Due Diligence Responsibilities of the Professional Geologist

HOBBS, G. WARFIELD, Ammonite Resources, New Canaan, CT

Whether in the role of independent consultant or company employee, a geologist has certain professional obligations in the evaluation of an oil and gas submittal from a third party. "Due diligence" is the term used to describe the analysis of an investment opportunity.

Due diligence involves a multidisciplinary examination of both the technical and business aspects of a submittal. As experienced geologists we should be familiar with basic technical review parameters. However, at a time when budgets are limited and there is a general disdain for the petroleum industry by outside investors, the geologist should provide more than a simple geological analysis if he is to successfully recommend a prospect to management or advise a client about a submittal.

In addition to the obvious geological considerations, prospect evaluations should include relevant details about the specific technical documentation reviewed, information sources, and how the data were verified. Full disclosure of ownership, technical risks, and negative aspects of the prospect should be included along with the positive elements.

After the geological analysis is completed, the economic merits of the prospect should be analyzed, incorporating all lease burdens and terms of participation into the calculations. Estimated exploration, development, and operating costs, together with projected annual production, cash flow, and reserves must be examined as to their reasonableness. Computer-generated sensitivities should be run for different oil and gas pricing and reserve recovery scenarios. Downside, expected, and upside cases are useful.

Finally, the due diligence review should include a thorough check on the reputation, financial condition, technical and managerial expertise, and prior track record of the operator. Bank, trade, legal, and prior partner references should be contacted.

The successful professional geologist in today's competitive world must have multidisciplinary skills. A solid background in geology and geophysics, a basic understanding of the principles of petroleum engineering and economics, and the wits of a private eye are needed for good due diligence work. Investment confidence depends on the ability of the geologist to thoroughly evaluate the submittal, uncover all technical and business risks, draw firm conclusions, and make clear-cut recommendations.

AAPG Search and Discovery Article #91004 © 1991 AAPG Annual Convention Dallas, Texas, April 7-10, 1991 (2009)