Abstract: Limiting the Upfront Costs of Acquiring Reserves

David A. Wood

For companies with limited equity resources wishing to buy oil or gas reserves a combination of purchase price hedging and commodity price hedging can (1) increase their purchasing power (i.e., reserves/dollar paid); (2) limit their downside risks to future performance of the asset purchased; (3) optimize the value of bank debt that can be raised on the asset being purchased.

The scope of hedging arrangements and the willingness of buyers, sellers and lenders to participate in them will depend upon the prevailing markets. There can be significant advantages for all three parties to undertake agreements with hedging components. Detailed evaluation of project and loan values of an asset or company purchase is required to identify the suitable hedging alternatives for a specific acquisition. Independent estimates of current proven and probable reserves and forecasts of capital and operating costs throughout the expected commercial life of the assets are also required.

In order to finalize purchase agreements involving project finance, a number of independent studies or audits are required to satisfy-all parties involved. These include: (1) engineering (reserves, production costs); (2) accounts (of assets and/or company); (3) tax and fiscal liabilities (including optimizing use of existing losses); (4) staff/employment liabilities; (S) contracts (legal title, pending litigation); (6) environmental (previous compliance with legislation, impact of any pending legislation). The cost of these audits together with legal documentation of purchase and loan agreements can be prohibitive and do not necessarily vary in proportion to the size of the assets being purchased.

AAPG Search and Discovery Article #90986©1994 AAPG Annual Convention, Denver, Colorado, June 12-15, 1994