Demonstrating Reasonable Certainty under Principles-based Oil and Gas Reserves Regulations

Abstract

AbstractHistorically, oil and gas reserves definitions have included the term "reasonable certainty" when describing the standard of high confidence/low uncertainty for a conservative estimate of future recovery from an accumulation. In 2008, the U.S. Securities and Exchange Commission (SEC), one source for such definitions and regulations, changed its rules on oil and gas reserves, and moved from a more rules-based approach to a more principles-based approach. While the SEC regulations both before and after this change incorporated the term "reasonable certainty", the philosophical change from rules-based to principles-based regulation puts more responsibility on the reserves evaluator to understand the uncertainties in the reserves estimation and to "get it right".This paper examines the stated definition of reasonable certainty as well as the effective definition based on how the regulations were interpreted under the prior rules-based system. Examples of prior methods of regulatory controls, under a rules-based system, that no longer fit under a principles-based system are noted. The paper then examines the current definition. The overprint of a principles-based regulatory system must be considered to understand how such an approach will impact the effective definition under the current rules. The insights from the financial and legal communities are examined for their learnings where other forms of regulations underwent this same philosophical change. This examination describes how rules-based systems are more "input control" focused, while principles-based systems focus more on "outcomes".Next the paper suggests how the reserves evaluator should apply this understanding of the new principles-based rules. The evaluator is now more responsible to understand the range of uncertainty in reserves estimates and to ensure that the outcome (the proved reserves estimate) satisfies the regulations. Also the paper discusses key tests to demonstrate that the correct outcome, a reasonably certain volume, has been achieved. After 30 years of well-established practices, the responsible reserves evaluator has examined changes as they evolved in then-current regulation text. Now the evaluator needs to additionally consider changes based on the implications of principles-based regulations.