2008 Ryder Scott Reserves Conference Evaluation Challenges in a Changing World “When the Year End Price ISN’T the Year End Price” Things You Need to Know…… IF the Rules Don’t Change Fred W. Ziehe – Managing Sr. VP, Ryder Scott Company
SEC DEFINES YEAR END PRICE The CURRENT SEC pricing guidelines state that the correct price to use is the one “… under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made.” Additional clarification indicates this price is: what you would have received IF you had marketed your production on your effective date, ………i.e., 12/31 for year end reports 1 "What's the Right Price?"
2 Is this price likely to be one you would ever see on "What's the Right Price?" your revenue statements? SEC YEAR END PRICE
3 NOT LIKELY!!!!! "What's the Right Price?" SEC YEAR END PRICE
SEC YEAR END PRICE So where do you get the year end prices??? How do you know if you have the RIGHT ONES??? First, it’s important to understand how Gas and Oil prices are reported………… 4 "What's the Right Price?"
Price Benchmarks Prices are generally referenced against familiar PRICE BENCHMARKS… WTI at Cushing Oklahoma for OIL Henry Hub, Louisiana for GAS HOWEVER, these physical locations are ALSO used as the reference locations for NYMEX FUTURES prices. This has caused a lot of CONFUSION ….. 5 "What's the Right Price?"
Price Benchmarks SEC has stated that NYMEX FUTURES prices are NOT to be used for SEC reporting purposes. FUTURES GAS price reported on 12/31 is actually a Settlement price for February deliveries……clearly NOT the intent of the SEC So what other 12/31 prices are there? 6 "What's the Right Price?"
Gas Price Benchmarks GAS is also reported as a SPOT (Cash Market) price. GAS SPOT (Cash Market) prices reported for DELIVERIES TO numerous HUBS in US/CANADA ... Henry Hub, Louisiana Houston Ship Channel Colorado Interstate Gas, Rockies AECO, Canada …..etc 7 "What's the Right Price?"
Gas Price Benchmarks The 12/31 SPOT gas price is NOT the same as the NYMEX FUTURES price. So how does SPOT market pricing work??? Where do you find these SPOT prices??? Which Benchmark Hub should I reference??? 8 "What's the Right Price?"
9 JUST TELL ME WHICH ONE TO USE!!!!! "What's the Right Price?" SEC Year End Prices
Gas SPOT Market Prices GAS is priced one day in advance on the SPOT Market In general, Gas delivered on 12/31 is actually sold at a price determined on 12/30. The price determined on the “Transaction Date” (12/30) sets the price for gas sold on the “Flow Date” (12/31). For SEC reports, use the price determined on the 12/30 Transaction date for gas produced on 12/31 Flow Date. 10 "What's the Right Price?"
Gas SPOT Market Prices EXCEPTIONS to the general rule……… SPOT Markets are closed during the weekends and holidays Market Traders do NOT allow the same Transaction Date price to apply to the last day of the month AND to the first day of the next month. 11 "What's the Right Price?"
Gas SPOT Market Prices If 12/31 is a Sunday and Henry Hub Monday, 1/1 is a holiday… Transaction Date Flow Date Price Then Thursday’s Transaction Thurs 12/28/2006 Fri 12/29/2006 $5.62 Date price (12/28) applies to Fri 12/29/2006 Sat 12/30/2006 $5.62 FLOWS on Friday, Saturday, and Sunday Sat 12/30/2006 Sun 12/31/2006 $5.62 AND Sun 12/31/2006 Mon 1/1/2007 $5.52 Friday’s Transaction Date price Mon 1/1/2007 Tues 1/2/2007 $5.52 (12/29) applies to FLOWS on Monday (1/1) and also Tuesday (1/2) Tues 1/2/2007 Wed 1/3/2007 $5.39 12 "What's the Right Price?"
Gas SPOT Market Prices If 12/31 is a Monday AND a Henry Hub Transaction Date Flow Date Price holiday and Tuesday, 1/1 is a holiday… Thurs 12/27/2007 Fri 12/28/2007 $6.79 Then Thursday’s Transaction Fri 12/28/2007 Sat 12/29/2007 $6.79 Date price (12/27) applies to Sat 12/29/2007 Sun 12/30/2007 $6.79 FLOWS on Friday, Saturday, Sunday, AND Monday Sun 12/30/2007 Mon 12/31/2007 $6.79 AND Mon 12/31/2007 Tues 1/1/2008 $7.16 Friday’s Transaction Date price Tues 1/1/2008 Wed 1/2/2008 $7.16 (12/28) applies to FLOWS on Tuesday (1/1) and also Wednesday (1/2) Wed 1/2/2008 Thurs 1/3/2008 $7.81 13 "What's the Right Price?"
