How the SEC chose its discount rate and other tales

Oil IT Journal editor Neil McNaughton reports virtually from last month’s Ryder-Scott Reserves Conference on how the SEC chose the discount rate used for the last 25 years in reserves reporting. Changing tack, he reflects on the relationship between software startups, major contractors and their respective marketing efforts, warning against post-acquisition website ‘rigor mortis’.

Back in the days when I worked in a small E&P outfit, computers (or rather ‘calculators’) were becoming just about affordable. One of the popular pastimes of us geophysicists (as the only not-too-numerically-challenged folks in the organization) was computing net present values and discounted cash flows. At the time I remember we had interesting debates on the ‘discount rate’ and its relationship, or otherwise, to interest rates—without, as far as I remember, coming to any useful conclusions. The discount rate was just a number that we plucked from thin air. It turns out that we were in good company.


At the Ryder Scott Reserves Conference last month, Richard Adkerson, former SEC* staffer and McMoRan CEO, revealed how reporting regulations for oil and gas reserves were drafted, back in 1978. The SEC initially proposed a formula tying the discount rate used in reserves disclosure to interest rate changes and the diversity of a company’s reserves portfolio. Industry baulked at such complexity so, in Adkeson’s words, ‘The then chief accountant at the SEC, Clarence Sampson, told me to “pick a rate.” Without hesitating, I replied, “Prime plus one percent.” At the time, prime was 9%, so the discount rate became a ‘standard measure’ of 10% and has remained so for the past 25 years!’


On a completely different tack, I was wondering what to make of Baker Hughes’ disposal of its Recall software unit to Petris. The history of Z&S’ Recall encapsulates many facets of the relationship between software houses and the major service contractors. The story often begins when a couple of consultants, working in a fairly narrow field, develop a software package—in this case for managing well log data. Subsequent sales to oil companies demonstrate the usefulness of the package and may then attract the attention of a major player.


Money changes hands and the software house becomes part of a larger organization. The original developers hopefully receive a cash bonanza and may be invited to stay with the company. The acquiring company can breathe a quick sigh of relief that the target has not fallen into the hands of a competitor, before stepping back and reflecting on how to manage the new situation ‘going forward’.

Acquisitions, acquisitions...

Baker’s acquisition of Recall parallels Halliburton’s acquisition of Landmark and Schlumberger’s acquisitions of both Geoquest and more recently, Petrel. All of which have presented a range of problems to the acquirers and to the acquired. The first issue to decide is that of integration. Seen from the golf course, boardroom, or wherever the shots are called, of a large service company, there is a prima facie case for closely coupling the newly acquired software with the company’s data acquisition division.

Decisions, decisions…

After all, everybody keeps banging on about ‘integration,’ so why not ‘integrate’ acquisition with the software? Of course, this doesn’t work. If Recall had ever got so close to Baker’s acquisition division that it neglected its ‘interoperability’ with Schlumberger or Halliburton data, its users would be up in arms. So one potential ‘synergy’ bites the dust and we are back to the golf course. How about rationalizing software development? Another tricky issue. The fact of the matter is that although logging and seismic companies have a lot of developers, that does not make them software houses.


Commercial software development is about more, much more, than writing code. The interface needs polishing, documentation has to be written, non expert users kept happy and the stuff needs to be marketed. Most logging software development is tool-specific and a lot is not even commercialized. Seismic processing software may be sold—but to a user community of considerable sophistication, who will likely be less concerned about the interface. In fact, if there is development synergy to be had, it is more likely to be achieved by the software house ‘taking over’ development of the service company’s niche products. This may be hard to realize because of demarcation rivalry and the fact that the acquired company is probably under-resourced.


In desperation, our golfing partners turn to the only synergy left, marketing. Here, I feel we have a kind of inside track on what’s going on. In our monthly efforts to put the newsletter together, we visit several hundred company websites. Over the years, this activity has turned into a kind of ‘industrial archaeology’ of corporate development. We track companies from the first flush of enthusiasm, through growth and betimes, to acquisition. Sometimes you can see what’s going on simply by listing the dates of press releases. In the early years, releases are made at regular intervals. In the worst post-acquisition train wrecks, releases stop overnight and website rigor mortis sets in. Sometimes the product website is unplugged completely.

Carry the torch

It would be nice to think that the marketing torch is being carried by the acquiring group, but this is not always the case. Sometimes it happens, one thinks of Schlumberger and Petrel. But often it seems that post acquisition marketing gets overlooked, with one marketing department leaving it up to the other. I submit that Baker and Recall may have fallen into that category. One pairing that definitely fits the bill is Halliburton and Geographix, with just three press releases in the last five years! A fact that appears to have been noticed (at last) by Halliburton’s top brass who were busy ‘re-igniting’ Geographix at the Calgary AAPG—more of which in next month’s Oil IT Journal.

* Securities and Exchange Commission—the US financial watchdog.

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