Oklahoma State University
Oil & Gas Accounting Conference
Nov. 16, 2007
Reserves Estimation in
Accounting and Reporting
presented by
Don Roesle, Chairman and CEO
Ryder Scott Company, L.P.
www.ryderscott.com
Discussion Outline
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SEC Compliant Report
Validating a Reserve Report
SEC Comment Letters
SEC Hot Button Issues
The information presented herein
represents informed opinions about U.S. SEC
reserves reporting regulations but does not purport
to be identical to advice to be obtained from the SEC.
This presentation is offered for information purposes only.
Ryder Scott assumes no liability
for the use (or misuse)
of the presented materials.
What does the United States Securities
and Exchange Commission (SEC)
expect in a 10-K Reserves filing?
RESERVES DEFINITIONS
SEC 1978
 Proved oil and gas reserves are the estimated quantities
of crude oil, natural gas, and natural gas liquids which
geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and
operating conditions, i.e., prices and cost as of the date
the estimate is made.
SPE/WPC 1997
 Proved reserves are those quantities of petroleum which,
by analysis of geological and engineering data, can be
estimated with reasonable certainty to be commercially
recoverable, from a given date forward, from known
reservoirs and under economic condition, operating
methods, and government regulations.
SEC Guidelines
“Reasonable Certainty”

“The concept of reasonable certainty
implies that, as more technical data
becomes available, a positive, or upward,
revision is much more likely than a
negative, or downward, revision.”
SEC Guidelines
Reasonable Certainty Requirements
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Generated by supporting geological and engineering
data.
Validation of assumptions are necessary.
Criteria for analogies should be equal to or better than
referenced reservoirs used as analogies.
Reasonable certainty is more than just the technical
considerations that oil and gas is recoverable. It also
includes resolution of how other barriers such as
financial, environmental, marketing, legal and political
will be overcome.
What is a SEC “compliant report”?
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An estimate of the reserves and future revenues
using “existing economic and operating
conditions” (12/31 prices and costs).
Recoverable from “known reservoirs” to a level
of “reasonable certainty”.
Revenues limited to that from sale of produced
hydrocarbons and not associated income from
sulphur, CO2, processing fees, platform rentals,
etc.
Limited reliance upon 3-D seismic and other new
technology.
How does SEC assure that
companies are in compliance?
SEC Review Process
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In recent years, the engineering staff issues
“comment letters” initially asking generic type
questions about many issues, including PUDs,
pricing, reliance upon third-party firms, reserveslinked performance bonuses, recovery factors
and other matters.
How does SEC assure that
companies are in compliance?
SEC Review Process
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Upon producer response, SEC then narrows
remaining relevant questions to specific
properties and may ask for maps and other
supporting documentation.
May result in iteration of several letters back and
forth until SEC is satisfied or asks producer to
make modifications (Debooking or Restatement)
SEC terms related to reserves compliance
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“De-booking” typically results from SEC request
to remove certain reserves from the next annual
reserves filing. Rather common but is not
typically publicized if the issuer voluntarily
complies in the next annual 10-K filing.
“Restatement” is a much more serious result,
particularly under SOX, as it requires the issuer
to retroactively “correct” past reserves
disclosures and recalculate earnings.
U.S. Department of Justice (DOJ) will probably
be involved in any investigation that
subsequently leads to a reserves restatement.
What May Cause a Reserves Audit by SEC
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Reasons for a Reserves Audits by SEC:
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History of downward reductions
By press releases
Response to Comment Letter
Annual reports that don’t conform to press releases
Partner Activity, press releases, or revisions
A history of SEC infractions
Negative publicity
The Calendar – Every 3 years
Unusual Stock Volume or Movement
“Whistle blowers” or
for several other reasons.
Reserves Terminology
Reviews - Audits - Determinations
Two typical types of reviews
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Process review is an analysis of the process and
procedures established to ensure that reserves
have been estimated using industry accepted
practices and in compliance with relevant
standards. May involve qualifications and
independence of internal reserves evaluators
and auditors. Does not address reserves
quantities
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Reserves review is more typically a cursory
investigation of client-selected properties for
various client purposes.
Reserves audit
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A reserves audit is an examination of the work
of others for the purpose of expressing an
opinion that a reserves report is reasonable in
the aggregate and generally conforms to
accepted engineering and geological principals
and relevant reserves definitions.
