TWENTY-EIGHTH ANNUAL

SOCIETY OF PETROLEUM EVALUATION ENGINEERS'

SURVEY OF PARAMETERS USED IN PROPERTY EVALUATION

JUNE 2009

PRESENTED AT THE
ANNUAL MEETING
OF THE
SOCIETY OF PETROLEUM EVALUATION ENGINEERS
SANTA FE, NEW MEXICO
JUNE 13 –16, 2009

SPEE – 5535 MEMORIAL DRIVE, SUITE F654

HOUSTON, TEXAS 77007
(713) 651-1639
 THE SOCIETY OF PETROLEUM EVALUATION ENGINEERS

THE TWENTY-EIGHTH ANNUAL

SURVEY OF ECONOMIC PARAMETERS

USED IN PROPERTY EVALUATION

June 2009

In April 2009, the Society of Petroleum Evaluation Engineers (“SPEE”) distributed the questionnaire
for its Twenty-Eighth Annual Survey of Economic Parameters Used in Property Evaluation
(“Survey”) to all SPEE members and certain invited guests. This report represents an analysis and
summary of the 161 responses received.
The Survey questions asked, the analysis performed, and the presentation format change slightly
from year to year in an effort to improve the clarity and value of the Survey report. A copy of the
questionnaire is included in Appendix II to allow readers to see the questions that prompted the
responses reported.
The Survey Committee recommends reading the entire report text before using the summary data
contained herein for any specific purpose. Neither the SPEE nor its members endorse nor
necessarily agree with the composite opinions presented herein. It is not the intent of the Survey to
dictate Fair Market Value parameters.
The Survey Committee would like to thank all of the Survey respondents whose contributions of
time and shared evaluation experience make the Survey a valuable industry resource. We also thank
each respondent who contributed written suggestions, criticisms and compliments. It is this input
that drives modifications to the Survey questionnaire which in turn keeps the report content fresh
and responsive to a dynamic industry.

EVALUATION PARAMETERS SURVEY COMMITTEE

Michael Garcia, P.E.
Cary McGregor, P.E.

Thomas S. Collier, P.E.,

Chair
(INTENTIONALLY LEFT BLANK)

2
 THE SOCIETY OF PETROLEUM EVALUATION ENGINEERS

THE TWENTY-EIGHTH ANNUAL

SURVEY OF ECONOMIC PARAMETERS

USED IN PROPERTY EVALUATION©

June 2009

©
Copyright 2009: Society of Petroleum Evaluation Engineers, all rights reserved. The Society of Petroleum Evaluation
Engineers maintains exclusive rights to all prior versions and compilations of its Survey of Economic Parameters Used
in Property Evaluation, whether or not specifically noted.
3
 TABLE OF CONTENTS

TABLE OF CONTENTS .....................................................................................................................................................4

LIST OF FIGURES ..............................................................................................................................................................5
LIST OF TABLES................................................................................................................................................................5
STATEMENT OF PURPOSE..............................................................................................................................................6
BREAKDOWN OF SURVEY RESPONSES ......................................................................................................................7
PRICE PROJECTIONS AND ESCALATIONS ..................................................................................................................9
ESCALATION OF OPERATING COSTS, DRILLING COSTS AND INFLATION .....................................................13
PETROLEUM RESOURCES MANAGEMENT SYSTEM (SPE PRMS).......................................................................16
RESERVE ESTIMATING .................................................................................................................................................18
EVALUATION CRITERIA...............................................................................................................................................20
SUCCESS OF RESPONDENTS AND TRANSACTION SIZES ....................................................................................................20

PRICING ASSUMPTIONS ...................................................................................................................................................20

TYPES OF PROPERTIES VALUED.......................................................................................................................................21

PREFERRED METHOD FOR DETERMINING VALUES ..........................................................................................................21

DISCOUNT RATES AND RISK ADJUSTED DISCOUNT RATES ...............................................................................23

DISCOUNT RATE ..............................................................................................................................................................23

BORROWING RATE ..........................................................................................................................................................26

RISK ADJUSTED DISCOUNT RATE (RADR) .....................................................................................................................27

RESERVE ADJUSTMENT FACTORS AND UNCERTAINTY RELATED TO RESERVE CATEGORIES ................33

HOW RESERVE RISK IS APPLIED ......................................................................................................................................36

TRANSACTION VALUES MEASURED BY BARREL OF OIL EQUIVALENCE.......................................................39

APPENDICES....................................................................................................................................................................40
APPENDIX I: RANGES OF UNCERTAINTY SURROUNDING CRUDE OIL AND NATURAL GAS PRICE PROJECTIONS ..................41

APPENDIX II: SURVEY QUESTIONNAIRE ..........................................................................................................................43

4
 LIST OF FIGURES
Figure 1: Respondent affiliation ..........................................................................................................................................7
Figure 2: Oil price forecast by affiliation ..........................................................................................................................10
Figure 3: Natural gas price forecast by affiliation .............................................................................................................11
Figure 4: Actual prices and historic forecasts -- oil ...........................................................................................................11
Figure 5 Actual prices & historic forecasts – natural gas .................................................................................................12
Figure 6: Comparison of composite average operating expense, drilling and inflation forecasts......................................15
Figure 7: Comparison of composite cumulative increase in operating expense, drilling and inflation forecasts .............15
Figure 8: Total property values for which respondent calculated value during the past 12 months ...................................20
Figure 9: Most commonly used method for determining value of oil and gas properties..................................................21
Figure 10: Other evaluation methods utilized....................................................................................................................22
Figure 11: Other evaluation methods utilized normalized to respondents’ choice of prime methodology........................22
Figure 12: Breakdown of respondent’s discount rate applied to cash flows, composite ...................................................23
Figure 13: Respondent’s discount rate applied to cash flows, consultants ........................................................................24
Figure 14: Respondent’s discount rate applied to cash flows, producers ..........................................................................24
Figure 15: Respondent’s discount rate applied to cash flows, bankers..............................................................................25
Figure 16: Respondent’s discount rate applied to cash flows, private equity & other.......................................................25
Figure 17: Basis of respondents’ discount rate ..................................................................................................................26
Figure 18: Borrowing rate ..................................................................................................................................................27
Figure 19: Sources of debt financing for acquisitions .......................................................................................................27
Figure 20: Risk adjusted discount rate, composite ............................................................................................................29
Figure 21: Risk adjusted discount rate, respondents using only discount rates .................................................................30
Figure 22: Risk adjusted discount rate, respondents who account for risk using both discount rates and reserve
adjustment factors...............................................................................................................................................................31
Figure 23: How reserve adjustment factors are applied.....................................................................................................38
Figure 24: Comparison of reserve adjustment application methodology ..........................................................................38

LIST OF TABLES
Table 1: Respondent’s company size...................................................................................................................................8
Table 2: Average oil price projections by affiliation ...........................................................................................................9
Table 3: Average natural gas price projections by affiliation ............................................................................................10
Table 4: Inflation (CPI) forecast........................................................................................................................................13
Table 5: Drilling cost inflation forecast.............................................................................................................................14
Table 6: Operating cost inflation forecast..........................................................................................................................14
Table 7: Correlation between awareness and adoption of SPE PRMS ..............................................................................17
Table 8: Stage of field or reservoir lift when respondents apply the probabilistic approach .............................................18
Table 9: Anticipated impact of new SEC rules on respondent’s reserve filings.................................................................19
Table 10: Risk adjusted discount rate, composite..............................................................................................................29
Table 11: Risk adjusted discount rate, respondents who account for risk using only discount rates.................................30
Table 12: Risk adjusted discount rate, respondents using both discount rates and reserve adjustment factors .................31
Table 13 Factors affecting risk adjusted discount rate........................................................................................................32
Table 14: Reserve adjustment factors used for acquisitions ..............................................................................................33
Table 15: Reserve adjustment factors used for loans.........................................................................................................34
Table 16: Reserve adjustment factors used for loans.........................................................................................................35
Table 17: Reserve adjustment factors used for loans.........................................................................................................36
Table 18: How reserve adjustment factors are applied ......................................................................................................37
Table 19: Average $/BOE value based on reserve category..............................................................................................39

5
 STATEMENT OF PURPOSE
This Survey is conducted annually by the Society of Petroleum Evaluation Engineers to obtain
opinions from the evaluation community regarding a limited number of economic parameters used
largely in the United States and Canada to evaluate oil and gas properties. The stated purpose of the
Survey is to capture and analyze, at a single point in time, a set of chronically volatile economic
parameters including, among other things, projections of future oil and gas prices, drilling and
operating costs, and inflation. Opinions on the factors and methods used to calculate the present
value of future cash flows are also reflected in the statistical data.
When used with an appreciation for the purpose of the Survey and the source of the statistical
results, we believe this information can be useful in preparing and using evaluations of oil and gas
properties. Results can be particularly useful in comparing the relative thinking of different groups,
such as producers, consultants, and bankers, and in appreciating how opinions have changed over
time. Care should be taken in using the information in this report. The Survey covers only a few of
the many considerations of importance in the evaluation of oil and gas properties. Those that are
included represent opinions expressed by the individual participants in response to the questions
asked. The questions may not be precisely stated and the analysis provided might not fully reveal
the difference of opinion that may exist among the respondents. All respondents do not answer
every question. Additionally, the responses are subject to change over time and may not be relevant
to any period other than April – May 2009. Additionally, some questions had so few responses as to
be statistically insignificant – we have noted these as best we can.
The SPEE does not endorse the use of the Survey results, either in whole or in part, as a valuation
guideline. Neither the Survey nor its contents are intended to dictate Fair Market Value parameters.
Nevertheless, the popularity of the Survey shows that the Survey is relevant when used within the
scope of its intended purpose.

