On Friday, the crude-to-gas ratio – simply the price of WTI crude oil divided by the price of Henry Hub natural gas - hit a 12 year high of 52X ($83.85 WTI divided by $1.61 Henry Hub – left graph, green dashed oval). Over the past ten years, the average ratio has been 22X, so the relationship is way out of whack compared to historical norms.
Which calls into question an important metric used by the oil and gas industry to theoretically put the two commodities – oil and gas – on an apples-to-apples basis. That metric is BOE, or barrels-of-oil equivalent. For decades the industry has relied on thermal equivalence to summarize oil and gas volumes into a combined total, and although there are a number of conversion factors used, the most typical is the one used by the IRS – one barrel of oil is equal to 5.8 MMbtu of natural gas. This factor is most frequently used to go the other way – to convert gas volumes into “oil equivalent”. Thus, a Haynesville gas well producing 10,000 MMbtu/d would be equal to 1,724 bbl/d of oil.
