What Is a Barrel of Oil Equivalent (BOE)?
A barrel of oil equivalent (BOE) is a term used to summarize the amount of energy that is equivalent to the amount of energy found in a barrel of crude oil. By encompassing different types of energy resources into one figure, analysts, investors, and management can assess the total amount of energy the firm can access. This is also known as crude oil equivalent (COE).
Many oil companies produce both oil and gas, among other petroleum products, but the unit of measure for each is different. Oil is measured in barrels and natural gas is measured in cubic feet. To help facilitate like-for-like comparisons, the industry standardized natural gas production into "equivalent barrels" of oil. One barrel of oil is generally deemed to have the same amount of energy content as 6,000 cubic feet of natural gas. So this quantity of natural gas is "equivalent" to one barrel of oil.
BOE can be compared with natural gas equivalent, which translates the energy in an amount of oil (or other energy product) into that of gas.
- Barrel of oil equivalent (BOE) is a way of standardizing natural gas and other energy resources to a barrel of oil's energy.
- One barrel of crude oil generally has approximately the same energy content as 6,000 cubic feet of natural gas, so this quantity of natural gas is "equivalent" to one barrel of oil.
- Calculated BOEs per day (BOE/D) is an important metric for financial analysts and industry insiders to evaluate the performance of energy companies.
Understanding a Barrel of Oil Equivalent (BOE)
The BOE is frequently used when exploration and production companies are reporting the total amount of reserves they have. Oil and natural gas are formed through the same geological processes; therefore, the two energy commodities are often found together. Many energy companies have a mixed reserve base, and they need a way to communicate the total energy content of their reserves in a manner that is easily understood. They can accomplish this by converting all of their reserves to BOE.
An energy company's primary asset is the amount of energy it owns, so an energy company bases its financial decisions and planning on its reserve base. For investors, a company's reserves are important in assessing the value of the company and determining whether or not the company is a good investment.
Both investors and companies want to see a company's total energy resource increase over time. Representing reserves in BOE facilitates the comparison of total energy assets over time and against other similar energy companies. It would be more complicated to compare a company's energy assets over time and against other companies if natural gas and oil were presented separately.
Calculating Barrel of Oil Equivalents (BOEs)
Converting assets to BOE is fairly simple. In terms of volume, oil is represented per barrel, and natural gas is represented per thousand cubic feet (mcf). There are 42 gallons (approximately 159 liters) in one barrel of oil. The energy contained in a barrel of oil is approximately 5.8 million British thermal units (MBtus) or 1,700 kilowatt-hours (kWh) of energy. This is an approximate measure because different grades of oil have slightly different energy equivalents.
One Mcf of natural gas contains approximately one-sixth of the energy of a barrel of oil; therefore, 6,000 cubic feet of natural gas (6 Mcf) have the energy equivalent of one barrel of oil. For large quantities of energy, BOE can be represented at kilo barrels of oil equivalent (kBOE), which is 1,000 BOE.
Barrel of Oil Equivalents (BOEs) and Production
BOE also comes up when communicating daily energy production and consumption. This is expressed in barrels of oil equivalent per day (BOE/D). Barrels of oil equivalent per day (BOE/D) is a term that is used often in conjunction with the production or distribution of crude oil and natural gas. BOE/D is important to the financial community because it is used as a way to help determine the value of a company.
There are several different metrics that equity and bond analysts use to evaluate the performance of an oil company. First is a company's total production, which is calculated on a total equivalent barrel basis. This helps to determine the scale of the business. Companies that produce little oil and a lot of natural gas could be unfairly evaluated if equivalent barrels were not counted.