May include all or a portion of the properties of
an entity.
Acceptable tolerances usually within 5 to 10
percent.
May include reserves, production forecasts
and/or economics.
Reserves determination (reserves report)
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A reserves report is a “grass roots” evaluation in
which an evaluator has examined and evaluated
all available source data for the purpose of
producing an independent estimate of reserves
and reserves information in full compliance with
the relevant reserves definitions.
Includes projections of production, revenues,
costs ( Capex, Opex, Taxes, Abandonment ) and
future net income discounted at 10%.
A reserves report may be internally or externally
prepared.
Creation of “auditable” data and workproduct files
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Personnel should be trained in industry “best
practices” regarding (1) acceptable geological
interpretations and reservoir description (2)
basic understanding of reservoir mechanics and
fluid flow (3) comprehension of pertinent
reserves definitions and (4) ethics.
Evaluators should establish “real time” access to
data from employer-operated properties and
“ASAP” data from partner-operated assets.
Creation of “auditable” data and workproduct files
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Partners should be wary of accepting operatorsupplied reserves estimates.
Attention must be given to documentation of all
interpretative data steps, including narrative
descriptions of critical decisions.
All data and information related to a reserves
report, including geological maps, must be
archived in a form that can be accessed and
reviewed by authorized parties at any time.
General Reserves Determination
Problems Identified by the SEC
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Some abuses of the proved classification (in no particular order)
Spacing violations for PUDs
PUDs which are too optimistic based on supporting data
Seismic amplitudes for down dip limits
Use of non-hydrocarbon revenue streams
Misuse of reservoir simulation results
Field level decline curve analysis
Declining operating costs with declining well count
Allocation of development costs to probable category to
justify proved reserves economics
Justification of proved reserves by analogy with non-analogous
properties
Misuse of statistical analysis
Reserves being declared proved when no sales market exists
Scheduling of reserves which extend beyond the term of
foreign concessions
Validating a Reserve Report
Series of questions that should be asked
to help assess the degree
of reserve risk associated
with a company’s reserves
and their reserve report.
1.
Who did the underlying reserve evaluation?
internal engineering
or
independent engineering firm
2.
Is the independent engineering firm or
company engineering staff knowledgeable of
SEC reserve definitions
and the appropriate reporting requirement ?
3.
How long has the independent engineering
firm been doing the company’s reserves ?
Is the engineering firm familiar with special issues that
might be involved with the company’s properties ?
4.
Where are the reserves located ?
How knowledgeable is the company of the areas where the reserves are
located ?
Are they in an area where assessment of reserves carries greater risk
(I.e. Gulf Coast vs. Mid-Continent) ?
Are the reserves concentrated in specific areas, or are they widely
scattered (I.e. do they have core areas of competency) ?
Are the reserves in areas that require higher operating and development
costs (I.e. profit margin is smaller and expenditure demands are higher
on the company) ?
Are the reserves in areas that are environmentally very sensitive ?
Are the reserves all domestic,
or do they include international properties ?
5.
Is the independent engineering firm familiar
with the areas where the reserves are located ?
6.
Does the independent engineering firm look at
all of the company reserves or just a
percentage ?
Does the engineering firm do a detailed study
or an audit ?
7.
Are the company’s reserves concentrated in a
small number of properties, or is the portfolio
of properties more diverse ?
What type of interest position does the company hold
in its different properties ?
8.
Are the reserves mature,
or relatively new with minimal production ?
Is the reserve analysis primarily based on performance
methods or volumetrics ?
Are the reserves strictly primary, or do they include
secondary and EOR projects ?
9.
Are most of the properties operated
or non-operated ?
If a high percentage of the company’s reserves are
non-operated, what is known about the operators ?
Are the various operators substantial from a technical
and business standpoint ?
Do the operators have an established track record
of operations in the areas where the
reserves are located ?
10.
What is the breakdown on proved reserve
status categories
(I.e. producing, shut-in, behind pipe and
undeveloped) ?
Are the reserves fairly well split between categories, or
is there a high percentage in the non-producing and
particularly in the undeveloped ?
11.
What kind of reserve life index is there for the
proved producing reserves ?
Is this realistic for the type of proved producing
reserves stated in the SEC filing ?
Is this realistic taking into account the current
production of the company ?
12.
What kind of reserve life index is there for the
total proved reserves ?
