Ryder Scott - shale reserves, reporting and ethics

On the SEC and shale. Updating the PRMS. Legal aspects of the downturn. Engineers and ethics.

The collapse of the oil price has made regulatory reporting a fraught business. Speaking at the authoritative Ryder Scott Reserves Conference earlier this year, John Lee (University of Houston) provided an update on how the SEC is treating shale, where in fact, there are no special reporting regulations. However the particular nature of the novel ‘resource’ makes interpreting the SEC’s rules problematical. What for instance is ‘reliable technology’ in the context of shale evaluation? For the SEC this can include computer modeling providing it gives ‘reasonable certainty’ and produces volumes that are ‘more likely than not.’ The burden is on the reporting company to provide proof that such is the case. The SEC also requires that reported volumes are scheduled to be drilled within a five year time frame, a tough call in today’s low price environment.

The SPE’s influential Petroleum reserves management system (PRMS) is being updated to clarify its handling of shale. John Ritter (Occidental) enumerated the significant differences in its evaluation as production history is generally short, there may be few or no analogs and conventional petrophysical analysis may not be relevant. The PRMS authors are revisiting their basic definitions as shale estimates migrate from what was previously considered ‘discovered unrecoverable’ into risk-based economically recoverable categories. Quite a balancing act!

James Cowen (Porter Hedges) addressed the legal aspects of the fall in the oil price, in particular letters that the SEC has sent out to reporting companies. A survey conducted by Ryder Scott found that reserves-related comments are increasing, especially in regard of proved undeveloped reserves and the five year rule. The review letters and responses may be made public through the Edgar system. Cowen recommends assembling a technical and legal team to respond quickly to the letters. Note that, if probabilistic methods are used, there should be at least a 90% probability that the quantities actually recovered will equal or exceed the estimate.

All of which can put the petroleum engineer in a difficult position, as Steve Corso (Haynes Boone) explained in his ‘Ethics hour’ presentation. Companies may pressure a petroleum engineer to inflate reserve estimates who may be tempted to manipulate calculations to reach a pre-determined result or to assign value to an uneconomic field. Companies may fail to de-book reserves even when they clearly do not meet SEC requirements. The answer is to be objective and truthful and not to not make ‘fraudulent, deceitful, or misleading (in any way) assertions’ and not to associate with a venture that is engaged in such activity. More from Ryder Scott.

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