Reserve replacement in the oil and gas industry -A study on cost differences

Abstract

Background and the question at issue: When attempting to increment oil and gas reserves, an oil and gas company typically has two possibilities, either to prospect and develop reserves or to acquire reserves through a takeover of another company with proved reserves. In this thesis, the reader will find an approximated answer to the question at issue about which of these alternatives is the most cost effective. Purpose: The thesis was written with the intent to fill some of the holes in the academic literature regarding the cost effectiveness, related to the increment of oil and gas reserves. The paper also contains a discussion about the determents of value and costs in the oil and gas industry, written with the intention to contribute to the illumination of the economical dynamics of the industry. Delimitations: Some generalizations have been made in this thesis in order to increment the transparency and perspicuousness of the study. Methodology: This thesis was enabled by a thorough study of relevant academic research and empirical data, e.g. annual reports and press releases. The costs and outcomes of exploration activities between the years 2009-2013 was gathered from the ten largest oil and gas companies, according to the market capitalization per 2015-04-15, and compared to eight acquisitions that where considered to be a appropriate. Conclusions: The findings of this study indicate that, from a strictly economic perspective, that the alternative to prospect and develop oil and gas reserves is the most cost effective way to increment reserves, although the findings are not statistically significant. Possible stakeholders: This thesis should be interesting to anyone who takes particular interest in the oil and gas industry.