Reserves Booking in Upstream Fiscal Environments: Inconsistencies and a Proposal for Revised Guidelines

Abstract

Summary The lack of consistency has long hampered regulatory reserves booking in upstream fiscal systems, particularly in foreign jurisdictions. The root cause is ambiguity in reporting standards that leave much room for interpretation. Currently, no clear guidelines are issued by the US regulatory agencies for the recognition of reserves in different fiscal systems. Standards used by the industry go back to 1977, and they cater mostly to US situations. Oil companies use their own interpretive judgment to book reserves from across the spectrum of fiscal settings. Some of the reserves reported appear to be overstated. Separate from inconsistency, reserves that are currently reported from foreign operations may bear little relationship to what the investment community generally perceives as reserves. Investors need better transparency and better comparability. This paper addresses problems in the current reserves recognition practices in fiscal environments, and it proposes revised guidelines aimed to bring transparency and consistency in reserves recognition. We also provide relevant formulation. A key criterion for reserves recognition under the proposed scheme is ownership in kind. We exclude from consideration some of the practices currently used in the industry. It is hoped that this paper will stimulate further discussion on the subject and prompt the regulatory agencies to issue official guidance.