6
 BREAKDOWN OF SURVEY RESPONSES
There were 161 responses received by 1 June 2009 and included in this report. SPEE members
contributed 96% of these responses.
Consultants and producers comprised 38% and 43% of the total responses, respectively, essentially
the same as the 38% consultants and 45% producers reported last year. Bankers (7%) and private
equity responses (3%) were virtually unchanged from last year’s figures of 8% for bankers and 3%
for private equity participants. The remaining 7% of the Survey respondents placed themselves in
the “Other” category used in the Survey Questionnaire to compile responses from evaluators who are
not currently Producers, Consultants, Bankers, nor Private Equity professionals (Figure 1).

RESPONDENT AFFILIATION

Private Equity Other

Banker 8% 7%
3%

Consultant Producer
38% 44%

Figure 1: Respondent affiliation

7
Respondents were requested to rank the size of their companies by number of employees. The
responses to this question are shown in Table 1 below:

Respondents' Company Size

Small Companies
39% (0 - 5 employees)

Medium Size Companies (Level 1)

30% (6 - 30 employees)

Medium Size Companies (Level 2)

11% (31 - 100 employees)

Large Companies
20% (> 100 employees)

Table 1: Respondent’s company size

Last year’s responses were, with 37% of respondents reporting 0-5 employees, 30% reporting
medium size companies (level 1), 14% reporting medium sized companies (level 2), and 19%
reporting large companies.

8
 PRICE PROJECTIONS AND ESCALATIONS
In the 2009 Survey, respondents were asked to provide their current price forecasting methodology.
Of the 161 Survey responses received, all contained oil and/or natural gas price forecasts. Ninety-
six percent (96%) of those who submitted oil price forecasts used West Texas Intermediate crude as
the basis for the oil price projections presented. Fifty-five (55%) of respondents reported using
NYMEX pricing for their natural gas price projections. Nine percent (9%) reported utilizing spot
pricing, while 17% reported using a combination of pricing sources. Tables 2 and 3 show averages
of data provided by the respondents for oil and gas price projections for the decade ending in year
2019.

AVERAGE OIL PRICE PROJECTIONS BY AFFILIATION

Private
Year Combined Producer Consultant Other Banker Equity
(Responses) (160) (69) (61) (13) (12) (5)
2009 $52.91 $53.67 $54.51 $54.50 $41.46 $50.00
2010 $59.84 $61.00 $61.79 $60.08 $48.16 $52.40
2011 $65.65 $67.44 $66.32 $67.92 $54.25 $58.00
2012 $70.03 $72.26 $70.69 $70.38 $58.04 $62.90
2013 $72.70 $74.94 $73.53 $73.30 $59.58 $65.80
2014 $75.33 $77.24 $76.71 $77.51 $60.12 $68.60
2015 $77.45 $79.31 $78.88 $82.72 $60.24 $69.60
2016 $79.50 $81.37 $80.18 $88.97 $60.37 $73.13
2017 $81.55 $83.25 $81.99 $93.89 $60.50 $79.25
2018 $83.40 $84.87 $84.36 $96.95 $60.63 $80.38
2019 $85.04 $86.09 $86.47 $100.50 $60.77 $81.50

Table 2: Average oil price projections by affiliation

9
 AVERAGE NATURAL GAS PRICE PROJECTIONS BY AFFILIATION

Private
Year Combined Producer Consultant Other Banker Equity
(Responses) (161) (70) (61) (13) (12) (5)
2009 $4.39 $4.27 $4.57 $4.47 $4.16 $4.40
2010 $5.16 $4.98 $5.47 $4.89 $5.10 $4.90
2011 $5.76 $5.58 $6.10 $5.40 $5.76 $5.40
2012 $6.24 $6.16 $6.54 $5.82 $5.96 $5.75
2013 $6.60 $6.51 $6.86 $6.68 $6.06 $6.10
2014 $6.89 $6.79 $7.12 $7.42 $6.11 $6.45
2015 $7.21 $7.14 $7.42 $7.95 $6.17 $6.80
2016 $7.45 $7.44 $7.58 $8.37 $6.22 $7.08
2017 $7.67 $7.64 $7.81 $8.86 $6.25 $7.40
2018 $7.88 $7.81 $7.97 $9.68 $6.27 $7.50
2019 $8.06 $7.93 $8.22 $10.07 $6.28 $7.56

Table 3: Average natural gas price projections by affiliation

Charts of average oil and gas price projections by professional affiliation are presented in Figures 2
and 3, respectively. Comparisons of the 2009 Survey price projections to historical Survey price
projections are presented in Figures 4 and 5.

Oil Price Forecast by Affiliation

$110.00

$100.00
Composite
$90.00
Producer
$80.00 Consultant
$/bbl

$70.00 Private Equity

Banker
$60.00
Other
$50.00

$40.00
09
10
11
12
13
14
15
16
17
18
19
20
20
20
20
20
20
20
20
20
20
20

Figure 2: Oil price forecast by affiliation

10
 Natural Gas Price Forecast by Affiliation

$11.00
$10.00
Composite
$9.00
Producer
$/mmbtu

$8.00 Consultant
$7.00 Private Equity
Banker
$6.00
Other
$5.00
$4.00
09
10
11
12
13

14
15
16
17
18
19
20
20
20
20
20

20
20
20
20
20
20
Figure 3: Natural gas price forecast by affiliation

ACTUAL PRICES AND HISTORIC FORECASTS

- OIL -
$130.00

$120.00 Actual 2008 WTI (Cushing) Oil Price Thru May 23, 2008

$110.00
2008
$100.00

$90.00
2009
Oil Price ($/BBL)

$80.00 Actual
$70.00 2007
$60.00 2006

$50.00
2005
$40.00
2004
$30.00 2001 2003
1997 2000
$20.00 1995 1996
2002
$10.00 1999
1998
1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Figure 4: Actual prices and historic forecasts – oil

11
 ACTUAL PRICES & HISTORIC FORECASTS
- NATURAL GAS -
$11.50
Actual 2008 Henry Hub Natural Gas Price
$10.50

$9.50 2008

$8.50
Gas Price ($/MMBTU)

2006
$7.50

$6.50
Actual 2007 2009
2005
$5.50 2004
2001

$4.50

$3.50 2003
2000 2002
1998 1999
$2.50
1995 1997

$1.50 1996
1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016
Figure 5 Actual prices & historic forecasts – natural gas

There are, of course, a wide range in outlooks among respondents of all affiliations relative the
future of oil and natural gas prices. Additional information related to this variation can be found in
Appendix I.
In previous years, in terms of the starting point for respondents’ price forecasting protocols (price
benchmark), the results had indicated a trend away from posted and spot prices in favor of NYMEX-
based indices. This evolution to the NYMEX benchmark was first reported in the 2001 Survey
Report. The 2002 through 2005 Surveys showed a general continuation of that trend. In 2009, the
percentage of respondents that use NYMEX-based pricing indices was 56% for oil, and 55% for gas,
down from last year’s figures of 63% for oil and 62% for natural gas. Nineteen percent (19%) of
respondents reported using pricing based on a combination of parameters including NYMEX-based
prices. Focusing on oil prices, 8% prefer benchmarks based on posted prices with 7% using spot oil
prices. Nine percent (9%) of respondents use gas price benchmarks based exclusively on spot price,
and 7% use posted prices. The remainder use unspecified company-defined benchmarks or provided
responses that were too general to categorize.

12
 ESCALATION OF OPERATING COSTS,
DRILLING COSTS AND INFLATION
On average, respondents generally projected that drilling and operating costs would escalate at rates
11 – 12% less than predicted last year. Unlike the past two years, 2009 ten-year inflation
expectations have decreased by 7% over last year’s survey. Tables 4 through 6 present statistical
data on the respondents’ forecast of drilling/operating costs and inflation. A graphical representation
of the average data is presented in Figure 6. Although forecasting a initial depression in drilling
costs and operating expenses vis à vis overall inflation rates as represented by the Consumer Price
Index (CPI), the cumulative ten-year impacts were expected to converge by the 120 – 141
respondents.1

INFLATION CPI FORECAST (%)

Composite
Year Average Median Standard Dev.
2009 1.11% 1.00% 1.86%
2010 1.80% 2.00% 1.63%
2011 2.35% 2.00% 2.03%
2012 2.63% 2.50% 2.47%
2013 2.65% 2.50% 2.09%
2014 2.61% 2.50% 2.19%
2015 2.58% 2.50% 2.12%
2016 2.52% 2.50% 1.93%
2017 2.52% 2.50% 2.03%
2018 2.58% 2.75% 1.97%
2019 2.58% 2.75% 1.97%

Table 4: Inflation (CPI) forecast

1
The number of respondents varies by year and by table. The stated ranges represent the highest and lowest number of
respondents for each year in the cost escalation section.