14 "What's the Right Price?" Gas SPOT Market Prices
Gas SPOT Market Prices Gas SPOT prices generally reported in media are the Transaction Date prices….and easily confused with being Flow Date prices. 15 "What's the Right Price?"
Gas SPOT Market Prices So where do you get the year end GAS prices??? How do you know if you have the RIGHT ONES??? 16 "What's the Right Price?"
Oil Benchmark Prices Before I answer that…..What about OIL prices? 17 "What's the Right Price?"
Oil SPOT Market Prices For OIL there are several different benchmarks to consider: 1) WTI SPOT (Cash Market) are prices for deliveries to Cushing, Oklahoma (of WTI grade crude) The SPOT market prices change DAILY….so if you sell your crude on the SPOT, your price changes DAILY….not really rocket science… 18 "What's the Right Price?"
Oil SPOT Market Prices The OIL SPOT price IS RELATED to the NYMEX FUTURES price The 12/31 OIL SPOT serves as the CASH MARKET price for deliveries to Cushing, Oklahoma on that day AND Also serves as the FUTURES PRICE for February deliveries. 19 "What's the Right Price?"
Published Oil Prices Until recently, the OIL price usually referenced in the papers was the “NYMEX price”....not really clear as to what it was. Currently, the Houston Chronicle presents: ENERGY PRICES (“Cash price paid at delivery for various commodities”) AND ENERGY FUTURES ( “Prices for energy commodities for the contract closest to delivery” i.e., generally 2 months out) 20 "What's the Right Price?"
21 "What's the Right Price?" Published Oil Prices
Oil SPOT Market Prices Another consistent reference for WTI SPOT MARKET OIL prices is located on the EIA website The “Source” for these prices is stated to be from the Wall Street Journal. For Brent Prices, another EIA website quotes prices from Reuter’s 22 "What's the Right Price?"
23 "What's the Right Price?" Oil SPOT Market Prices
POSTED OIL Prices 2) OIL PRICE POSTINGS…..such as from Plains Marketing, LP, show their POSTED prices on their websites Some companies sell based on “POSTINGS PLUS”,… meaning they get the POSTED Price Plus an Adjustment. This adjustment is fairly complicated to explain, but is based in part on what the Futures are trading for. 24 "What's the Right Price?"
POSTED OIL Prices The POSTED price is in effect until the Posting Companies change it….maybe a day or several days. The POSTED prices are quoted as “delivered prices” at numerous locations, subject to the gravity adjustment scale and other terms explained in their Posting Bulletin: WTI (Midland) North Louisiana California Heavy Crudes …etc 25 "What's the Right Price?"
26 "What's the Right Price?" POSTED OIL Prices
SPOT vs POSTED OIL Prices There is a good correlation between the SPOT CASH MARKET prices and the POSTED prices. One note……the SPOT CASH MARKET price is referenced at Cushing, Oklahoma and the POSTED price shown on the next slide is WTI in Midland, Texas. 27 "What's the Right Price?"
SPOT vs POSTED OIL Prices MONTHLY AVG PRICES OF PLAINS POSTING (MIDLAND) vs WTI CUSHING SPOT 2003 + DATA ONLY Points in "Green" are 2007+ data points y = 0.9937x - 2.9442 2 = 0.9997 R $120.00 $100.00 PLAINS WTI POSTINGS (MIDLAND) $80.00 $60.00 $40.00 $20.00 $0.00 $0.00 $20.00 $40.00 $60.00 $80.00 $100.00 $120.00 WTI CUSHING SPOT 28 "What's the Right Price?"
SPOT vs POSTED OIL Prices IN SUMMARY……………… It would be appropriate to use either the SPOT CASH MARKET price in effect on 12/31 OR The POSTED PRICE in effect on 12/31 for SEC reports 29 "What's the Right Price?"
OIL Price Differentials HOWEVER………. It is EXTREMELY IMPORTANT that differentials be applied to these benchmark prices based on CONSISTENT methods of comparing actual sales prices to the appropriate benchmarks. It is NOT APPROPRIATE to apply the differential of sales prices and POSTED prices to these benchmark SPOT prices or vice versa. 30 "What's the Right Price?"
OIL Price Benchmarks In addition, while there is a relationship between WTI and other crude prices, it is suggested that you use a benchmark price close to your type crude….such as heavy crude POSTINGS for determining your differentials 31 "What's the Right Price?"
SEC Year End Prices So where do you get the GAS & OIL YEAR END prices and how do you know if you have the RIGHT ONES??? 32 "What's the Right Price?"
33 One way is to call your RYDER SCOTT engineer "What's the Right Price?" OR SEC Year End Prices
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