Can Reasonable Certainty be Assessed from Disclosed Proved Reserves Revisions?

Abstract

Abstract If properly estimated, technical revisions to disclosed proved reserves can be used to establish the reasonable certainty of both proved developed and undeveloped reserves. The trends in these technical revisions are important because they should result in overall positive revisions in EUR within a representative time period. If this criterion is not met, then the proved status of the reserves disclosed becomes questionable with the implications that this may have in depreciation, profit and loss, impairment tests and other reserves indicators where proved reserves are used. Unfortunately, in our review of the annual proved reserves revisions of developed and undeveloped proved reserves disclosed by companies to the SEC, we identified different interpretations and inconsistencies in the annual changes of proved reserves. We used data from annual reports issued between 2010 and 2020 by 141 companies, complemented by hundreds of comment letters issued by the SEC during this period, and found that companies did not apply the regulations and standards consistently, highlighting the limited effect the SEC comment letters have had in improving clarity and understanding in this important area of reserves estimation and categorization. We identified several issues which, if not carefully considered, may lead to incorrect interpretations and conclusions regarding the reliability and comparability of the disclosed proved reserves annual changes and their embedded level of certainty. The paper highlights different interpretations of key definitions and the different approaches and practices that seem to exist in companies when evaluators estimate, categorize, and disclose annual proved reserves changes due to revisions, improved recovery and extensions and discoveries, with special focus on isolating the technical revisions. We also show that the approach that some companies use to estimate the impact of changes due to changes in economic factors in the disclosed proved reserves leads to incorrect estimates and distorts the overall results or comparisons between companies. The evidence shown in the paper calls for improved and systematic official guidance if the proved reserves disclosures are to be used in a practical and useful manner. In the absence of such official guidance, this paper provides a simple project-based framework that may be used to properly analyze and extract value from the disclosed annual changes of proved reserves to improve the alignment, consistency, and proper interpretation of the disclosed proved reserves information and ensure that annual reserves changes do not end up being useless, impractical, or unreliable.