BOE oil figures compared to BBL can be the difference between a profit and a loss
Knowing the difference between a barrel of oil (BBL) and a barrel of oil equivalent (BOE) can be very important when looking at the reserves and production potential of a field.
Imagine two identical exploration projects with exactly the same proven reserves of BOE… One could be wildly profitable, the other an economic disaster if the actual BBL and BOE numbers are too far apart. This is how important the difference is, and one that producers, accountants and investors need to know.
BBL, NGL & BOE oil implications
You might be a casual industry observer, a student, or perhaps a previously mentioned accountant looking at a topic you’re fully familiar with. This article will contain a series of Q&As that gradually become more technical, complex or controversial. To begin with we’ll define terms, then mention some industry standard statistics and measurements.
As you scroll down, the topics will get slightly more complex, and at the bottom of the page, there will be an opportunity to ask more questions. Hopefully some of you reading this will be at a higher level of understanding than the humble writer, and will be able to offer further insights…
How many gallons or litres of oil or BOE are in a barrel?
There are 42 gallons (USA) / 35 gallons (UK) of oil in a barrel. This is equal to 159 litres. Natural gas reserves are measured in per thousand cubic feet (MCF). 6000 cubic feet (6MCF) has the same energy potential as a barrel of oil, so 6 MCF is a BOE equivalent of 1 barrel.
This is a rough estimate as some oil and gas is more potent that others, and percentages of each hydrocarbon will vary not just per well, but during the lifetime of the production coming from it.
How much energy can one barrel of oil produce?
One barrel of oil can produce 5.8 million British thermal units (MBtus) which is equal to 1,700 kilowatt-hours (kWh) of energy. This is also an estimate due to the different grades of oil producing different levels of energy.
In fact it’s important to bear in mind that until hydrocarbons are extracted, processed and sold, EVERYTHING is an estimate!
How do we arrive at the BOE figure?
We’re comparing the equal energy outputs for each hydrocarbon combination. Each barrel of BOE oil will create 5.8 MBtus/1,700 kWh of energy, whether it consists of all oil, all gas or a percentage mix.
We could compare this metric sensible to national GDP figures. A billion dollar GDP consisting mainly of raw materials and agricultural produce, is very different to a modern economy with a mix of hundreds of produce, materials, goods and services. Nevertheless, BOE is a useful tool, (one of many).
Why does some production data discuss NGL and what is it?
NGL stands for ‘Natural Gas Liquid’ and these are compounds that separate from the natural gas, sometimes naturally and sometimes through processing. Examples include propane, butane and methane. These are valuable hydrocarbons but are obviously used for different industrial purposes than oil. While the ‘basket’ of energy production in a well, company or country will have overall BTU figures, the actual composition is more important.
In your work calculations, care must be taken to follow the standards set by other members of your company or organisation. If they use NGL, then don’t recalculate any figures and switch labels. For example, if the proven reserves are calculated in BOE, then don’t substitute NGL as you will cause a potentially huge accounting error.
What other hydrocarbons are used in the BOE figure?
The largest component by far is the oil, if the well were a purely gas play, then the MCF figure is more relevant. In the natural gas mix, we find methane, ethane, propane and butane. There are a number of other less well known gasses that will be extracted at the same time. Examples include hexane, octane, benzene and toluene.
Can the BOE and BBL be the same on a particular field?
Only if the reserves are pure oil, with no other hydrocarbons. This is very unlikely, although it’s possible that mid production the gas will be flared and discounted from the accounting figures.
What’s the dollar value differential between oil and other ‘ oil equivalents’
We know that a barrel light sweet crude fetches substantially more than the equivalent in LNG. This value will change over time according to individual commodity prices.
LNG is currently at around $3 per MBtu, if we multiply that by 5.8 we get $17.40 per BOE. We know that despite fluctuations, this prices gas at around a third of oil, for the same energy output. This means that one well reservoir could be valued at triple the reserves of another the same size.
Again, there might be reasons in the future why gas is preferable to a local situation, it’s also possible that oil will come down in value as gas rises. For now, the percentages are very important to profitability.
One other point to consider, is the market potential for gas in a local area, how far is the compression facility? How far will the gas need to be shipped to a potential buyer and will this make a sale non-viable?
Apart from the dollar value differential, what other factors influence the usefulness of the other oil counterparts?
There are so many factors at play, other than looking at BOE and BTU statistics. For example LNG is no good for creating plastics for industrial purposes. Another example is within the different grades of oil, if the refineries of a country are all set up to refine sweet crude oil imported overseas, local heavy oil doesn’t help.
Globally, we see heavy oil and light oil being exported and imported to refineries that are able to process it. As previously mentioned, each measure is of little use on its own, and can lead to false assumptions. There are few people who fully understand the bigger picture.
If the financial implications of BOE over BBL are so huge, why is it used? What purpose does it serve?
Oil and gas are created in the same reservoirs, by the same geological model. When you drill and find one, you’ll almost always find the other. BOE is one measure of comparing the total reserves for each company, country or well. As with any type of technical analysis, in any industry, we never focus on a single metric, but look at an overview of all the data that is available to us.
What are the problems with using BOE?
Problems occur when insufficient due diligence is performed, or figures are ‘fudged’ for accounting purposes. Some wells are notoriously gassy in nature, so industry standard accounting measures can create a false sense of wealth. A current example of this is the shale boom.
Fracked/tight/shale oil fields tend to contain a lot of gas in proportion to the amount of oil. For refinancing/debt expansion purposes, BOEs can give a false impression of future profitability. On a more macro scale, presidents and leaders might get carried away in talking about energy independence. If there is more LNG than is needed, but light oil imports remain consistently high, there’s no actual energy independence.