What level of producing rates will have to be added by
non-producing and undeveloped reserves to make a
reasonable life index ?
Does this seem attainable for the types of
reserves involved ?
13.
Are the reported reserves based on the
appropriate economic parameters
as specified by the
Securities and Exchange Commission ?
Did the reserve appraiser use current
economic conditions ?
14.
Historical Checks
Do future revenue projections appear
reasonable considering recent historical
company revenues ?
15.
Historical Checks
Do future cost projections appear reasonable
considering recent historical company
expenditures ?
Have the appropriate operating costs been applied against
the reserve projections ?
Does the company have sufficient cashflow to carry their burden of
operating costs and service other necessary company expenditures ?
Have sufficient development costs been included to develop the stated
non-producing and undeveloped reserves ?
Does the company have an established track record
and the financial stability to spend the amounts of capital dollars
necessary to fund the development ?
16.
Company Performance
How does the company look over the years in
regards to “revisions of previous estimates” ?
Have the revisions consistently been significant
in size in relation to the company’s base reserves ?
Are the revisions consistently negative ?
Are the negative revisions consistently associated
with the non-producing and undeveloped
reserve categories ?
17.
Company Performance
“Extensions, discoveries, other additions”
are an indicator of how well the company is
moving proved undeveloped and probable
reserves into the developed reserve base
of the company.
Is the company historically demonstrating an
ability to do so ?
How well is the company finding new reserves through the drill bit ?
Does the company have an active exploration and development drilling
program ?
Does the company have a good acreage position around its developing
properties ?
What kind of exploratory acreage position does the company hold ?
18.
Company Performance
Does the company typically grow through
acquisitions or the drill bit ?
Is there a good mix of both ?
Does “purchase of reserves in place” contribute
significantly to the company’s reserve base ?
If the company traditionally grows through
acquisitions, is the company paying an appropriate
amount for reserves ?
Could too much success with competitive bids mean
they are over-paying for the reserves ?
19.
Company Performance
Does the company “sell reserves in place”
to divest themselves
of non-strategic reserves ?
Is the company burdened with a large number of low
margin wells in non-core areas ?
20.
How recent is the reserve evaluation
that is the source of the company’s reserves
in the public filing ?
Based on the answers to some of the previous
questions, are the reserves of a nature
that significant changes in reserve quantities can
occur over a limited period of time ?
Is the reserve evaluation a recent study or a prior
study that has been mechanically adjusted to a
specific as-of date for public reporting purposes ?
SEC Comment & Audit Letters
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A series of questions posed by accountants, lawyers, and
engineers designed to test the compliance of the company
with SEC regulations regarding technical and commercial
issues.
The first producer answers are typically followed by a shorter
list of questions, which typically are more specific and ask for
more detail. SEC may request maps, logs, test data, copies of
contracts, market studies, etc.
Iteration of letters may lead to request to restate previous
filings, "de-booking" of reserves in subsequent reports or,
simply, no more letters.
Most favorable response from SEC is “ We have no more
questions at this time”.
SEC Comment & Audit Letters
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Typical SEC Staff question :
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Please inform us of any circumstance
where you have reported proved reserves
located structurally below the lowestknown hydrocarbons as established
through well logs and if these additional
reserves have not been confirmed through
performance history.
SEC Comment & Audit Letters
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Another question may be:
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Please inform us of any circumstances where
your reported reserves and future income
were estimated using prices other than those
in effect on the last day of the year.
SEC Comment & Audit Letters
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Another common question asks:
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Have you reported any undeveloped reserves
attributable to well locations more than one
offset location (“legal location”) away from
a commercial well?
SEC Comment & Audit Letters
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A recent letter also posed the
following:
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Are performance bonuses linked to reserves
increases?
SEC Comment & Audit Letters
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In the same letter:
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Who has the authority to engage third party
engineers and who do they report to?
SEC Comment & Audit Letters
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Interesting Questions – One recent SEC
comment letter asked for the following:
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Identify all independent engineering firms
used over last 5 years.
What properties were reviewed?
How much the firms were paid for work on
projects other than year-end type work?
If the firms were discharged, reason(s) why?
SEC Comment & Audit Letters
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Another common question asks:
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Have you reported proved reserves in
untested fault blocks, structures, or seismic
amplitudes?
