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Choosing a method for valuing an interest in a petroleum project
The ATO considers that the choice of an appropriate method by which to value the interest in a petroleum project as a whole should be consistent with existing market valuation practice, as well as guidelines such as the VALMIN Code3 and ASIC Regulatory Guide RG 111: Content of expert reports4.
The VALMIN Code states that selection of an appropriate valuation method depends on such factors as:
- the nature of the valuation
- the development status of the petroleum assets, and
- the extent and reliability of available information5.
Development status of a project
Most petroleum assets can be classified into one of the following categories6:
- Exploration areas - properties where petroleum may or may not have been identified, but where a petroleum resource has not been identified. At this stage it is not uncommon for geoscientists to propose a 'target resource'. The proposed target resource is based on the geoscientists' understanding of the geology of the title and the prospectivity of the region for the target commodity. However, uncertainties exist in terms of the magnitude and geological characteristics of the target resource that may ultimately be discovered (if discovered), the extraction cost and capital expenditure required to exploit the target resource, and the probability of successfully progressing through the exploration phase to ultimately declare a maiden Petroleum Resource Management System (PRMS)-compliant7 resource.
- Advanced exploration areas - properties where considerable exploration has been undertaken and specific targets have been identified that warrant further detailed evaluation, usually by establishing exploration or appraisal wells or some other form of detailed geological sampling. A resource estimate may or may not have been made but sufficient work will have been undertaken on at least one prospect to provide both a good understanding of the type of petroleum present and encouragement that further work will elevate one or more of the prospects to the resource category.
- Pre-development projects - properties where petroleum resources have been identified and their extent estimated (possibly incompletely) but where a decision to proceed with development has not been made. Properties at the early assessment stage, properties for which a decision has been made not to proceed with development, properties on care and maintenance, and properties held on retention titles are included in this category if petroleum resources have been identified, even if no further valuation, technical assessment, delineation or advanced exploration is being undertaken. The category also includes properties that have declared a maiden resource that is compliant with the PRMS at the completion of a successful exploration campaign, and after having undertaken the necessary technical evaluation of exploration data. A maiden resource statement may include resources in the 'contingent' resource categories.
- Development projects - properties for which a decision has been made to proceed with construction and/or production, but which are not yet commissioned or are not yet operating at design levels. These are projects in which an economically viable deposit (that is, at the 'reserve' category) has been demonstrated to exist and which has been committed to production. Such a property is at a sufficiently advanced stage that information is reliable enough to enable the value of the property to be established with reference to the DCF valuation method with a reasonable degree of confidence. However, some degree of uncertainty may exist in terms of extraction costs and capital expenditure.
- Producing fields - petroleum properties and processing plants that have been commissioned and are in production. These are properties containing a petroleum producing operation active as at the valuation date. At this stage of development, highly detailed field of development plans have typically been developed and optimised over time. Operators of such properties have the benefit of having a detailed historical understanding of extraction costs and capital expenditure. This information provides a strong basis for forecasting the production, equipment utilisation, fixed and variable operating cost and capital expenditure inputs into a DCF valuation model.
The main distinction between these project categories is the amount of information and knowledge that exists to inform the valuer about the geological and geotechnical characteristics of the property, and the degree of confidence that they calculate about the prospect of converting the property into a producing field.
For a summary of the methods that may be used to value projects, refer to Table 1.
For more information on recognised methods for market valuation in the petroleum sector based on the status of the project refer to Table 2.
End of further information
It is up to the valuer to apply an appropriate industry-recognised method using market valuation principles. The following information sets out what the ATO understands to be common industry practice valuation methods for projects depending on their status. While it is recognised that each project will have its own specific facts, the ATO, when looking at the level of risk of a valuation, will consider these approaches.