Valuation of Crude Oil and Gas Reserves

35 Pages Posted: 3 Dec 2011

See all articles by Richard A. Heaney

Richard A. Heaney

University of Western Australia

Bruce D. Grundy

University of Melbourne

Date Written: November 30, 2011


The valuation of crude oil and gas reserves is a critical step in pricing crude oil and gas producing firms. This is of interest both to academics and practitioners who are called upon to value these firms. It is also of interest to regulators, particularly in their oversight of mergers and acquisitions and the issue of securities to the public. Our results reject the notion that the market value of crude oil and gas per unit of reserves varies one-to-one with the current price, net of extraction costs (Hotelling model). Crude oil and gas reserve pricing is more complex in practise with both production rate and the proportion of developed proven reserves playing a role in valuation. We use fixed effects panel methods in analysis of data provided by IHS Herold Inc, which comprises 409 crude oil and gas producers (3303 firm-years) over an 18-year period from 1992 to 2008. We find no evidence to support the Hotelling model prediction of a one-to-one relation between the market value of crude oil per unit of reserves and the price of these reserves, net of extraction costs. There is evidence of time variation in this pricing relationship, with the relation being correlated with extraction rate. Further, there is evidence that the proportion of proven reserves that are developed is positively correlated with the market value of reserves. The main implication to be drawn from this study is that the valuation of crude oil and gas reserves requires more information than just reserve volume and spot price.

Keywords: crude oil pricing, Hotelling model, Adelman model

JEL Classification: G14

Suggested Citation

Heaney, Richard A. and Grundy, Bruce D., Valuation of Crude Oil and Gas Reserves (November 30, 2011). Available at SSRN: or

Richard A. Heaney (Contact Author)

University of Western Australia ( email )

Perth, Western Australia 6009
0414700799 (Phone)

Bruce D. Grundy

University of Melbourne ( email )

Faculty of Economics & Commerce
Department of Finance
Victoria, 3010
+61 3 8344 9083 (Phone)
+61 3 8344 6914 (Fax)

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