Proved Reserves Revisions: How Reliable Are They?

Abstract

Summary This paper incorporates the findings of our previous publication (Morales and Lee 2022) and identifies, isolates, and quantifies elements in the annually disclosed proved reserves revisions that should not be considered technical or economic revisions. This has resulted in significantly different technical and economic revisions compared to those simplistically and directly derived using a common interpretation of the Financial Accounting Standards Board (FASB) Topic 932-235-50-5 (a) definition. We have assessed the reliability and comparability of the updated technical revisions when used to judge the reasonable certainty of the underlying proved reserves. We have carried out the analysis separating the proved reserves into developed and undeveloped. To derive a realistic data set to generate the updated technical and economic revisions, we reviewed more than 1,000 annual reports (10K and 20F Forms) and more than 600 comment letters from 141 companies filing annual reports to the Securities and Exchange Commission (SEC) during the period 2010–2020, extracting the information related to annual reserves changes and explicitly focusing on the disclosed revisions of previous estimates (RPE). We present evidence showing that the approach followed is robust and more reliable than the simple approach where technical revisions are estimated by simply subtracting the disclosed revisions due to price effects from the disclosed revisions in annual reports. The root causes for the significant differences between the simplistic approach and the one presented in this paper are mainly due to (1) including annual reserves changes due to nontechnical or economic factors as technical revisions, (2) using different interpretations of SEC and FASB regulations, and (3) not providing critical disaggregation information needed to estimate technical, economic, or other types of revisions correctly. Without proper consideration of these issues, the derived technical and economic revisions from disclosed data can be significantly distorted, affecting any conclusions derived. The annual average changes in technical revisions during a representative period, if correctly estimated, can provide an indication of both overstated and understated certainty of proved reserves estimates, which can impact a company’s relative valuation, asset impairment, internal depreciation, profit/loss, standardized measure, unit development costs, and other indicators based on proved reserves, making the reliability of the technical revisions and their actual upward or downward movements of paramount importance. We also highlight the significant different root causes driving the major differences between developed and undeveloped reserves in their annual technical revisions. The results indicate that for some companies that provide most of the information required for proper analysis, the certainty level of their disclosed developed and undeveloped proved reserves points toward an apparent overestimation of historically disclosed proved reserves. Our analysis shows the dubious quality and lack of reliability and comparability of the disclosed proved reserves revisions and highlights the limited value of existing guidance and current practices. We provide evidence that calls for FASB and SEC to provide complementary guidance in critical areas that currently limit the value, reliability, and comparability of the proved reserves revisions disclosed.