What is a Barrel of Oil Equivalent - BOE
You do not need an Animal Husbantry degree from A&M to recognize cow patties.
Why use BOE? First, that is how it is reported on statements to investors, annual reports and the SEC to show the relative health of a company by showing production and reserve reports.
How much is a BOE?
The benchmark crude in the US is WTI at the Cushing hub in Cushing Oklahoma.
The benchmark natgas price in the US is the Henry Hub in Louisiana.
The IRS has conceded that on the average the conversion rate will be 6,000 BTU/BO.
OK, science says it is really 5,777 BTU/BO. But, close enough for government work.
Notice that the conversion factor is BTU based. However, production for gas is measured in MMCF, but payment is made on MMBTU. Ok, what does that mean?
To me, it means that the conversion formula should be on price received vs an archaic volumetric measurement on gas produced (and maybe not sold).
This takes into account the wide variations in product pricing. FOR example, using 7/31/12 reference spot price figures, one BO (WTI) sold for $83.04. The Henry Hub price was $3.20. Using the volumetric expression of value, then there were 13.84 MMBTU in that 1 MMBTU of gas.
On the flip side, I BO should be worth no more than $19.20.
There fore the conversion by volume was off. Way off. 435% off.
On July1, 2006, gas peaked at $13.28. Oil was at $137.35. Therefore the conversion by volume was really off. But only 172% off.
Where is the rub? I RARELY see oil/gas production ratios reported....such as we have 10,000 BOEPD, with 65% being liquids. Now, if you are smarter than a 5rh grader (which I am not, according to the game show), a little algebra gives the answer on how much oil or condensate was produced. Course, you can go to the Production Data Query on a per well basis on the RRC and figure it out. But what about Chesapeake? Production all over the county.
The Bakken and the Eagle Ford. Both produce gas and where there is not a pipeline infrastructure, they get a flaring exception. Think they would run the gas to the town to help with heating the natatorium or the sanatorium? Think again. That would...well...make too much sense. BUT they still report BOE on the 6:1 basis, even when they might not be selling any gas at all.
When are people going to demand a dollar equivalent to BOE, or when IRS demands it, or at least a requirement to report percentage oil sold and percentage gas sold? That way, the companies' health can be more accurately measured.
Here is to Aggies everywhere.