13
 DRILLING COST INFLATION FORECAST (%)
Composite
Year Average Median Standard Dev.
2009 -2.01% 0.00% 10.01%
2010 1.15% 0.00% 5.65%
2011 2.52% 2.00% 5.07%
2012 4.04% 2.50% 7.67%
2013 3.30% 3.00% 5.01%
2014 2.91% 2.50% 2.98%
2015 2.87% 2.50% 3.16%
2016 2.83% 2.50% 3.11%
2017 2.69% 2.50% 2.68%
2018 2.66% 2.50% 2.68%
2019 2.67% 2.50% 2.67%

Table 5: Drilling cost inflation forecast

OPERATING COST INFLATION FORECAST (%)

Composite
Year Average Median Standard Dev.
2009 0.55% 0.00% 4.90%
2010 1.74% 2.00% 3.61%
2011 2.50% 2.00% 3.19%
2012 2.67% 3.00% 2.60%
2013 2.68% 3.00% 2.22%
2014 2.57% 2.75% 2.20%
2015 2.57% 3.00% 2.23%
2016 2.57% 2.50% 2.22%
2017 2.58% 3.00% 2.20%
2018 2.58% 3.00% 2.18%
2019 2.58% 3.00% 2.17%

Table 6: Operating cost inflation forecast

14
The plot below shows a comparison of the data in the above tables.

Comparison of Composite Average Operating Expense,

Drilling Cost and Inflation Forecasts

7%
Composite Average Yearly Percentage

6% Inflation (CPI)
5% Drilling Costs
4% Operating Expenses
3%
Increase

2%
1%
0%
-1% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

-2%
-3%

Figure 6: Comparison of composite average operating expense, drilling and inflation forecasts

The survey results, converted from a year on year basis to a cumulative basis, appear in Figure 7.

Comparison of Composite Average Operating Expense,

Drilling Cost and Inflation Forecasts, Cumulative Basis
Composite Cumulative Percentage Increase

130%

125% Inflation (CPI)

Drilling Costs
120%
Operating Expenses
115%

110%

105%

100%

95%

90%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Figure 7: Comparison of composite cumulative increase in operating expense, drilling and inflation forecasts

15
 PETROLEUM RESOURCES MANAGEMENT SYSTEM
(SPE PRMS)
In 2007, a Petroleum Resources Management System sponsored by the Society of Petroleum
Engineers, the World Petroleum Council, the American Association of Petroleum Geologists, and
the Society of Petroleum Evaluation Engineers was approved by the sponsoring organizations. This
“Project-Based” system seeks to classify resources based on a project’s chance of commerciality as
categorized by recoverable uncertainty using the evaluator’s forecast of future conditions. It applies
to both conventional and unconventional reserves.
This year’s questionnaire once again posed two questions to address the awareness of the state of
adoption of this new system. Ninety-six percent (96%) of respondents reported an awareness of the
new system. Of those reporting some level of awareness, 32% reported good understanding, 45%
reported a basic understanding, and 19% reported that they hadn’t reviewed the system. This
represents a slight increase in awareness over last year (77% as compared to 71% reporting either a
good or basic understanding of the system).
Respondents were asked to provide information on the level to which they (or their firms) have
adopted the PRMS. Seventeen percent (17%) reported that their firm used the PRMS as their
primary resource tracking tool2. Twenty-three percent (23%) reported a moderate degree of
adoption, frequently using it for non-regulatory resource tracking while 30% reported a low degree
of adoption with plans underway to adopt all or part of the system, but no present usage. Thirty
percent (30%) report no use of nor plans to adopt the PRMS. This is also an increase over last year
in the level of adoption by firms. Prior year’s figures were 10% reporting its use as a primary tool,
26% reporting a moderate degree of adoption, 24% reporting a low degree of adoptions, and 40%
reporting no plans to adopt PRMS.
Table 7 below presents the correlation found in the responses between awareness of the program and
the degree of adoption reported indicating a rough positive correlation between level of awareness
and level of adoption.

2
Although referred to by the SEC, PRMS has not been adopted by securities regulators, the questions were limited to
non-regulatory resource tracking.

16
 Correlation Between Awareness and Adoption of SPE PRMS

Degree of Adoption

High Moderate Low Not

150 Respondents degree degree degree adopting

Aware & have a good understanding 14% 9% 5% 5%

Awareness
Level

Aware, but have only a basic understanding 3% 13% 19% 9%

Aware, but haven't reviewed it 0% 1% 6% 13%
Unaware, hadn't heard of it 0% 0% 0% 3%

Table 7: Correlation between awareness and adoption of SPE PRMS

17
 RESERVE ESTIMATING
For the last ten years, respondents have been asked to provide certain information on the reserve
estimation methods employed in evaluations. The catalyst for these questions has been the revisions
to the reserve definitions approved by the Society of Petroleum Engineers (SPE) in 1997. In the
revised definitions, probability limits were added to define recovery certainty when the probabilistic
method of reserve estimation is employed. The SPE makes the following distinction between
“deterministic” and “probabilistic” reserve estimation methods:
“The method of estimation is called deterministic if a single best estimate of reserves is made
based on known geological, engineering, and economic data. The method of estimation is
called probabilistic when the known geological, engineering, and economic data are used to
generate a range of estimates and their associated probabilities.”
This year 49% of 152 respondents reported that they used the probabilistic method in their
evaluations – an increase over the 54% reported in 2008. Respondents were asked to define the
stage of field production or reservoir life at which probabilistic methods were employed. Table 8
presents the responses to this query. No respondents reported utilizing the probabilistic method in
all stages of reservoir life.

STAGE OF FIELD OR RESERVOIR LIFE

WHEN RESPONDENTS APPLY THE PROBABILISTIC APPROACH

63% Pre-Drill

32% Early Stages of Production

4% Middle Stages of Production

1% Later Stages of Production

Table 8: Stage of field or reservoir lift when respondents apply the probabilistic approach

Of the respondents that use the probabilistic method, 90% did so in combination with deterministic
methods. Eighty-one percent (81%) of respondents who use the probabilistic approach employ the
method in their evaluations of domestic properties and 39% employ the approach to evaluate
reservoirs outside of the United States. The international locations reported were: Africa, Asia,
Australia, Azerbaijan, Brazil, Columbia, Egypt, India, Kazakhstan, Lithuania, Nicaragua, Norway,
Panama, Peru, Russia, South America, Turkmenistan, United Kingdom, and the Ukraine.

18
In 2008, the SEC issued Release Nos. 33-8995; 34-59192; FR-78; File No. S7-15-08
MODERNIZATION OF OIL AND GAS REPORTING. These revised rules which go into effect
with financial reports filed in 2010. Respondents were asked to classify the anticipated impacts of
various aspects of the revised rules would have a high, medium, or low impact on their reserves
filing. Table 9 summarizes the responses.

High Medium Low

Offset spacing 34% 28% 42%
Non-proved disclosure 39% 41% 58%
Technologies other than flow tests 15% 31% 0%
Contacts (lowest known oil) 12% 0% 0%

Responses 41 68 52

Table 9: Anticipated impact of new SEC rules on respondent’s reserve filings

19
 EVALUATION CRITERIA
Respondents were asked if they work closely with acquisitions and evaluations. Seventy-eight
percent (78%) of the 153 respondents who answered this question responded affirmatively.
Statistical data is presented for those respondents who work closely with acquisitions/evaluations
and who responded to the questions at issue.

Success of Respondents and Transaction Sizes

Respondents were asked to judge the success rates of their companies or clients in making
acquisitions based on their analyses and/or advice. Responses were captured for 97% of evaluators
who work closely with estimates of acquisition price, fair market value or loan value. Of these
respondents, 12% replied that they (or their clients) are usually successful in acquiring properties,
52% replied that they are sometimes successful in acquiring properties and 21% replied that they
were seldom successful in acquiring properties.
Each respondent was asked to sum the values of all properties and/or transactions evaluated by the
respondent or the respondent’s company for the preceding 12-month period. Figure 8 reflects that
distribution. Fifty-nine percent (59%) of respondents were involved last year in value assessments
and transactions with cumulative values that exceed $100 million, 42% in assessments with
cumulative values that exceeded $250 million, 34% that exceed $500 million, and 26% in
assessments with cumulative values that exceeded $1 billion. These figures are down from last year
in which 52% reported transactions in excess of $250 million.

