The Banff Taxonomy of Asset Valuation Methods:
Lessons from Financial Markets for Valuation in the Upstream Petroleum Industry
The paper is available in .pdf - here.
It is still in draft form. Comments, questions and suggestions are all welcome.
The current version was uploaded on 07 March 2007.
We have posted on another publications page a presentation deck on end-of-life oil field management as an example of the use of the Banff taxonomy to compare different methods of estimating asset value. It is in part a presentation deck for parts of this paper.
The SPE (Society of Petroleum Engineers) held a workshop in Banff, Canada in 2003 to discuss the future of real asset valuation in the upstream petroleum industry. A taxonomy of valuation methods was developed to organise the work of that workshop. This paper describes the taxonomy and the reasons for its structure. It then reports on how it may be used to organise a discussion of:
the evolution of asset valuation:
in the upstream petroleum industry since 1960; and
in financial markets since 1970;
some lessons the industry might learn about valuation from developments in financial markets;
the foundations of, and similarities and differences among, the valuation methods used, or proposed for use, in the industry.
some implications for the choice of valuation method arising from the interaction of strategic analysis and asset valuation as parts of the asset selection, design and management process;
organisational considerations in the design:
of a valuation method for use in this process (to complement the technical considerations raised in this paper); and
of a process to change valuation methods, if change is desirable;
several misconceptions about so-called "real options" approaches to valuation, in particular showing why two well-known proposals for change in the direction of dealing with "real options" are dead ends; and
potential future developments in this field.
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The photo, taken by Dr. Laughton, is of Moraine Lake, Banff National Park.