What's in a BOE?
I was recently asked the question "what's in a BOE?" At first this seems like a fairly straight forward question-- a BOE is a barrel of oil equivalent. So exactly what is a barrel of oil equivalent to? Most oil and gas evaluators would tell you a barrel of oil equivalent is equal to one (1) barrel of crude oil or six thousand cubic feet (6 MCF) of natural gas, and If you press further they will tell you this is based on the equivalent heating value of oil and gas.
According to the DOE one barrel of crude oil has the heating capacity of approximately 5,800,000 BTU, and one standard cubic foot of gas contains about 1,028 BTU. If you do the math you'll see this means it takes 5.642 MCF of natural gas to equal a barrel of crude oil. This may not seem too far off since 5.642 rounds up to 6, but it represents a 6.3% discrepancy which could be significant when dealing with millions of barrels. The definitions section of the Petroleum Resource Management System (PRMS), which forms the basis for the new SEC reserve reporting guidelines, recognizes the conversion factor commonly used ranges from 5.6 to 6. In fact a quick search around the internet found BOE conversions ranging from 5.487 to 6, this represents a 9.3% variation!
But why are we concerned about BTU equivalence anyway? Oil and gas haven't traded anywhere near 5.5 or 6 to 1 for years. In a perfect world maybe we would buy our fuel based on its underlying utility, after all that's why we are buying it, and we might even buy our food on the same basis, it's a type of fuel too. I did a little research (very little) and put together the following table showing the relative cost for various items based on their BTU value.
Two things jump out at me from this table: First, we don't buy and sell things simply based on their heating value, and second, oil and gas are a pretty good deal. This comparison isn't really fair since potatoes don't compete with natural gas for fueling a power plant, at least not yet, and I don't know anyone who willingly eats oil. There are a number of factors that go into the relative 'value' of oil and gas including supply and demand, and the versatility of the products as both a fuel and a feedstock.
Currently oil is trading around $80 per barrel and natural gas is around $4 per MCF, this represents a "value conversion factor" of 20 MCF per BOE. This is higher than it's been in a while reflecting the "depressed" gas market and recovering oil market. The simple fact that the oil and gas markets do not track each other very well gives rise to this ever changing value conversion factor, and this is no doubt why companies have resorted to the more stable BTU conversion methodology, even though there is a fairly wide range of BTU conversion factors being used.
So when buying and selling oil and gas assets we need to be very careful not to just rely on the total reserves reported in BOE. We need to understand that an oil BOE is more valuable than a gas BOE in today's market, and be sure we are not comparing apples to oranges-- which by the way have an amazingly similar value per BTU ($2100/MMBTU for the apple, and $2200/MMBTU for the orange).
