The Expectations of Oil Companies on Future Oil Prices: An Empirical Analysis of Reserves Trading

Abstract

This paper develops a methodology to assess the expectations of oil companies managers regarding future oil prices implied in the acquisition of reserves. The method is applied to a sample of farm-ins and farm-outs of developed onshore oil fields in the US from 1979 to 2004, where we make assumptions on expectations of oil production and decline over time. The main findings point out that the determinants of the purchase price of reserves has not changed significantly over these 25 years and that oil companies (or their managers) generally believe in a mean-reverting process for the price of oil in the process of bidding and accepting offers for reserves, which means that they expect the price of oil to increase when it is below historical average and to decrease when it is above average. We also find that major oil companies are either more conservative than independent firms in estimating future oil prices or strategically decide to focus mainly on large capital-intensive oil prospects.

Keywords: valuation, oil price forecasting, petroleum reserves

JEL Classification: G31, L71