Total Property Values for Which Respondent Calculated Value During

Past 12 Months

100%
35% 96% 105%

Cumulative Frequency (% greater

83%
Percentage of Respondents

30% 90%
26%
24%
25% 75%
59%
20% 17% 60%
than)

42%
15% 13% 34% 45%
26%
10% 8% 8% 30%
4%
5% 15%

0% 0%
Less than $1 million to $10 million $100 million $250 million $500 million Over $1
$1 million $10 million to $100 to $250 to $500 to $1 billion billion
million million million

Figure 8: Total property values for which respondent calculated value during the past 12 months

Pricing Assumptions
The survey asked the 119 respondents who work closely with acquisitions and evaluations if the

20
pricing assumptions used for valuation matched the price projections provided for the “Price
Projections and Escalations” section of this report. Fifty percent (50%) indicated that they utilize the
same price projections as reported in the earlier section of this report. The remainder were divided
between those reporting the use of a constant price model (21%), company policy (14%), and client
policy (14%). Two percent (2%) relied on other assumptions.
Of the same group, 33% responded that they included the results of hedging programs into their
pricing assumptions.

Types of Properties Valued

This year’s survey asked respondents to supply the most frequent type of property valued. The
majority of respondents (73% of 113) reported that operated working interests were most frequently
valued. Fifteen percent (15%) reported most frequently valuing non-operated working interests, and
9% reported most frequently valuing royalty interests.

Preferred Method for Determining Values

The respondents were asked to provide their most commonly used method of valuation. Similar to
past years, discounted cash flow (DCF) is the most commonly used method (83%) as shown in
Figure 9. Other methods used in addition to the respondent’s primary method as a percent of total
responses for all methods selected are presented in Figure 10. The low response rate to DCF is
believed to be related to the large number of respondents who selected this method as their primary
method. Figure 11 presents the same analysis, normalized for the number respondents remaining
who did not choose a given methodology as their primary method.

Most Commonly Used Method for Determining Value of Oil

and Gas Properties

Return on P/I (Profit-to-

investment Investment) Payout
11% 2% 1%
Multiple of monthly
cash flow Other
1% 2%

Discounted cash
flow
83%

Figure 9: Most commonly used method for determining value of oil and gas properties

21
 Other Evaluation Methods Utilized

Discounted cash flow 5%

Multiple of monthly cash flow 18%

Return on investment 18%

$/BOE 16%

P/I (Profit-to-Investment) 11%

Payout 20%

Comparable sales 11%

Other 1%

Figure 10: Other evaluation methods utilized

Other Evaluation Methods Utilized (Normalized)

Discounted cash flow 22%

Multiple of monthly cash flow 14%

Return on investment 16%

$/BOE 13%

P/I (Profit-to-Investment) 9%

Payout 16%

Comparable sales 9%

Other 1%

Figure 11: Other evaluation methods utilized normalized to respondents’ choice of prime methodology

22
 DISCOUNT RATES AND
RISK ADJUSTED DISCOUNT RATES
Respondents were asked to identify the “Discount Rate” and “Risked Adjusted Discount Rate”
currently being employed to assess value or to determine acquisition price. The 2009 Survey
Questionnaire contained the following definitions for these variables:
Discount Rate
“The yield rate used to determine the present value of a future cash flow based solely on the cost of capital”.

Risk Adjusted Discount Rate

“The yield rate used when evaluating the acquisition price or value of an oil/gas asset. This factor should
include a consideration for the cost of capital, a profit or expected rate of return for the buyer and any
risk/uncertainty that the evaluator may choose to impute to the asset. Because the “Risk Adjusted Discount
Rate” includes a profit for the buyer, it is expected that it will be larger than the ‘Discount Rate’. Some
evaluators allow reserve risk to influence their assessment of this discount rate; others do not, choosing instead
to handle reserve risk exclusively with ‘Reserve Adjustment Factors’”.

Discount Rate
The average composite “Discount Rate” used to determine the present value of a future cash flow
stream is 10.5%, up slightly from 10.4% last year (Figure 12). The distributions by respondent
affiliation are presented as Figures 12 through 16.

Breakdown of Respondent's Discount Rate Applied to Cash

Flows, Composite (109 Responses)

70%
61%
Percent of respondents

60%
50%
40%
30%
20% 13%
12%
9%
10% 3%
1% 1%
0%
4.5% to 6% to 7.5% to 9% to 10.5% to 12% to 13.5%+
6% 7.5% 9% 10.5% 12% 13.5%

Figure 12: Breakdown of respondent’s discount rate applied to cash flows, composite

23
 Respondent's Discount Rate Applied to Cash Flows,
Consultants (37 Responses)

70% 62%
Percent of respondents

60%
50%
40%
30%
20% 16%
11%
10% 3% 3% 5%
0%
0%
4.5% to 6% to 7.5% to 9% to 10.5% to 12% to 13.5%+
6% 7.5% 9% 10.5% 12% 13.5%

Figure 13: Respondent’s discount rate applied to cash flows, consultants

Respondent's Discount Rate Applied to Cash Flows,

Producers (48 Responses)

60% 56%
Percent of respondents

50%

40%

30%

20% 15%
13% 13%
10% 4%
0% 0%
0%
4.5% to 6% to 7.5% to 9% to 10.5% to 12% to 13.5%+
6% 7.5% 9% 10.5% 12% 13.5%

Figure 14: Respondent’s discount rate applied to cash flows, producers

24
 Respondent's Discount Rate Applied to Cash Flows, Bankers
(12 Responses)

80% 75%
Percent of respondents

70%
60%
50%
40%
30%
20%
8% 8% 8%
10%
0% 0% 0%
0%
4.5% to 6% to 7.5% to 9% to 10.5% to 12% to 13.5%+
6% 7.5% 9% 10.5% 12% 13.5%

Figure 15: Respondent’s discount rate applied to cash flows, bankers

Respondent's Discount Rate Applied to Cash Flows

Private Equity & Other (12 Responses)

70% 67%
Percent of respondents

60%
50%
40%

30%
20% 17% 17%

10%
0% 0% 0% 0%
0%
4.5% to 6% to 7.5% to 9% to 10.5% to 12% to 13.5%+
6% 7.5% 9% 10.5% 12% 13.5%

Figure 16: Respondent’s discount rate applied to cash flows, private equity & other

Respondents were asked to identify the method used to arrive at the reported “Discount Rate”.
“Other Considerations” dominated this year’s survey, with 24% of responses. Professional judgment
was cited by 20% of respondents. Methods based on financial markets (cost of equity, cost of debt,
and weighted average of both) comprised 40% of the total. This represents a significant change
from last year in which only 35% citing professional judgment (23%) or other (15%) contrasted with

25
this year’s combined response of 44% for the same categories. Of the 109 respondents expressing a
preference, 91% calculated the discount rate on a pre-tax basis. Figure 17 presents a breakdown of
all responses, indicating the basis of respondents’ chosen discount rate.

Basis of Respondents Discount Rate

(109 Responses)

Debt Alone, 6%
Equity Alone, 15%

Cost of
Other, 2% Debt/Equity, 17%

Prime Lending
Clients, 19% Rate, 4%

Past SPEE Prime Lending

Surveys, 4% Rate/Judgment,
6%
Professional Financial Indices,
Judgment, 25% 2%

Figure 17: Basis of respondents’ discount rate

Borrowing Rate
Since the cost of debt can be an important component of the “Discount Rate”, respondents were
asked to define their average borrowing rate or the average borrowing rate of their clients. The
respondents average Borrowing Rate was 7.0% (Figure 18), down slightly from 7.6% in 20083. On
average, 73% of the 88 reporting Respondent’s Buyers relied on debt as a means, to some degree, to
finance the acquisition(s) in which they were involved. This represents a decrease over last year’s
reported 81% of transactions. The primary sources of financing reported were commercial bank
debt (81%), equity partnerships (9%), mezzanine financing (5%), or a combination thereof (Figure
19). Relative to last year’s survey, commercial bank has greatly expanded its share from 61% last
year as Mezzanine dropped from 22% in 2008 to only 5% in 2009 and Seller financing (3% in 2008)
disappeared as a response in 2009.

3
These calculated averages exclude reported borrowing rates in excess of 15% for both years discussed. After
eliminating this outlying data, the averages are based on 96% of the data reported for both years.

