Lack of consistency has long hampered reserves booking in upstream fiscal systems, in particular in foreign jurisdictions. This is notwithstanding the fact that US oil companies derive a major portion of their earnings from foreign operations. The root cause is ambiguity in reporting standards that leave much room for interpretation. There are currently no clear guidelines issued by the US Securities and Exchange Commission (SEC) for recognition of reserves in different fiscal systems. Oil companies use their own interpretation to book reserves from across the spectrum of fiscal settings. Some of the reserves reported appear to be overstated.

Separate from inconsistency, reserves that are currently reported from foreign operations may bear little relation to what the investment community generally perceives as reserves. Investors need better transparency and better comparability.

Criteria currently used for booking reserves in the industry rely on contingencies devised by the US accounting organization Financial Accounting Standards Board (FASB) in 1977. The SEC has not unified these contingencies into a coherent set of standards. SEC's 2008 "Modernization" left this subject untouched.

This paper will address problems in the current reserves recognition practices, in particular in foreign jurisdictions, and propose revised guidelines aimed to bring transparency and consistency in reserves recognition. We will also provide relevant formulation. A key criterion for reserves recognition under the proposed scheme is ownership in kind, as allowed by the host government. We exclude from consideration reserves corresponding to taxes as well as volumes converted from revenue received from a foreign government. We simplify royalty treatment and discourage the working interest method. The author hopes that the paper will stimulate further discussion on the subject and prompt the SEC to issue clarifying guidance. A second aim is to align the reported reserves with the expectation of investors.

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