if 26.5 % before royalties are applied, and royalties are 20 %, the net SHE WI is 21.2 %.

The best thing to ask DD , is what the % breakdown of the total BOE stream is now, what change if any is expected as the well matures. That will enable you to more accurately work out each individual stream gross and net revenue, ( including NGL’s , if present)



It is OK to have they royalty rate in the op cost calculation, especially if the information needed to seperate it is not given. Just be aware that it will increase or decrease those costs as commodity prices change. Most important though, is not attributing the oil price to an BOE production stream that is not 100% oil, as a 1000 BOPD oil stream is not the same as a 1000 BOEPD gas stream, unless the oil and gas price match in BOE terms. At US $ 60 per barrel oil, gas would need to sell at US $ 10 per mcf to generate the same revenue, but then you need to apply the gas cost base, not the oil cost base to work out the net revenue.

Dan