26
 Borrowing Rate (Cost of Debt)
76 Responses

35%
31%
Percent of respondents

30%
25%
25%
20% 18%
17%
15% 12%
10%
5% 3%
0%
0%
2.5% to 4% to 5.5% to 7% to 8.5% to 10% to >11.5%
4% 5.5% 7% 8.5% 10% 11.5%

Figure 18: Borrowing rate

Sources of Debt Financing for Acquisitions

Equity
partnership Other &
Mezzanine 9% Undesignated
financing 5%
5%

Commercial
bank
81%

Figure 19: Sources of debt financing for acquisitions

Risk Adjusted Discount Rate (RADR)

There can be significant variability between evaluators in the factors incorporated into the “Risk
Adjusted Discount Rates”. “Risk Adjusted Discount Rates” influenced by reserve risk can vary
dramatically from those reported by evaluators who handle reserve risk outside of the “Risk
Adjusted Discount Rate” (such as by the application of “Reserve Adjustment Factors” - - discussed
in later sections of this report). Therefore, a statistical accounting of “Risk Adjusted Discount
Rates” is more meaningful if it is reported with deference to the reserve risk handling practices of

27
the evaluators polled instead of as a single amalgamated value.
In this Survey, a majority of the 116 respondents (54%) reported that they exclusively use “Reserve
Adjustment Factors” to handle reserve risk; therefore any discount rate they use is not risk adjusted.
Twenty-seven percent (20%) of respondents handle reserve risk exclusively within the “Risked
Adjusted Discount Rate”. The remaining 26% handle reserve risk with both the “Reserve
Adjustment Factors” and the “Risk Adjusted Discount Rates”. Tables 10 through 12 present the
statistical data on RADR reported while the distribution for each group is presented in Figures 20-
22.

28
 RISK ADJUSTED DISCOUNT RATE
-COMPOSITE-

Responses Min Max Average

Combined 58 4.0% 80.0% 15.3%

Producer 29 9.0% 80.0% 17.0%

Consultant 18 4.0% 20.0% 14.2%

Banker, Private
Equity, and
Other 11 11.5% 15.3% 12.7%

Table 10: Risk adjusted discount rate, composite

Risk Adjusted Discount Rate

Composite (58 Responses)

40% 38%

35%
Percent of respondents

30% 28%
25%
20%
16% 16%
15%
10%
5% 2% 2%
0%
0%
0% to 4% 4% to 8% 8% to 12% 12% to 16% to 20% to >24%
16% 20% 24%

Figure 20: Risk adjusted discount rate, composite

29
 RISK ADJUSTED DISCOUNT RATE

Respondents Who Account for Risk Using ONLY Discount Rates

Responses Min Max Average

Combined 27 8.0% 20.0% 13.5%

Producer 14 9.0% 20.0% 14.3%

Consultant 7 8.0% 18.0% 13.5%

Banker, Private
Equity, and
Other 6 11.3% 12.3% 11.8%

Table 11: Risk adjusted discount rate, respondents who account for risk using only discount rates

Risk Adjusted Discount Rate

Respondents Who Account for Risk Using ONLY Discount Rates
(13 Responses)

45%
38%
Percent of respondents

40%
35% 31%
30%
25%
20% 15% 15%
15%
10%
5% 0% 0% 0%
0%
0% to 4% 4% to 8% 8% to 12% to 16% to 20% to >24%
12% 16% 20% 24%

Figure 21: Risk adjusted discount rate, respondents using only discount rates

30
 RISK ADJUSTED DISCOUNT RATE
Respondents Who Account for Risk Using BOTH Discount Rates and Reserve Adjustment
Factors

Responses Min Max Average

Combined 18 4.0% 80.0% 17.9%

Producer 9 10.0% 80.0% 22.1%

Consultant 7 4.0% 20.0% 13.9%

Banker, Private
Equity, and
Other4 2 __ __ __

Table 12: Risk adjusted discount rate, respondents using both discount rates and reserve adjustment factors

Risk Adjusted Discount Rate

Respondents Who Account for Risk Using BOTH Discount Rates
and Reserve Adjusment Factors
(18 Responses)

45%
Percent of respondents

39%
40%
35%
30%
25%
20% 17% 17% 17%
15%
10% 6% 6%
5% 0%
0%
0% to 4% 4% to 8% 8% to 12% to 16% to 20% to >24%
12% 16% 20% 24%

Figure 22: Risk adjusted discount rate, respondents who account for risk using both discount rates and reserve adjustment factors

The average “Risk Adjusted Discount Rate” was evaluated for respondents based upon the success
rate in acquiring oil and gas properties. The average rate for the group of respondents that replied
that they (or their clients) are usually successful in acquiring properties was 12.4%5. The average

4
SPEE Survey of Economic Parameter Used in Property Evaluation, Confidentiality and Data Handling Procedures
preclude the reporting of results for groups with fewer than five respondents.
5
This average excludes an abnormally large reported RADR of 80%. The group average including this data point is
31
rate for the group of respondents replying that they are sometimes successful in acquiring properties
was 15.0%. The average rate for the group of respondents replying that they are seldom successful
in acquiring properties was13.4%.
Respondents who work closely with estimates of acquisition price, fair market value or loan value
provided information on the considerations that influence their selection of the “Risk Adjusted
Discount Rates”. Respondents were permitted to provide multiple factors. Table 13 summarizes the
responses.

FACTORS AFFECTING “RISK ADJUSTED DISCOUNT RATE” (RADR)

Percent of Percent of
RADR Factors
Respondents Responses

36.1% 16.2% Profit

40.3% 18.0% Reserve Risk

41.2% 18.4% Price Uncertainty

31.9% 14.3% Expense Uncertainty

Unidentified Reserve
24.4% 10.9% Potential

26.9% 12.0% Mechanical Risk

Political/Regulatory
19.3% 8.6% Uncertainty

3.4% 1.5% Other

Table 13 Factors affecting risk adjusted discount rate

Ninety-six percent (96%) of respondents apply “Risk Adjusted Discount Rates” to cash flows before
consideration of federal income tax. Fifty-two percent (52%) of the respondents indicated that they
do not decrease RADR for unidentified reserve potential, 26% sometimes do, and 18% responded
that they do.

23.7%.

32
 RESERVE ADJUSTMENT FACTORS AND
UNCERTAINTY RELATED TO RESERVE CATEGORIES
Fifty-four percent (54%) of respondents said that they used “Reserve Adjustment Factors” exclusive
of risk adjusted discount factors. Another 26% responded that they use “Reserve Adjustments” in
addition to utilizing RADRs. Table 14 presents the “Reserve Adjustment Factors” used for
acquisitions (based on responses from non-bankers) and Table 15 presents the “Reserve Adjustment
Factors” used for loans (based exclusively on responses from Bankers – note that there were only ten
(10) respondents available for this table). These tables were compiled using all responses to this
question, regardless of whether the respondent also utilized RADRs.

RESERVE ADJUSTMENT FACTORS USED FOR ACQUISITIONS (%)

75 Responses Average Median Std. Dev. Min. Max. Mode

Proved Producing 96.7 100.0 4.5 85.0 100.0 100.0

Proved Shut In 75.8 80.0 21.6 0.0 100.0 80.0

Proved Behind Pipe 70.4 75.0 18.2 5.0 100.0 75.0

Proved Undeveloped 55.0 60.0 20.9 5.0 100.0 50.0

Probable Producing 46.6 50.0 27.6 0.0 100.0 50.0

Probable Behind Pipe 33.6 35.0 24.6 0.0 100.0 0.0

Probable Undeveloped 30.2 30.0 22.9 0.0 100.0 50.0

Possible Producing 26.6 25.0 20.7 0.0 100.0 50.0

Possible Behind Pipe 17.1 10.0 23.4 0.0 100.0 0.0

Possible Undeveloped 9.8 5.0 13.3 0.0 50.0 0.0

Table 14: Reserve adjustment factors used for acquisitions

33
 RESERVE ADJUSTMENT FACTORS USED FOR LOANS (%)

10 Responses Average Median Std. Dev. Min. Max. Mode

Proved Producing 100.0 100.0 0.0 100.0 100.0 100.0

Proved Shut In 71.0 75.0 19.3 25.0 90.0 75.0

Proved Behind Pipe 68.5 75.0 18.1 25.0 90.0 75.0

Proved Undeveloped 50.5 50.0 18.5 25.0 90.0 50.0

Probable Producing 0.0 0.0 0.0 0.0 0.0 0.0

Probable Behind Pipe 0.0 0.0 0.0 0.0 0.0 0.0

Probable Undeveloped 0.0 0.0 0.0 0.0 0.0 0.0

Possible Producing 0.0 0.0 0.0 0.0 0.0 0.0

Possible Behind Pipe 0.0 0.0 0.0 0.0 0.0 0.0

Possible Undeveloped 0.0 0.0 0.0 0.0 0.0 0.0

Table 15: Reserve adjustment factors used for loans

34
Tables 16 and 17 contain the Reserve Adjustment Factors used by those respondents who reported
using them exclusively and by those who reported using them in conjunction with RADR,
respectively.

