Effect of Production Sharing and Service Contracts on Reserves Reporting

Abstract

Abstract This paper reviews the various types of production sharing and service-type contracts that are currently used and how they impact oil and gas reserves reporting. The primary focus is on reserve reporting for international producing companies but it also discusses issues from the perspective of the government, crude purchaser and, financial institution funding the project. The paper addresses all categories of reserves with special attention given to the reporting of proved reserves to the U.S. Securities and Exchange Commission. It highlights the contractual terms and wordings that allow or prevent booking of proved reserves. Problems associated with meeting these criteria and the ways of avoiding these during contract negotiations are demonstrated through examples. Introduction Oil and gas reserves are the fundamental assets of a producing company and host country alike. They are the fuel that drives economic growth and prosperity. When produced and sold, they provide funding crucial for future exploration and development projects. With the sharpening focus of the investment community on reserves inventories and the value of reserves added, many companies are reluctant to undertake a project that does not provide the opportunity to capture and report reserves. Production sharing and service-type contracts cover a wide spectrum of fiscal and contractual terms established by host countries to best meet their sovereign needs. Currently, there is no consistent industry approach or established practice for recognizing reserves under these types of contracts. Through this paper, the authors hope to promote additional dialogue on the subject and foster development of generally accepted practices for recognition and reporting of reserves under the wide range of contract types encountered. Regulations, Standards and Definitions In defining reserves, it is important to distinguish between the specific regulations that govern the reporting of reserves externally and the internal reporting requirements for technical and business planning purposes. But what exactly do we mean by reserves? The term is used throughout the industry but has many different and often conflicting meanings. The explorationist refers to the reserves of an undrilled prospect, the engineer refers to the reserves of a producing property, the financial analysts refers to the reserves of a company, and governments refer to the reserves of the country. Rarely do they have the same basis or mean the same thing, yet they all use the same terms. Before we can address the impact of international agreements on reserves reporting, we must first define what we mean by the term reserves and the various purposes for which reserves are reported. A summary of the key regulations, standards, and definitions are given in Figure 1. Financial and Regulatory Reporting of Reserves Numerous international regulatory bodies have developed standards for reporting reserves within their respective countries. Historically, however, the agency which has had the most influence in setting standards for external reserves reporting has been the U.S. Security and Exchange Commission. The SEC regulates all publicly held companies, including those foreign companies whose stock is sold through one of the U.S. Stock Exchanges. With the exception of government owned companies, this includes most majors and many of the smaller producing companies. For that reason, this paper considers only the SEC requirements. We should note that in those cases where the SEC rules conflict with local host country regulations, the local regulations must be honored and the reporting entity must meet the requirements of both agencies. P. 203^