Oil and Gas Reserve Calculations

Oil and Gas Reserve Calculations

February 01, 2004

Oil and gas reserve calculations are receiving scrutiny from the US Securities and Exchange Commission.

A downward revision in reserves by one of the oil majors in mid-January has triggered a flurry of investor demands for tighter rules and greater transparency in connection with petroleum reserve accounting. Shell reclassified 20% of the company’s stated proven reserves into a lesser category. El Paso warned that it will make “a material negative revision” to its stated reserves. Forest Oil revised its reserves downward in late January. Other oil companies are expected to follow.

The SEC was already reviewing its reserves definitions, which were established in 1978, and previously sent questionnaires relating to reserve calculations and reporting to a number of oil and gas companies involved in Gulf of Mexico operations last summer. This interest was fueled by increasing concerns that US reserves reporting rules have become outdated due to dramatic changes in the tools for evaluating reserves, as well as in the way in which oil and gas are marketed.

The chairman of the Financial Accounting Standards Board, Dennis Beresford, said, “It’s certainly a wakeup call for the SEC and maybe the FASB to think about this.” Jim Murphy, an in-house SEC petroleum engineer, has warned in the past that a 10% difference between what a producer initially reports as proven reserves and what is reflected after a revision is likely to trigger an SEC probe.

Current SEC rules allow companies to report only proven reserves, and exclude reporting of lesser categories of reserves, such as “probable” and “possible.” Some analysts and investors are now calling for greater disclosure of both proven and probable reserves to supplement the information required under the current rules, as well as much more detail on the breakdown of such reserves. Many companies are also placing greater reliance on independent third-party certification of reserves, at least partly in response to heightened management concerns because of the Sarbanes-Oxley Act.

Canadian reserve reporting rules require third-party reserve certification. There have been calls for the US to adopt the same approach.

Keith Martin