RESERVE ADJUSTMENT FACTORS: RAF ONLY (%)

53 Responses Average Median Std. Dev. Min. Max. Mode

Proved Producing 96.6 100.0 4.7 85.0 100.0 100.0

Proved Shut In 74.4 80.0 21.6 5.0 100.0 80.0

Proved Behind Pipe 69.0 75.0 19.1 5.0 100.0 75.0

Proved Undeveloped 51.5 50.0 21.1 5.0 100.0 50.0

Probable Producing 35.9 35.0 31.3 0.0 100.0 0.0

Probable Behind Pipe 26.1 25.0 26.2 0.0 100.0 0.0

Probable Undeveloped 23.1 20.0 24.5 0.0 100.0 0.0

Possible Producing 20.3 15.0 21.5 0.0 100.0 0.0

Possible Behind Pipe 13.4 0.0 22.3 0.0 100.0 0.0

Possible Undeveloped 8.5 0.0 14.1 0.0 50.0 0.0

Table 16: Reserve adjustment factors used for loans

35
 RESERVE ADJUSTMENT FACTORS: BOTH RAF AND RADR (%)

27 Responses Average Median Std. Dev. Min. Max. Mode

Proved Producing 98.1 100.0 3.7 90.0 100.0 100.0

Proved Shut In 76.1 85.0 22.7 0.0 100.0 85.0

Proved Behind Pipe 72.1 75.0 16.7 25.0 100.0 80.0

Proved Undeveloped 58.5 60.0 20.3 5.0 90.0 50.0

Probable Producing 48.5 50.0 23.5 0.0 75.0 50.0

Probable Behind Pipe 36.1 40.0 23.1 0.0 80.0 40.0

Probable Undeveloped 34.1 40.0 20.6 0.0 65.0 50.0

Possible Producing 30.8 30.0 19.6 0.0 60.0 50.0

Possible Behind Pipe 13.8 10.0 15.2 0.0 50.0 0.0

Possible Undeveloped 7.8 7.5 9.0 0.0 35.0 0.0

Table 17: Reserve adjustment factors used for loans

How Reserve Risk is Applied

Of the respondents who use “Reserve Adjustment Factors” in their evaluations, 52% reported
applying those factors to reserve volumes before scheduling production in their cash flow
calculations. Forty-five percent (45%) indicate that they schedule production from un-risked
reserves and then apply the “Reserve Adjustment Factors” to the discounted cash flow for each
reserve category (see Table 18).
Of the 52% of respondents who apply the “reserve Adjustment Factors” to reserve volumes before
scheduling production, most (72%) lower the expected initial production rate and use the decline rate
that would otherwise apply to the production stream had the reserves been un-risked. Fifteen (15%)
leave the initial rate the same and increase the decline rate. Another 13% said they change the
number of projected wells (multi-well evaluations) such that the reserves from the remaining wells

36
sum to the risk adjusted reserve amount or used another method. The results are presented in Figure
23.
Respondents who apply the “Reserve Adjustment Factors” to reserve volumes before scheduling
production were then asked if they: (1) leave expenses, capital investments and abandonment costs
unchanged from the cash flow projection before applying the “Reserve Adjustment Factor”, (2) use
the same “Reserve Adjustment Factors” to adjust expenses, capital investments and abandonment
costs under the assumption that the risk that the additional drilling will actually occur is equal to the
reserve risk or (3) use professional judgment to make new estimates for expenses, capital
investments and abandonment costs. Sixty-six percent (66%) of the 35 respondents reported leaving
expenses, capital investments and abandonment costs unchanged from the cash flow projection
before applying the “Reserve Adjustment Factor”. Fourteen percent (14%) use the same “Reserve
Adjustment Factors” to adjust expenses, capital investments and abandonment costs. Seventeen
percent (17%) reported using professional judgment to make new estimates for expenses, capital
investments and abandonment costs.

HOW RESERVE ADJUSTMENT FACTORS ARE APPLIED

Private
Equity &
89 Responses Producer Consultant Banker Other Overall

To Reserve Volumes
Before Cash Flow
Analysis 24% 17% 8% 3% 52%

Apply to Discounted Cash

Flow 21% 13% 3% 8% 45%

Other 1% 2% 0% 0% 3%

TOTAL 100%

Table 18: How reserve adjustment factors are applied

Figure 24 presents a comparison of the reserve adjustment factors used by evaluators who apply the
factors to the discounted cash flow with those who apply the factors to reserve volumes before
performing the discounted cash flow analysis. For every reserve category except Proved Producing,
the reported reserve adjustment factors applied to the discounted cash flows were lower than those
applied to reserve volumes before cash flow analysis. Reported averages for both methods lie within
one standard deviation of the mean for all reserve categories.

37
 HOW RESERVE ADJUSTMENT FACTORS ARE APPLIED

Other
3%

Lower initial
production rate,
leave decline rate,
To reserve volumes 73%
Apply to discounted
before cash flow
cash flow Leave initial
analysis
45% production rate,
42%
increase decline
rate, 13%

Change the number

of projected wells or
"other", 14%

Figure 23: How reserve adjustment factors are applied

Comparision of Reserve Adjustment Factor

Application Methodology
(errror bars represent one standard deviation)

Proved Producing
Proved Shut-in
Proved Behind Pipe
Proved Undeveloped
Probable Producing
Probable Shut-in
Probable Behind Pipe
Probable
Possible Producing
Prossible Shut-in
Possible Behind Pipe
Possible

0 20 40 60 80 100
Reserve Adjustment Factor, %

Reserve Volumes, 21respondents Discounted Cash Flow, 19 respondents

Figure 24: Comparison of reserve adjustment application methodology

38
 TRANSACTION VALUES MEASURED BY
BARREL OF OIL EQUIVALENCE
Respondents were asked to report the range of $/BOE values where such values were either used in
their transactions or calculated after the transaction. The $/BOE values were also requested by
reserve category where known in such detail. Table 16 summarizes the responses. Seventy-four
percent (74%) of respondents reported calculating MCF/BBL factors based on BTU equivalence
while 26% preferred instead to use price equivalence. The average MCF/BBL factor reported by the
majority who base the factor on BTU equivalence was 6.1 Mcf per barrel of oil.

AVERAGE $/BOE VALUE

BASED ON RESERVE CATEGORY

Low High (58 Respondents)

$12.74 $25.66 Overall w/o Reserve Category (50 responses)

$16.52 $25.56 Proved Developed Reserves (39 responses)

$8.79 $15.94 Proved Non-Producing Reserves (33 responses)

$2.07 $5.97 Probable Reserves (31 responses)

$0.65 $2.23 Possible Reserves (31 responses)

Table 19: Average $/BOE value based on reserve category

39
APPENDICES

40
 Appendix I: Range of uncertainty surrounding crude oil and natural gas price projections

Appendix I: Ranges of uncertainty surrounding crude oil and natural gas price projections
The following charts show, by affiliation the outlook for crude oil and natural gas prices presented in
Price Projections and Escalations section of this report with along with curves showing the 80%
confidence limits associated with each projection.

Oil Price Forecast: Composite Natural Gas Price Forecast: Composite

Average & 80% Confidence Interval Average & 80% Confidence Interval

140.00 12.00
120.00 10.00

$/mmbtu
8.00
100.00
$/bbl

6.00
80.00
4.00
60.00 2.00
40.00 0.00
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Oil Price Forecast: Producers Natural Gas Forecast: Producers
Average & 80% Confidence Interval Average & 80% Confidence Interval

140.00 12.00
120.00 10.00
$/mmbtu

8.00
100.00
$/bbl

6.00
80.00
4.00
60.00 2.00
40.00 0.00
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Oil Price Forecast: Consultants Natural Gas Price Forecast: Consultants
Average & 80% Confidence Interval Average & 80% Confidence Interval

140.00 12.00
120.00 10.00
$/mmbtu

8.00
100.00
$/bbl

6.00
80.00
4.00
60.00 2.00
40.00 0.00
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41
 Appendix I: Range of uncertainty surrounding crude oil and natural gas price projections

Oil Price Forecast: Bankers Natural Gas Price Forecast: Bankers

Average & 80% Confidence Interval Average & 80% Confidence Interval

140.00 12.00
120.00 10.00

$/mmbtu
8.00
100.00
$/bbl

6.00
80.00
4.00
60.00 2.00
40.00 0.00
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Oil Price Forecast: Private Equity Natural Gas Price Forecast: Private Equity
Average & 80% Confidence Interval Average & 80% Confidence Interval

140.00 12.00
120.00 10.00

$/mmbtu
8.00
100.00
$/bbl

6.00
80.00
4.00
60.00 2.00
40.00 0.00
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Oil Price Forecast: Other Natural Gas Price Forecast: Other
Average & 80% Confidence Interval Average & 80% Confidence Interval

140.00 12.00
120.00 10.00
$/mmbtu

8.00
100.00
$/bbl

6.00
80.00
4.00
60.00 2.00
40.00 0.00
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42
 Appendix I: Range of uncertainty surrounding crude oil and natural gas price projections

Appendix II: Survey Questionnaire

TWENTY-EIGHTH ANNUAL
SOCIETY OF PETROLEUM EVALUATION ENGINEERS'
SURVEY OF PARAMETERS USED IN PROPERTY EVALUATION©
APRIL 2009

COVER SHEET: TO BE REMOVED BY NON-TECHNICAL PERSONNEL

COVER SHEET TO BE REMOVED BY NON-TECHNICAL PERSONNEL BEFORE DELIVERY TO PARAMETER SURVEY

COMMITTEE

You may either complete and return this survey form or you may complete the online
version of the survey by following the instructions you receive via email.

