RE:RE:RE:To $76 in five years? Not so fast!Oil reserves are valued on a "net present value" basis (NPV). The net revenue from a barrel of oil is derived from the estimated selling price at the time the barrel is produced (this can vary based on quality of oil, local market conditions, and oil price futures curves), less a number of costs. These costs include royalties paid to mineral rights owners (governments), operating costs to produce the oil, transportation costs to ship the oil to market, upgrading/refining costs to get the oil up to marketable quality, corporate overhead costs, and taxes payable to jurisdictions where oil is produced. So the NPV of a barrel produced today could be $70 sales price minus $20 royalties, minus $10 operating cost, minus $5 transportation cost, minus $10 upgrading cost, minus $5 Corp overhead, minus ?? taxes......leaving $20 net back.
the NPV of all the barrels produced over the life of the well has to include a discount factor for barrels produced far into the future, taking the NPV of all the barrels down to maybe $15.
then you have to deduct the capital cost of turning the reserves into producing barrels - drilling wells, shooting seismic, installing production equipment, building production facilities and pipelines...this can easily be another $10 per barrel.
So in the end it's really not that far off to "present value" a barrel of reserves at $5. And that's before you apply any risk to those barrels actually being there and being produced.
a typical barrel of reserves in western Canada has an NPV of about $10.
The oil business doesn't sound quite as sexy anymore, does it?