Oil & Gas Due Diligence
Executive Summary
Key Takeaways
- ✓ Oil and gas transaction due diligence requires checks beyond general practice, reserve report reconciliation, contract assignment verification, and decommissioning liability quantification.
- ✓ Reserve report reconciliation confirms the target's financial model reflects the same reserve and decline basis as the independent reserve engineering report relied upon in the transaction.
- ✓ Contract assignment verification confirms production sharing contract or joint venture terms, including any change-of-control or pre-emption rights, transfer correctly to the acquirer under the target jurisdiction's specific requirements.
- ✓ Decommissioning liability quantification identifies the specific end-of-life obligation being assumed, and whether it is fully reflected in the target's model and any associated financial security.
Objective¶
This guide sets out the oil and gas-specific checks financial model due diligence requires, within Oil & Gas Financial Modelling, extending the general disciplines addressed in Financial Model Due Diligence and Transaction Due Diligence.
Reserve Report Reconciliation¶
Due diligence should confirm the target's financial model reflects the same reserve category and decline basis as the independent reserve engineering report the transaction relies upon, addressed alongside the underlying mechanics in Upstream Financial Models. A divergence between the model and the reserve report misstates the actual production and value basis being acquired, and should be resolved before the transaction proceeds on the model's stated figures.
Contract Assignment Verification¶
Production sharing contracts and joint operating agreements frequently include change-of-control provisions or pre-emption rights held by co-venturers or the host government, addressed alongside the underlying joint venture mechanics in Joint Venture Financial Models. Due diligence should confirm these terms transfer correctly, or identify the specific consents required, since an unaddressed assignment provision can create a material post-completion risk not visible from the financial model alone.
Decommissioning Liability Quantification¶
Due diligence should quantify the specific end-of-life obligation being assumed in the transaction, confirm whether it is fully reflected in the target's financial model, and confirm whether the associated financial security, addressed in Decommissioning Cost Models, transfers to the acquirer or remains with the seller under the transaction terms.
Common Due Diligence Gaps¶
- Relying on the target's stated reserve figures without independently reconciling them against the underlying reserve engineering report.
- Overlooking change-of-control or pre-emption provisions in production sharing contracts or joint operating agreements.
- Failing to quantify or confirm the transfer of decommissioning liability and its associated financial security.
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Related Pillars¶
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Frequently Asked Questions
How does oil and gas due diligence differ from general financial model due diligence?
It adds sector-specific checks, reserve report reconciliation, contract assignment verification, and decommissioning liability quantification, on top of the general financial model due diligence discipline already covered in Financial Model Due Diligence and Transaction Due Diligence.
What does reserve report reconciliation check in a due diligence context?
That the target's financial model reflects the same reserve category and decline basis as the independent reserve engineering report the transaction relies upon, since a divergence between the two misstates the asset's actual production and value basis being acquired.
Why does contract assignment verification matter in an oil and gas transaction?
Because production sharing contracts and joint operating agreements frequently include change-of-control provisions or pre-emption rights held by co-venturers or the host government, and failing to confirm these transfer correctly can create a material post-completion risk not visible in the financial model alone.
What should decommissioning liability quantification confirm?
The specific end-of-life obligation being assumed in the transaction, whether it is fully reflected in the target's financial model, and whether the associated financial security, addressed in Decommissioning Cost Models, transfers to the acquirer or remains with the seller under the transaction terms.
Related Articles
Oil & Gas Financial Modelling
Oil and gas financial modelling is the practice of building financial models across the four structurally distinct segments of the hydrocarbon value chain, upstream exploration and production, midstream transport and processing, downstream refining and petrochemicals, and LNG, each governed by different revenue mechanics, contract structures and risk drivers. This page is the hub for the Knowledge Centre's oil and gas financial modelling content: industry structure and segment definitions, the financial KPIs the sector is measured against, the investment lifecycle from exploration through decommissioning, and how this domain builds toward asset and project-level models, commercial and investment analysis, and governance and assurance practice as it expands.
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Financial model due diligence is the discipline of testing whether the financial model used to price, structure, or finance a transaction is itself structurally sound — a distinct question from whether the target business's historical financials are reliable (the domain of financial due diligence) or whether its commercial prospects are durable (commercial due diligence). A model can be structurally unsound — an untraceable synergy figure, a broken purchase price allocation link, a hardcoded override masking the true output of a formula — independent of whether the underlying business is fundamentally healthy, and this risk is what financial model due diligence is specifically built to catch. This page is the hub for the Knowledge Centre's model-risk-in-transactions content: how model review differs by audience (independent, lender, investor, vendor), how it differs from a quality of earnings review, and how transaction-specific model risk maps onto FMAE's own structural rule set.
M&A and Transaction Due Diligence
Transaction due diligence is the structured process by which a party to a proposed transaction — most often a buyer, but also a seller preparing for sale or a lender financing the deal — investigates a target business before committing capital. It is organized into distinct workstreams (financial, commercial, operational, technical, legal, tax, ESG), run from one of three process postures (buy-side, sell-side, or vendor), and its findings feed directly into the financial model used to price the transaction and support the investment decision. This page is the hub for the Knowledge Centre's transaction due diligence content: what due diligence is, how each workstream and process posture differs, and how model risk specifically enters a transaction — the angle this platform is built to address in depth.
Decommissioning Cost Models
Decommissioning cost models estimate and provision the mandatory end-of-life obligation to plug wells and remove oil and gas infrastructure, an obligation that should be funded progressively across the production life rather than treated as a single terminal-year cost. This guide sets out how decommissioning cost is estimated, the funding mechanisms, sinking funds, parent company guarantees, and letters of credit, regulators typically require, and why timing and discounting of the liability matter to how it is represented in a financial model.
Joint Venture Financial Models
Oil and gas assets are frequently developed and operated through joint ventures, with an operator managing day-to-day activity on behalf of itself and non-operating partners holding working interests. This guide sets out how joint venture financial models represent working interest versus net revenue interest, the cash call process funding joint operations, and the authorization for expenditure (AFE) mechanism governing capital commitments under a joint operating agreement.