(Untested here refers to the drilling of a well
confirming presence of oil and/or gas)
SEC Comment & Audit Letters
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November 9th, 2004, the SEC sent a 9 page, 23
question inquiry to an independent US oil
company
Among other items, the SEC asked for:
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A one line summary for each proved reserve entry on
the books as of 12/31/2002 and 12/31/2003
Narratives, engineering and geological exhibits for the
three largest reserve extensions or discoveries during
2003
SEC Comment & Audit Letters
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Hindsight analysis of 5 largest PUD locations booked as
of 12/31/2002 drilled during 2003
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“Include the engineering and geological exhibits
used to justify the reserve booking at each year end
and a brief narrative reconciling the differences
between the two estimates.”
“Address corporate methodology for eliminating
future discrepancies between the estimates”
SEC Comment & Audit Letters
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“Narratives, engineering and geological exhibits for the
3 largest reserve revisions – both positive and negative
– not caused by economics”
“Supplementally, tell us all the estimated hydrocarbon
volumes, if any, you have claimed as proved reserves;
A) In undrilled fault blocks
 B) Below the LKH – penetrated or assessed –
structural occurrence of hydrocarbons”
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SEC Comment & Audit Letters
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“For the PUD locations as of 12/31/2002 drilled during
2003, provide a comparison table of projected capital
expenditures and actual expenditures for each well.
Explain any variances over 1%.” (This is not a typo)
“Prepare a list of the PUD wells as of 12/31/2002
projected to be drilled during 2003 but were not
drilled. Provide an explanation as to why the wells
were not drilled, if they are still carried as PUD
locations as of 12/31/2003 and why they still qualify as
PUD locations.”
SEC Comment & Audit Letters
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Discuss the internal controls you have in place
to assure consistency and conservatism in your
proved reserve estimations.
Discuss how the effectiveness of these controls
is reflected in your history of proved reserve
revisions over the past 3 years
Identify the personnel in your company who
have final authority over your proved reserves
SEC Red Flags and Hot Button Topics
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Technical Issues
Validation of proved undeveloped locations (PUDS)
Proper use of analogies
Determination of down dip limits/LKH
Application of seismic interpretations
Recovery factors
Application of reservoir simulation
Flow testing/Data comprising a conclusive formation test
Undrilled fault blocks
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Commercial Issues
SEC year-end pricing
Costs – Capex and Opex
Non-hydrocarbon revenues
Financial commitment to develop/project stagnation
Project sanctioning
Commerciality – lack of market
Booking under PSC’S
SEC HOT-BUTTON TOPICS
A) SEC year-end pricing
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SPE/WPC – allow some latitude, average
period OK
SEC – no interpretation. Must use price on
effective date
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SEC position reflects its dated origins (1978)
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A time with less volatility in O&G markets
Now O&G sold on spot markets
Year-end price to be used for rev. projections and
economic limits
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Can lead to abnormally high (or low) economic well
lives
CONSEQUENCES OF SEC SINGLE DAY
YEAR-END PRICE
A) SEC Year-End Pricing
CONSEQUENCES OF SEC SINGLE DAY
YEAR-END PRICE
A) SEC Year-End Pricing
SEC HOT-BUTTON TOPICS
B) Recovery factors
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SEC increasing scrutiny
Staff pressing for hard evidence for recovery
factor’s higher than low-side of range
May ask for supporting documentation of
assumptions
 Examples:
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water drive for oil
absence of water drive for gas
SEC HOT-BUTTON TOPICS
C) PUD’s
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One offset “rule” (regulatory spacing)
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Website – “certainty” beyond one location
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Rule also applies to CBM
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Large percentage of PUDs
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“Stale” PUDs
PUDs remain undrilled
Analogy for PUDs no longer valid
SEC HOT-BUTTON TOPICS
D) Reliance upon seismic interpretations
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Historically SEC has dismissed as too uncertain for
proved reserves
Extension of lowest known hydrocarbons
Proving up nearby untested analog structures
SEC HOT-BUTTON TOPICS
E) Booking reserves under PSC’s
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Necessary Elements
 Right to develop and extract
 Reasonable certainty of production
 Intent and commitment to develop
 Capital at risk
 Legal right to produce at the date of the estimate
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SEC Position – after foreign government declaration of
commerciality or government approval of development plan
Exceptions if “Compelling Case” made to SEC
SEC HOT-BUTTON TOPICS
F) Determination of LKH – SEC - well logs only
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SEC position can lead to significant differences relative to
SPE/WPC reserves
Reversal of 2000 SPEE forum position – “compelling case”
SIGNIFICANT DIFFERENCES IN SEC AND
SPE / WPC RESERVES DEFINITIONS
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Determination of lowest-known hydrocarbons
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SPE and SEC definitions read similarly
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SEC – “in the absence of information on fluid
contacts, the lowest known structural occurrence of
hydrocarbons control the lower proved limit of the
reservoir.”
