Measuring fossil fuel reserves: A simulation and review of the U.S. Securities and Exchange Commission approach

Abstract

In its modernization of its reporting requirements, the U.S. Security and Exchange Commission (SEC) defined measures of oil and gas reserves which exaggerated price changes leading to volatile financial reporting of reserves. To predict future prices they defined “current prices” on the basis of a deterministic 12 month rolling average. They defined reserves to be “economically producible” based on a lagging measure, “current prices,” which converted a geophysical measure of fossil fuel formations into a price index of oil and gas prices. A simulation using actual crude oil prices from 2013 to 2021 pits these measures against a proposed measure, the expected economic resource amount, that accounts for uncertain outcomes, probabilistically weights price behavior, and eliminates false signals. Fitting into current SEC reporting procedures, the design provides a flexible platform upon which the SEC can accommodate the changing needs of the energy company stockholders and stakeholders.