Recovery of hidden state participation effects on oil and gas asset values

Abstract

Commodity price shocks are shown to cause shifts in both the quantity and timing of risk in natural resource assets. We provide evidence that static risk measures understate the periodicity of price risk implicit in depleting assets. Risk measurement is demonstrated to be asset specific and to vary heterogeneously in response to the combined effects of state participation and market factors. We use a global sample of oilfield assets to demonstrate that oilfield participation terms cause corporate asset cash flows, volatility horizons and minimum variance hedge ratios to vary in response to oil price. We provide additional insights into movements in the timing of physical oil and gas asset risk, a hidden effect not recoverable from market oil prices. Temporal variance for physical assets is shown to be a hidden dimensional outcome of the effects of market factors and state participation.oil and gas, volatility, ledging,

Oil price and reserve location—Effects on oil and gas sector returns

“…Work by Kretzschmar and Kirchner (2008) suggest that the premium will become increasingly observable when oil prices are above US$45/bbl, a finding that corroborates PSC and concession oil price volatility work by Geman (2005). Our asset and location specific findings provide evidence of variation in corporate performance anticipated by Bekaert and Harvey (2002); companies holding PSC assets demonstrate stock return under-performance relative to companies invested in concession oilfields.…”

Limits to international diversification in oil & gas – Domestic vs foreign asset control

“…We know little about the ownership of these assets nor is there much research into these closely held assets. To complicate matters the sector is often subject to political, fiscal, and economic protectionism as companies seek control of the assets needed to sustain earnings (see Kretzschmar and Kirchner (2008)). The largest and most important oil and gas reserves are state owned, directly limiting corporate access to these (Victor 2007).…”