SPE – “lowest known occurrence of hydrocarbons
controls the proved limit unless otherwise indicated
by definitive geological, engineering or performance
data.”
SIGNIFICANT DIFFERENCES IN SEC AND
SPE / WPC RESERVES DEFINITIONS
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Determination of Lowest-Known Hydrocarbons
Well A
O = 31.1%
K = 1100 md
Well B
LKO Log
SPE Proved Volume
Increment
OWC (RFT)
O = 32.4%
K = 1600 md
Reservoir cross section through wells A and B
SIGNIFICANT DIFFERENCES IN SEC AND
SPE / WPC RESERVES DEFINITIONS
Determination of Lowest-Known Hydrocarbons
Formation Pressures
MDT
8100
Well A
MDT Pressures
8200
Top of sand
8300
Depth TVDSS
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Well B
MDT Pressures
8400
Base of sand
8500
Calculated OWC
Top of sand
8600
Base of sand
8700
8800
4880
4920
4960
5000
5040
5080
5120
Pressure PSIA
Wireline test data established
5160
5200
SIGNIFICANT DIFFERENCES IN SEC AND
SPE / WPC RESERVES DEFINITIONS
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Determination of Lowest-Known Hydrocarbons
SEC HOT-BUTTON TOPICS
G) Simulation-derived reserves estimates
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Model in-place volumes limited by SEC
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LKH limitations
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Flow test requirements
SEC recognizes models often represent expected case
SEC requires “good history match”
SEC HOT-BUTTON TOPICS
H) Revenue from Sale of Non-Hydrocarbons
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SEC Prohibits All Non-Hydrocarbon Reserves
(including Sulphur , CO2 , and Helium)
Third Party Processing Revenue excluded
Cannot use non-hydrocarbon income to offset or
reduce operating costs
SEC HOT-BUTTON TOPICS
I) Flow Test Requirements
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SEC – “Reserves are considered proved if economic
producibility is supported by either actual production
or conclusive formation test.”
SEC Survey on Booking Practices in GOM
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SEC “Special Project”
Inquiry concerning booking proved reserves without
conventional flow test
Addressed in 2002 SPEE Forum with SEC
SEC HOT-BUTTON TOPICS
I) Flow Test Requirements
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Significant Unresolved Issue – SEC Definition of
“conclusive formation test”
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In certain areas- GOM -not seen as necessary or feasible
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Producers reasons for no flow test in deepwater GOM
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Redundancy to calculated test rates
Costs often exceed $10MM
Delays of up to two years
Environmental concerns and permitting requirements
SEC HOT-BUTTON TOPICS
I) Flow Test Requirements
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Potential Impact of SEC Decision – If Position Enforced
Producers will be required to under report reserves
Impact will be greater on smaller independents
SEC’s mandate of full disclosure may not be met
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Deepwater GOM ruling
Collaboration of logs, cores, seismic and MDTs
SEC HOT-BUTTON TOPICS
J) Net Profits Interest (NPI)
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For properties subject to payment of net profits, SEC
requires property owner to deduct NPI “reserves”
from owned reserves
SPE/WPC definitions – silent, but tradition considers
NPI’s to be financial transaction without reserves
ownership
What’s on the Horizon
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SPE is revising its petroleum reserves definitions and will
issue new ones in 2006-2007.
The United Nations has integrated the SPE/World
Petroleum Congress reserves definitions into its
framework with an aim to fully align both.
SPE is working with the International Accounting
Standards Board and other organizations, including the
UN, to ensure the adequacy of reserves standards.
The IASB and FASB have agreed to work towards the
convergence of existing U.S. and international financial
accounting practices and the joint development of future
standards.
According to Roger Schwall, assistant director for the
Division of Corporate Finance - the SEC has no current
plans to change their definitions or guidelines.
Thank You for Listening