This paper was also presented as SPE 96169, "Suggested Modifications to the Reporting Requirements for a Company's Oil and Gas Reserves," at the 2005 SPE Annual Technical Conference and Exhibition held in Dallas, Texas, 9–12 October.

Abstract

The recent restatements by several Oil and Gas companies of their petroleum reserves has created a lot of short-term publicity, but not a fundamental and widespread discussion regarding the process that is followed to determine a company's reserves.

To minimize the chance of reserves misstatements in the future, some have called for the certification of the individuals preparing a company's petroleum reserves or even the use of outside auditors to certify the reserves claimed, much like the certification of the financial reports by an independent auditor.

This paper will review both sides of such an approach, but conclude that a solution in line with the thinking behind the Sarbanes-Oxley regulations governing a company's financial reporting is more appropriate.

However, while this approach clearly defines the responsibility for the reserves estimate, the reporting of this estimate has to be expanded to ensure more transparency. This paper will recommend that the reserves statement uses a set of probabilistic numbers rather than a single deterministic number.

Finally, the objective of this paper is not necessarily to answer all questions surrounding the process to be followed by a company for stating its reserves, but rather to ensure that there is a fundamental discussion regarding that process, and that in the end the methodology is improved in a practical manner that provides added transparency and accountability.

Introduction

The restatement by a number of Oil & Gas companies of their petroleum reserves in recent months has created a lot of short-term publicity, but not a widespread and fundamental discussion regarding the process that is followed to determine these reserves.This doesn't mean that these restatements will not have any lasting consequences.Within the United States the Securities and Exchange Commission (SEC), the Department of Justice and other government agencies are studying the subject, and there are also efforts under way in the US Congress to address this issue.In addition, there are several groups and organizations within the industry trying to develop recommendations on how to modify the reporting requirements.However, none of these efforts have attracted the type of widespread attention and following that appears warranted, because the entire system that was put in place some 70 years ago (and since then has undergone only minor revisions), needs more than just a review: it should undergo a fundamental revision to bring it again in line with the current state of the industry.

Under the current system, the SEC, which governs the reporting of petroleum reserves, only requires filings on proved reserves.But as Accounting Staff Members in the Division of Corporation Finance of the SEC noted in a report they issued in 2001: "Over the last several years, the estimation and classification of petroleum reserves has been impacted by the development of new technologies such as 3-D seismic interpretation and reservoir simulation. Computer processor improvements have allowed the increased use of probabilistic methods in proved reserve assessments. These have led to issues of consistency and, therefore, some confusion in the reporting of proved oil and gas reserves by public issuers in their filings with the Commission." 1 The report then attempted to clarify the "proved reserve" definition adopted by the SEC taking into account the current state of the industry.

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