Information about Oil & Gas Interests



The short answer:  We use a Discounted Cash Flow to value the reserves in the ground as of January 1st.

  • First, we use the actual historic production of each lease to project how much oil &/or gas will be produced by that lease each year until the economic limit of the lease is reached.
  • Then we value that production for each year using pricing guidelines required by law. (Tax Code Section 23.175)
  • Finally, using the Comptroller’s Manual for Discounting Oil & Gas Income, as required by law, we discount those future revenues back to today’s values to get our value on January 1st.


The longer answer:

1. Get Production

Operators report production to Texas Railroad Commission

2 – 3 months behind actual

Report will show Oil, Gas and Water production

For 2022 appraisal, use production through December 2021.

 2. Create a Decline Curve

Shows actual production up to January 1

Rate of production on January 1 is our starting rate

Projects reserves on Jan. 1 based on historical, actual production

Shows production decline

Shows projected production until end of life of lease

Shows cut-off at Economic Life

3. Determine Pricing

Section 23.175 controls the calculation of pricing for each lease.

Start with last year’s actual 12-month average price received for each barrel of oil and/or mcf of gas.

Follow 23.175 to calculate the “factors” used to adjust last year’s averages to this year’s starting prices.

Follow 23.175 to calculate the “escalators” or “de-escalators” used to calculate the prices for years 2 - 6.



. . . use the average price of the oil or gas from the interest for the preceding year multiplied by a price adjustment factor as the price at which the oil or gas produced from the interest is projected to be sold in the current year of the appraisal.


4.  Create Mineral Appraisal

Price = last year’s actual average (if available) x Annual Adjustment Factor

Comptroller’s Price Escalations

LOEs = last year’s actual average with no capital or one-time expenses (if available)

Discounted Cash Flow Analysis over Economic Life of Lease

Calculate a 7/8 (WI) and 1/8 (RI) Value.

Equipment Included in Value

5. Spread the Value over the Division Order

A division order is a list of all owners, type of interest and % ownership

WI = Working Interest

Taxed on equipment

Credit for LOEs

RI = Royalty Interest

OR = Overriding Royalty Interest

     Interest expires with the lease

     The value from the mineral appraisal is spread to each owner on the lease based on their % and type of interest.



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