New SEC Rules Carry Responsibilities

American Association of Petroleum Geologists (AAPG)

For more than a decade petroleum geoscientists, engineers and E&P executives expressed concern that U.S. Securities and Exchange Commission (SEC) rules governing oil and gas reserves disclosures disallowed the use of technology recognized as industry best practice and were inconsistent with most company’s internal planning processes.

In March 2007, members of SPE, SPEE, AAPG and WPC jointly released the Petroleum Resources Management System (PRMS). PRMS is a principlesbased system for classifying and categorizing oil and gas reserve and resource estimates for purposes of managing a company’s petroleum portfolio, which is distinctly different from the previous SEC rules.

At the end of 2008 – after input from industry and professional societies, including the AAPG – the SEC announced its modernized rules incorporating much of PRMS, to be employed for all disclosure reports after Jan. 1, 2010. A significant change in the new SEC rules is the allowance of companies to report Probable and Possible Reserves at their discretion.

Many participants in the Houston GTW who were involved in the effort to encourage the SEC to adopt more modern procedures expressed genuine concern about how the E&P Industry would employ the new guidelines. “Be careful of what you wish for, because you might get it!”

Acknowledging the financial consequences of public reserves disclosures, the potential for ethical malfeasance may be greater with the new system. The consequences of even a single, widely publicized reserves write-down has the potential to negatively impact the entire E&P Industry. By analogy, consider the lasting effects of the 1969 Santa Barbara Channel oil spill on companies still hoping to develop the petroleum potential of offshore California.

The new SEC rules necessitate that geoscientists play an increasingly important role in estimating oil and gas reserves. The SEC allowance of reporting Probable and Possible Reserves involves more uncertainty, elevating the importance of geologic insights relative to engineering data. Geologic input into reservoir characterization, integrated with petrophysical and engineering data, is critical to developing robust estimates of hydrocarbons-in-place, recovery factors and reserves.

Substantial questions exist on key elements of the new rules such as a) the definition and demonstration of “reliable technology”; b) the definition of “projects”; c) the assignment of proven undeveloped reserves (PUDs); and d) stringent checks for bias.

Recognizing these implications, the Steering Committee strongly urges all AAPG members engaged in professional work related to public disclosure of a company’s oil and gas reserves and resources to:

  • Ensure that the data used and assumptions made are both reasonable and tenable.
  • Follow established guidelines and rules to the best of your ability, and ask probing questions where there is uncertainty or doubt.
  • Carefully and consistently distinguish among various reserve categories.
  • Synthesize and integrate work with other disciplines.
  • Restrict judgments and opinions to your area of technical expertise.
  • Maintain a paper-trail explaining the rationale and procedures followed in generating your work products, especially if new approaches or technologies are employed.
  • Take steps to identify and support a defined organizational route for effective internal resolution of emerging ethical conflicts.
  • Implore colleagues, managers and clients to practice sound ethical and technological conduct in the generation of reserves and resources estimates for public disclosures.

We will break new ground as we apply these revised rules, which offer the potential for more realistic estimates, and the possibility of increased malfeasance.

We asked for these new guidelines, and now it is up to us – all of us – to see that they are implemented responsibly.

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Sneider and Jenkins were co-chairs of the GTW on “Geological Aspects of Estimating Petroleum Resources and Reserves.”

Others contributing to this article were AAPG members Richard Nehring, John Ritter, Pete Rose and Dan Tearpock, and Delores Hinkle.