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©
Copyright 2009: Society of Petroleum Evaluation Engineers, all rights reserved

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 Appendix I: Range of uncertainty surrounding crude oil and natural gas price projections
TWENTY-EIGHTH ANNUAL
SOCIETY OF PETROLEUM EVALUATION ENGINEERS'
SURVEY OF PARAMETERS USED IN PROPERTY EVALUATION©
APRIL 2009

PART I: GENERAL INFORMATION

1. Respondent affiliation?

a. ____ Producer
b. ____ Consultant
c. ____ Banker
d. ____ Private Equity
e. ____ Other

2. No. of company employees involved in oil & gas activities?

a. ____ 5 or less.
b. ____ 6 - 30.
c. ____ 31 - 100.
d. ____ More than 100.

3. Are you an SPEE Member?

a. ____ Yes.
b. ____ No.

4. In how many surveys have you participated in the past? ____.

(Enter zero if this is your first survey)

Copyright 2009: Society of Petroleum Evaluation Engineers, all rights reserved. The Society of Petroleum Evaluation
Engineers maintains rights to all prior versions and compilations of its Survey of Economic Parameters Used in Property
Evaluation, whether or not specifically noted.

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 Appendix I: Range of uncertainty surrounding crude oil and natural gas price projections

PART II : PRICE AND COST FORECASTS

5. Projected Oil & Gas Prices for 2009:

a. State your projected average oil price for 2009:_ _ _ _ _ _ _ _ _ _ _ ___________ $/STB
b. State the basis for your 2009 oil price (Nymex, spot, posted, combination):____________
c. Using what crude type as a reference (WTI, Brent, Arabian Light, etc.) _______________
d. State your projected average gas price for 2009:_ _ _ _ _ _ _ _ _ _ ________ $/MMBTU
e. State the basis for your 2009 gas price (Nymex, spot, posted, combination):__________.
f. Were your 2009 prices influenced by inflation? ____No. _____Yes.

6. Price and Expense Projection Table

(Please enter all price figures in nominal terms, i.e. the prices which are expected to actually prevail
during the year for which they are entered.)

Operating Drilling
Nominal Nominal Inflation
Expense Cost
Year Oil Price Gas Price CPI
Escalation Escalation
($/STB) ($/mmbtu) %
% %
2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

7. Are your projections presented in Questions 5 and 6 above based on:

(Select only one. If your projections are based on a combination of the following answers, select
“Personal opinion”.)

a. ____ Personal opinion?

b ____ Client policy?
c. ____ Company policy?

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 Appendix I: Range of uncertainty surrounding crude oil and natural gas price projections

PART III: RESERVE ESTIMATING

8. Do you ever use a probabilistic approach in your valuations?

_____ Yes.
_____ No.

9. If the answer to Question 8 is “yes”:

a. In what percent of the reserve studies that you performed last year did you use a
probabilistic approach? _________%.
b. The probabilistic approach was used to evaluate hydrocarbon reserves in the following
regions (check applicable items):

1. _____ U.S.A.
2. _____ Outside the U.S.A.
3. Specify Countries or Regions if possible: _____________________________________
___________________________________________________________________

c. In what stage of field or reservoir life was the probabilistic approach most commonly used?

1. _____ Pre-drill.
2. _____ Early stages of production.
3. _____ Middle stages of production.
4. _____ Later stages of production.

d. When you use the probabilistic approach, do you compare the results with deterministic
methods?
_____ Yes.
_____ No.

PETROLEUM RESOURCES MANAGEMENT SYSTEM (PRMS)

In 2007, a Petroleum Resources Management System sponsored by the Society of Petroleum Engineers and jointly sponsored by the
World Petroleum Council, the American Association of Petroleum Geologists, and the Society of Petroleum Evaluation Engineers was
approved by the sponsoring organizations. This “Project-Based” system seeks to classify resources based on a project’s chance of
commerciality as categorized by recoverable uncertainty using the evaluator’s forecast of future conditions. It applies to both
conventional and unconventional reserves. The following questions address the level of awareness, and the stage of adoption of this
system.

10. Which of the following best describes my understanding of the SPE-PRMS?

a.____ I am aware of SPE-PRMS and have a good understanding of the system.
b.____ I am aware of SPE-PRMS, but have only a basic understanding.
c.____ I am aware of SPE-PRMS, but haven’t reviewed it.
d.____ I am not aware of SPE-PRMS. Prior to this survey I hadn’t heard of it.

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 Appendix I: Range of uncertainty surrounding crude oil and natural gas price projections

11. Which of the following best describes the present state of adoption of the SPE-PRMS within my
or my client’s organization?
a.____ High degree of adoption: The SPE-PRMS is used to classify most of our resources
and is used as our primary basis for non-regulatory resource tracking.
b.____ Moderate degree of adoption: Although our present reserves classification system is
not SPE-PRMS, we frequently use it as a tool to describe and characterize resources.
c. ____ Low degree of adoption: The SPE-PRMS is not used to any significant degree, but
there is a plan to adopt all or a portion of it being developed.
d.____ Not adopting. The SPE-PRMS is not used to any significant degree; no plans are
being made to adopt it at present.

12. In 2008, the SEC issued Release Nos. 33-8995; 34-59192; FR-78; File No. S7-15-08
MODERNIZATION OF OIL AND GAS REPORTING. Please circle the letter
(High/Medium/Low) that you feel describes the impact the new SEC rules will have on your
reserve assessments.
Item Impact
a. Change in offset spacing bookings to include wells beyond one offset ........ H M L
b. Disclosure of reserves categories other than proved.................................... H M L
c. Use of technologies other than flow tests ..................................................... H M L
d. Bookings related to contacts (e.g. below lowest known oil) .......................... H M L
e. Other (Please specify) ___________________________________ ........ H M L

13. Does the Respondent prepare or work closely with estimates of acquisition price, fair market
value or loan value for oil and gas properties?

a. _____ Yes.
b. _____ No.

IF YOU ANSWERED “YES” TO QUESTION 13, PLEASE

CONTINUE WITH THE REMAINDER OF THIS SURVEY.

IF YOU ANSWERED “NO”, YOU MAY PROCEED TO

QUESTIONS 38 AND 39. AFTER COMPLETION, PLEASE
RETURN YOUR SURVEY RESPONSES TO THE ADDRESS
OR FAX NUMBER SHOWN AT THE END OF THE SURVEY

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 Appendix I: Range of uncertainty surrounding crude oil and natural gas price projections

PART IV: RECENT VALUATION EXPERIENCE

14. The total property values for which the Respondent (or company) prepared estimates of
acquisition price, fair market value or loan value over the past 12 months.

a. _____ Less than $1 million.

b. _____ $1 million to $10 million.
c. _____ $10 million to $100 million.
d. _____ $100 million to $250 million.
e. _____ $250 million to $500 million.
f. _____ $500 million to $1 billion.
g. _____ Over $1 billion.

15. Of the property valued, which type of property was most frequently valued?
a._____ Operated working interest.
b._____ Non-operated working interest.
c._____ Royalty interest.
d._____ Other / this information is not tracked.

16. How would you rate the success of your company or clients in making acquisitions based on
your analysis and/or advice?

a. ____ Usually successful in acquiring properties.

b. ____ Sometimes successful in acquiring properties.
c. ____ Seldom successful in acquiring properties.
d. ____ Other.

17. If you answered Question 14:

a. What is the range of $/BOE values used in your transactions or calculated after your
transactions?
1. _______ to _______ Overall (without distinction to reserve category).
2. _______ to _______ For Proved Developed Producing reserves.
3. _______ to _______ For Proved Non-Producing reserves.
4. _______ to _______ For Probable reserves.
5. _______ to _______ For Possible reserves.
b. How did you convert gas mcf to equivalent barrels of oil?

1. _____ Based on BTU equivalence. Using what equivalence factor _______ Mcf/Bbl?
2. _____ Based on price equivalence.

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 Appendix I: Range of uncertainty surrounding crude oil and natural gas price projections

PART V: EVALUATION CRITERIA

DEFINITIONS
Note: In an attempt to provide consistency in the survey responses, definitions are provided. The Society of Petroleum Evaluation
Engineers (SPEE) does not endorse or adopt these definitions for any purpose and no representations concerning the accuracy of the
definitions are made by SPEE by the inclusion of definitions herein.

