Engineering Appraisals

CARTER, D.V., MEMBER AIME, PETROLEUM CONSULTANT, DALLAS, TEX.

Editor's Note: D. V. Carter, Dallas petroleum consultant, submitted the following short report to the SPE Board of Directors last fall in fulfillment of his duties as chairman of a special SPE Committee appointed in Sept., 1965, to study the feasibility of developing a Society-recommended format for petroleum engineering valuation reports. The dual assignment of the Committee was as follows. (1) To develop an evaluation format suitable for the bulk of evaluations, whether or not third parties are involved, for the purposes of: financing the purchase of oil and gas properties which are wholly or partially proved; financing installation of some method of improved recovery; borrowing money; or any other purpose such as estate valuations, trading of properties or merger purposes, as well as field-wide unit or reservoir unitization or relatively simple drilling unit evaluations with the objective of achieving acceptable equities to all interested parties concerned. (2) To write a "Code of Ethics" or a list of admonishments which might be called the "Ten Commandments" to guide the valuation. Serving with Carter on the Committee were Tom G. Calhoun, II, Pete W. Cawthon, Jr., R. J. Dobson, C. R. Dodson, Robert B. Gilmore and Harold Vance.

Standard Impractical

The type of work performed by an appraisal engineer for a client is determined by the requirements of the client and by the possible requirements of third parties to whom the client or his successors may make the results available. The client's requirements may range from verbal discussion through a summary letter to a formal report, or may involve merely having a representative of a financial institution examine the appraiser's work data. Requirements of third parties, whether financial institutions or potential buyers, may be and frequently are different from those of the client who pays for the investigation. It seems impractical to recommend that an appraiser furnish more detailed information than a client is willing to pay for unless the absence of such detail could be construed to be misleading to a user of the appraiser's work who is reasonably sophisticated in methods of estimating reserves and evaluating properties. The Committee believes it would be presumptious to recommend the adoption of any format or even scope of formats to cover the spectrum of conditions giving rise to the desirability of an engineering appraisal in terms of oil and gas reserves or dollars. For the convenience of those who would seek a model, a possible format is included with the report of this committee (see Table 1 and Fig. 1). This committee does not approbate this model with such terminology as "standardized", "accepted", or "recommended" for the obvious reason that no format or series of formats can cover all of the circumstances in an appraiser-client relationship and certainly not in the more complex appraiser-client-third party relationship.

Code of Ethics

However, it does appear appropriate to prepare a partial list of steps which can be taken to prevent the misuse of an appraisal engineer's work.

1. The appraiser is entitled to know the use to which his work will be put and to amplify or qualify his work so as to make it appropriate to that usage. Obviously a report to secure a loan of a fraction of the value of the properties will not require the detail of a report which has for its purpose the formation of a basis for the sale of the properties.

2. An appraisal engineer will not undertake to prepare at his client's request a report which is based upon one method of reserve estimating when alternate methods available to him may provide a more accurate appraisal. Examples: Sole reliance on volumetric calculations when performance calculations are possible; use of projections including harmonic or hyperbolic declines when performance or analogy suggests exponential decline.

3. Where there are valid alternate methods of computing reserves and the results of these methods are significantly different, reasons should be given for the choice of method. An appraiser should not be required to accept as a starting point interpretative work furnished by his client, but may accept such work either partially or wholly, provided he is satisfied that such acceptance will not result in conclusions which will be misleading or substantially different than if the appraiser had made (or caused to be made) an independent investigation.

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