Time to rethink the mcf to BOE conversion factor?
Editor’s Note: While VISAGE rebranded to VERDAZO in April 2016, we haven’t changed the VISAGE name in our previous blog posts. We’re proud of our decade of work as VISAGE and that lives on within these blogs. Enjoy.
Lately my daughter has continuously asked me to read “The Emperor’s New Clothes”. This has been a suitable inspiration to ask the question, “Is it time to rethink the 6:1 mcf to BOE conversion factor?”. To help us answer this question I have included the following:
- Historical Review: we will show how a price-based BOE conversion factor has varied since 2007
- Better Operational Insights: we will show how a price-based BOE conversion factor would offer enhanced operational insights into the profitability of a well
- An Analysis Technique that is Independent of BOE Conversion Factors: we will offer a simple technique to “level the playing field between oil and gas” in financial performance analysis without any BOE conversion
- What’s a well’s financial performance right now?: we will inform you about more advanced techniques VISAGE has developed to help operators understand financial performance of their wells based on today’s production rates and prices
Historical Review: Price-based BOE Conversion Factor
Let’s be clear … I am not asking companies to change their financial reporting standards. Using a consistent conversion factor across the industry has its merits. However, with oil price to gas price ratios currently around 19:1 we may be undermining operational insights on the financial performance of producing assets. To start off the discussion I thought I would investigate what the oil price to gas price ratio has been since March 2007. We can see that the ratio approached 6:1 in December of 2008 and reached an all time high of 53:1 in April 2012.
Better Operational Insights
Netback/BOE is a common, and useful, measure of financial performance for a well or asset. For a well it communicates the margin of profit per BOE (excluding overhead and other unallocated field costs). I have taken a dataset for a field and colour-coded the wells: red points are wells with >50% gas revenue; and green points are wells with >50% oil revenue. I have put linear trend lines through the data to visually benchmark their relative financial performance using a 6:1 BOE conversion (see the chart below). I’ve highlighted one gas well which is performing worse than all of its oil peers.
If we take the same wells and same data and use realized prices for the field, the price-based BOE (PBOE) conversion factor is 23:1 (see the chart below). We can see that in this context the gas-dominated well performance is much better and one’s perception of their relative performance is much higher. The highlighted well is now performing better than all of its oil peers. Would this affect decisions about where to focus operational efforts? I think it would.
An Analysis Technique that is Independent of BOE Conversion Factors
If you don’t have a system that easily allows you to change, or use multiple, conversion factors in your analysis, then you can accomplish a similar result using “Netback as a Percent of Revenue” instead of Netback/BOE. This creates a similar analysis where the points are positioned in almost the same relative location as a price-based BOE conversion factor analysis. Its shortcoming is that it does not give you the actual dollar measure of your profit margin per BOE.
What’s a well’s financial performance right now?
The above examples demonstrate the merits of a price-based BOE conversion factor for operational analysis. Price-based BOE analysis allows you to understand how your wells perform financially in the context of actual market conditions. A more advanced technique leverages a combination of data sources and performs calculations that give you a measure of a well’s financial performance right now. To do this you need to use the following data:
- user input of oil and gas prices
- current production rates from your Field Data Capture (FDC) system
- accurate well to cost center links (between your FDC system and financial system)
- latent (historical) accounting data (i.e. pre-accrual wedge)
Combine all of this data into a series of calculations and you can make financially informed operational decisions based on today’s production and prices. This same approach also provides the ability to assess financial performance under a variety of pricing conditions (e.g. what if gas goes up to $4 or what if oil drops to $40).
To learn more about VISAGE and how this approach can help you please contact us.
Price Data provided by: GLJ Petroleum Consultants
Thanks for reading. I welcome your questions and suggestions for future blogs.
Some other blogs you may find of interest:
About VISAGE – visual analytics for the petroleum industry
VISAGE analytics software equips operators and analysts in the petroleum industry to make the most valuable and timely decisions possible. VISAGE brings together public and proprietary oil and gas data from multiple sources for easy to use interactive analysis.