18. Respondent's most commonly used method for determining value of oil and gas properties is:
(Select only one.)

a. _____ Discounted Cash Flow

b. _____ Multiple of Monthly Cash Flow.
c. _____ Return on Investment
d. _____ $ / BOE.
e. _____ P/I (Profit-To-Investment Ratio)
f. _____ Payout.
g. _____ Comparable sales.
h. _____ Other

19. Other than method indicated in Question 18, identify additional methods that you utilize, if any.
(Check all that apply)
a. _____ Discounted Cash Flow.
b. _____ Multiple of Monthly Cash Flow.
c. _____ Return on Investment
d. _____ $ / BOE.
e. _____ P/I
f. _____ Payout.
g. _____ Comparable sales.
h. _____ Other

20. You provided price projections in Part II to demonstrate your predictions of future oil and gas
prices. Is the pricing scenario that you presented in Part II the same pricing scenario that you
usually incorporate into your cash flow models for assessing acquisition price and value?

a. ____ Yes.
b. ____ No. I usually use a constant price model in determining acquisition price.
c. ____ No. I usually use company policy for determining acquisition price or value.
d. ____ No. I usually use client defined criteria for determining acquisition price or value.
e. ____ No. I usually use probabilistic price distributions.

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 Appendix I: Range of uncertainty surrounding crude oil and natural gas price projections

21. Do the prices you incorporate into your cash flow models for assessing acquisition price and
value include the results of hedging programs (e.g. collars, swaps, etc.)?
a.____ Yes
b.____ No

22. If you answered “Yes” to question 21, how do you incorporate these into your cash flow models?
a.____ Use hedged pricing alone
b.____ Use weighted average of hedged and bank pricing
c.____ Use weighed average of hedged and internal client/company price forecast
d.____ Other: (Please specify)________________________________________

Definitions:
Risk Adjusted Discount Rate
The yield rate used when evaluating the acquisition price or value of an oil/gas asset. This factor should include a
consideration for the cost of capital, a profit or expected rate of return for the buyer and any risk/uncertainty that the
evaluator may choose to impute to the asset. Because the “Risk Adjusted Discount Rate” includes a profit for the buyer, it is
expected that it will be larger than the “Discount Rate”. Some evaluators allow reserve risk to influence their assessment of
this discount rate; others do not, choosing instead to handle reserve risk exclusively with “Reserve Adjustment Factors”
(defined below).
Reserve Adjustment Factor
The factors used to downward adjust reserves for risk by reserve status and category, generally expressed as a %. Some
evaluators apply the factor to the estimated reserve volume (STB or Mcf) in order to arrive at a risk adjusted reserve volume
before performing the cash flow analysis. Other evaluators perform the cash flow analysis before risk adjusting the reserves
and only thereafter apply the “Reserve Adjustment Factor” to the cash flows ($) for each reserve category. (There are
questions below to explore the percentage of evaluators that use each approach to adjust acquisition price and value for
reserve risk.) NOTE FOR BANKERS: This is NOT the advance rate, but the adjustment that will allow the same advance
rate to be used for all categories of reserves.

23. How do you adjust your cash flow models to account for reserve risk?

a. ____ I handle reserve risk exclusively within the “Risk Adjusted Discount Rate” (see definition
above). DO NOT ANSWER #24, #25 and #26, IF YOU CHECKED THIS BOX.

b. ____ I only use “Reserve Adjustment Factors” (see definition above).

c. ____ I use “Reserve Adjustment Factors”, but then I make an additional correction in the “Risk
Adjusted Discount Rate”.

24. If you use “Reserve Adjustment Factors”, please provide the factors you use by reserve
category.
PROVED RESERVES PROBABLE RESERVES Possible Reserves

_______% Producing _______% Producing _______% Producing

_______% Shut-in _______% Shut-in _______% Shut-in

_______% Behind Pipe _______% Behind Pipe _______% Behind Pipe

_______% Undeveloped _______% Undeveloped _______% Undeveloped

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 Appendix I: Range of uncertainty surrounding crude oil and natural gas price projections

25. Explain how you typically apply the “Reserve Adjustment Factors” as reported above?

a. ____ To reserve volumes (STB or MCF) before performing the cash flow analysis.
b. ____ To the discounted cash flow ($) after performing a cash flow analysis for each reserve
category using un-risked reserves.
c. ____ Other

26. If you answered "a" to Question 25:

a. How do you schedule the production in your cash flow analysis to reflect the risk-adjusted
reserve volume?
1. _____ Leave the initial rate the same and increase the decline rate.
2. _____ Lower the initial rate and leave the decline rate the same.
3. _____ Change the number of projected wells.

b. If you answered “1" or “2" in 26(a), do you:

1. _____ Leave expenses, capital investments and abandonment costs unchanged from
the cash flow projection before applying the “Reserve Adjustment Factor”.

2. _____ Use the same “Reserve Adjustment Factors” to adjust expenses, capital
investments and abandonment costs.

3. _____ Use professional judgment to make new estimates for expenses, capital
investments and abandonment costs.

Definition:
Discount Rate
The “Discount Rate” for this section is the yield rate used to determine the present value of a future cash flow based solely
on the cost of capital.

27. ______ % is the “Discount Rate”. (Please use definition above)

28. The Discount Rate I use is calculated on the following basis:

a. ___ Pre-tax
b. ___ After-tax

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 Appendix I: Range of uncertainty surrounding crude oil and natural gas price projections

29. How did you arrive at the “Discount Rate” that you identified in your response to Question 27
above? (If the “Discount Rate” is typically provided by a client(s), try to reflect method used by client(s).)

a. _____ Cost of equity

b. ___ Pre-tax cost of debt
c. ___ After-tax cost of debt
d. ___ Separately assess cost of debt and cost of equity and then blend those costs with
an appropriate weighting.
1. Cost of debt included this calculation is on a
____ Pre-tax basis
____ After-tax basis
e. ___ Based exclusively on the prime lending rate.
f. ___ Based on the prime lending rate and adjusted based on judgment.
g. ___ Based on financial indices other than the prime lending rate.
Specify which financial indices. _______________________________________
_________________________________________________________________
h. ___ Based strictly on professional judgment.
i. ___ Based on the results of past SPEE surveys.
j. ___ Provided by clients whose approaches are too divergent to summarize.
k. ___ Other considerations. (Please specify) __________________________________

Definition:
Borrowing Rate
Cost of debt component of company’s/client’s overall cost of capital.

30. _____ % is the average “Borrowing Rate” (as that term is defined above) of Respondent or
Respondent’s clients. (Question useful in conjunction with response to Question 27 to identify, on average, how
much of a company’s/client’s cost of capital is based on cost of debt.)

31. _____ In what percent of the transactions in which you were involved or evaluated did the
acquiring company use debt as a means of financing acquisitions?

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 Appendix I: Range of uncertainty surrounding crude oil and natural gas price projections

32. Where a debt component was incorporated into the financing of acquisitions in which you were
involved last year, what were the primary sources of debt financing used last year?

a. _____Commercial bank debt.

b. _____Mezzanine financing.
c. _____Seller financing.
d. _____Equity Partnership.
e. _____Other.

33. a. _____ % is the “Risk Adjusted Discount Rate”. (Only include reserve risk in the factor if
that is your normal evaluation practice.)

b. ____ If your answer in Question 33(a) is an average, what is the range? ____ % to ___ %.

34. The component parts of Respondent's choice of “Risk Adjusted Discount Rate” are influenced
by: (Choose as many as are appropriate in your experience.)

a. ____ Profit.
b. ____ Reserve Risk (for those evaluators who include reserve risk within the “Risk Adjusted Discount Rate”).
c. ____ Price Uncertainty.
d. ____ Expense Uncertainty.
e. ____ Unidentified Reserve Potential.
f. ____ Mechanical Risk.
g. ____ Political/Regulatory Uncertainty.
h. ____ Other.

35. The “Risk Adjusted Discount Rate” is applied to cash flow projections which are estimated:

a. ____ Before federal income tax.

b. ____ After federal income tax.

36. Regardless whether you adjust the acquisition price or value for reserve risk using the “Risk
Adjusted Discount Rate”, the “Reserve Adjustment Factors”, or both, do you decrease the “Risk
Adjusted Discount Rate” for unidentified reserve potential?

a. _____ Yes. c. _____ Usually.

b. _____ No. d. _____ Sometimes.

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 Appendix I: Range of uncertainty surrounding crude oil and natural gas price projections

37. Which statement best describes your approach to “profit” or “value creation” when acquiring oil
and gas properties?

a. _____ I rely solely on Risk Adjusted Discount Rate and/or Reserve Adjustment Factors
b. _____ I rely on a conservative view of production and reserves, but discount cash flows
at the Discount Rate (cost of capital)
c. _____ I rely on a subsequent sale of the asset in my valuation
d. _____ I rely on a conservative price forecast
e. _____ I don’t provide valuations for the purchase of oil and gas properties
f. _____ Other: _________________________________________________

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 Appendix I: Range of uncertainty surrounding crude oil and natural gas price projections

PART VI: GENERAL QUESTIONS

38. How many minutes did it take to complete this survey? ______________________________.

39. What might we do to improve this survey?

______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

Please return to: SPEE Survey FAX: 432-688-6009

3300 North “A” Street
Building 6-100
Midland, Texas 79705-5495

CONTACT B. K. BUONGIORNO AT THE SPEE OFFICE +1 (713) 651-1639 FOR INFORMATION ABOUT SURVEY RESULTS.

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