Correctly Reporting Reserves Requires Skill and Input From Multiple Groups03/24/2014
At a recent SPE conference, some of the leading figures in reserves reporting met and discussed how the Petroleum Reserves Management System (PRMS) can be successfully implemented. For those not familiar with the PRMS, it is a definition and classification system for petroleum reserves and resources that reflect advances in technology. It is available for any company, agency, country or stakeholder to use and has been recognised by various official bodies including the US Stock Exchange Commission, the Australian Stock Exchange (ASX) as well as the Norwegian Petroleum Directorate.
Although the framework and definitions within PRMS are comprehensive, what was crystal clear was that many systems for reporting reserves have evolved within a company over time as standards have changed. The reliance upon the reporting of reserves and contingent reserves is so important that there is, of course, a reluctance to change this system due to the possibility of changes in the reported numbers and therefore a change in investor’s attitude (Think about the Annuity insurance companies in the UK after the recent budget change). This is an advantage in that the provenance of the reporting system is known, the disadvantage is that the system is immutable because no-one wants to fix what is not (seemingly) broken!
Based on the PRMS, what also became clear was that the Chance Of Commerciality is one of the key measures to determine whether Contingent Resources should be reported as Reserves, or indeed if Reserves should migrate back to Contingent Resources. There are conditions to enable this movement such as all required internal and external approvals being in place, and environmental and governmental approvals. There must also be evidence of a company’s clear intention to proceed with development within a reasonable timeframe (5 years typically).
What is not mentioned and can be considered disruptive in this are of course the rapidly changing political and geopolitical situations which can affect investment decisions. The decision to hold referendums on independence and the results of these can happen in a short timeframe (as experienced recently within 3 weeks) and yet the approvals to proceed with projects can take years to finalise. In this scenario, this would pose problems to any company operating in this multinational and dynamic space, and the knock on effect of the changed reporting of reserves can have a dramatic effect on the share value of a company.
Reporting the reserves and their appropriate classification is therefore a skilled activity which requires input from multiple groups and concatenated information to enable the correct analysis. Volumetric details, reservoir analysis, deterministic or probabilistic estimates, financial estimates, updates on technological possibilities and risks are a part of the dataset; additionally now the political situation requires costing into the feasibility of a project and therefore can affect the Chance of Commerciality.
Reserves Reporting tools for newer smaller JV style companies therefore need to be robust, enable dynamic analysis, be fit for purpose, aligned to the major commissions in terms of classifications and also adhere to requirements such as Sarbanes Oxley. The tools also need to be integrated into accounting and volumetric simulation tools, allow “slicing and dicing” of data and support the wider organisational collaboration whilst also being scalable, supported and migratable over different operating systems.
The recent world events have shown that the reporting and analysis of reserves is only going to become more complex – and all this without the great “crew change” to consider!
About the Author
Andy Coward is Senior Director, Business Solutions at P2 Energy Solutions.