When Shell checked its oil at the beginning of the year, the dipstick
read 3.9 billion barrels low.
Shell reduced its reported proved reserves by that amount in January,
and later wrote down another 220 million boe from year-end 2003
reserves.
Then, in February, El Paso Corp. reduced its proved natural gas
reserves by 41 percent.
The size of those revisions stunned many investors and caught
the attention of regulatory agencies.
Questions soon followed, distilled to a single concern:
Is the oil and gas industry having trouble estimating its known
reserves?
You'll hear at least three answers, "Probably not," "Apparently
yes" and "Maybe."
The last two answers are problematic, because the entire industry
suffers when stockholders, lenders and other investors begin to
doubt the reliability of its reported numbers.
Naresh Kumar is president of Growth Oil and Gas in Dallas, and
an international consultant experienced in reserves estimation who
currently chairs AAPG's Committee on Resource Evaluation.
In a post-Enron world, investor questions about company reports
should come as no surprise, according to Kumar.
"I can understand why there is so much skepticism right now, because
nobody thought the balance sheets audited by very respected accounting
firms would be called into question, and that has happened," he
said.
"Our industry has to be especially careful and especially vigilant
about what's being reported," he added.
That noted, Kumar doesn't believe a few reserve revisions will
have any deep impact on the industry.
"At this stage," he said, "I don't see that we have any real crisis."
Training Days?
Following the Shell and El Paso revisions, a call to certify E&P
professionals in reserves estimation came from Ron Harrell, chairman
and CEO of Ryder Scott Co. LP, a Houston-based reservoir evaluation
consulting firm.
In March, Harrell publicly urged the industry to establish a formal
process of training courses, examinations and certification for
qualified petroleum geologists and engineers.
Harrell said he became even more convinced about the need for
certification when he observed the interactions at meetings between
members of the Society of Petroleum Evaluation Engineers (SPEE)
and petroleum engineers on the staff of the U.S. Securities and
Exchange Commission (SEC).
Industry engineers showed some confusion about SEC rules and guidelines,
and often lacked a full grasp of the reporting regulations, according
to Harrell.
"I think there very definitely are gaps," he said. "That is one
point of evidence that there is a lot of confusion about the SEC
requirements."
AAPG President Steve Sonnenberg, along with several members of
the DPA executive committee were to meet with Harrell and others
to further explore the possibilities of AAPG being a cooperating
certifying entity. DPA already has a proposal readied to allow reserve
estimators to be qualified in Canada by virtue of DPA membership.
Harrell noted that his concern about industry standards for reservoir
evaluators is long-standing.
Last year, he presented a paper about the need for better industry
stewardship of reserves estimation, especially in light of requirements
in the Sarbanes-Oxley Act, a U.S. corporate responsibility law.
"People are going to say that the timing of this (call for certification)
is just because of Shell and the others. That's not true," he said.
In the worldwide petroleum industry, the number of reservoir evaluators
"has exploded over the past few years" because of privatization
and the formation of new companies, he observed.
At the same time, Harrell said, evaluation has become more and
more complex with the availability of new software packages and
other tools.
"It's a little bit mind-boggling, all the tools that are available
to us," he said. "It's important that everyone use these responsibly."
In addition to a certification process, Harrell urged the industry
to develop a set of reserves-estimation best practices that could
be shared among companies.
It could be difficult for one professional in a single petroleum
company to see the need for industry-wide action on reserves estimation,
especially if that company has strong faith in its own reserves
numbers, he noted.
"They might say, 'Where's the problem?' But we work with 51 companies
that report reserves," Harrell said.
"I do have a unique perspective, because we see the inside of
a lot of companies," he added.
Going By the Book
In general, reserves estimates can vary for three major reasons.
Or maybe five reasons.
Although it might be four.
Or even six.
Everything depends on how you count.
That's why regulatory agencies like the SEC work to develop standardized
reporting rules for industry.
H. Roger Schwall is assistant director for the Office of Natural
Resources in the SEC's Corporation Finance Division.
Schwall said his office is less concerned with dictating specific
practices than making sure SEC regulations are followed across the
industry.
"Our main focus is, 'Are companies complying with the rules?'"
he said.
To that end, Schwall encouraged reserves estimators to contact
his office if they have any doubt about meeting SEC requirements.
While his staff won't consider hypotheticals, it can offer assistance
on specific problems and questions, he explained.
"If companies have some question about their situation, the best
thing they can do is contact our engineers at the SEC," he said.
He said his office in Washington, D.C., can be reached at 202-942-1870.
Schwall added that information also is available on the SEC's
Web site at www.sec.gov, including matters addressed in the "Current
Issues" sections of the Corporation Finance Division page.
The SEC is investigating Shell's reserves revision, and so are
regulatory agencies in Britain and the Netherlands.
In the coming year, the petroleum industry can expect a closer
focus on reserves estimation. Look for scrutiny of any company with
sizeable reserves, including national oil companies.
Largely because of comments by investment banker Matthew Simmons,
the industry recently began another round in a continuing debate
about the reliability of Saudi Arabia's reserves estimates.
Also, regulators may require companies to face stiffer requirements
for reserves reporting.
Earlier this year, Canadian producer Nexen Inc. reduced its reported
reserves by 67 million boe — 8 percent of its worldwide total —
to meet stricter standards.
Part of El Paso's large reserves reduction came from evaluation
of its coalbed methane production.
Methods and Ethics
AAPG's Committee on Resource Evaluation is considering resource
assessment methodologies that involve nonconventional resources,
including coalbed methane and tight gas sands, according to Earl
Ritchie.
Ritchie, the committee's co-chair, is vice president and general
manager, Houston division, for EOG Resources Inc.
"The assessment of those is in some ways more difficult than the
assessment of more conventional resources," he said. "We're looking
at methane hydrates as well."
In general, Ritchie noted, the committee deals only with assessment
methods and approaches, and does not consider proved reserves issues.
"To some extent, the proved reserves reporting is more of a reservoir
engineering function," he said.
Kumar said reserves revision won't affect AAPG's view of the overall
available oil and gas resource.
"It does not because the Committee on Resource Evaluation's charter
is to look at the methodology by which resource estimates are made.
"One thing we have stayed out of ourselves is criticizing the
numbers the various agencies have come out with," Kumar noted.
"We generally do not get involved with specific numbers-proved,
probable, possible reserves. The total numbers we see may not change
much, if the reserves are shifted around among categories," he added.
If reserves reporting comes under more scrutiny, one effect might
be increased caution by estimators, according to Kumar.
"I have a feeling that what will happen over time is that people
will get even more conservative, and the reported reserves are already
fairly conservative.
"That is partly why we have what we call 'field growth,' the additional
reserves that will come out of known fields over time," he said.
"This is a very, very significant amount added to the resource every
year."
Harrell proposed that ethics training should be part of any certification
process for reserves evaluators, in addition to tests related to
technical competency and knowledge of applicable regulations.
He sees a need to "draw some fairly bright lines" in setting ethical
standards.
"In different parts of the world, ethics mean a lot of different
things," Harrell said. "A certification program could bring some
of those differences to light and see that they are addressed."