In
July of this year, the US House Committee on Financial Services
held a hearing in Washington called, "Hearings - Shell Games:
Corporate Governance and Accounting for Oil and Gas Reserves".
Congressman Michael G. Oxley of Ohio (one of the sponsors of
the Sarbanes-Oxley Act) is the Chairman of this House Committee.
The Committee oversees the entire financial services industry,
including the securities, insurance, banking, and housing industries.
The Committee also oversees the work of the Federal Reserve,
the Treasury, the SEC, and other financial services regulators.
At
the hearings, Dr. Bala G. Dharan, the J. Howard Creekmore
Professor of Accounting at Rice University, testified before
the US House Committee. He stated, "Having useful and reliable
information on oil and gas reserves is enormously important
to the US policy makers, managers of the companies, investors
and the public. Over 150 publicly owned oil and gas producers
file reserve data in their 10-K and their reported total
reserves is valued at over $3 Trillion." On a worldwide basis,
reserves are estimated to have a value of over $600 Trillion.
That's a lot of oil and gas!
Dr.
Dharan's testimony agrees with a report published by Lehman
Brothers in 2003. They indicate that the value of E&P companies
is determined largely by their reserves and production. Therefore,
one can conclude that "reserves" is one of the primary factors
used to determine a company's total market value. Dr. Dharan
cited such industry associations as the AAPG, SPEE and SPE
as strong and well-functioning groups that could develop and
implement certification program for reserves evaluators.
Whether
you wish to invest in an exploratory prospect, purchase a producing
field or determine the value of a company, the major factor
is the reserves, whether they are classified as proved, probable
or possible. It is vital to private and public oil and gas
companies, and governments to have reliable reserves estimates.
The
importance and reliability of oil and gas reserves and the
potential intervention by government in the determination of
reserves estimates and disclosure are two primary reasons why
a number of industry leaders are recommending the investigation
into the possible establishment of a certification program
for geoscience and engineering reserves evaluators. The idea
centers around the possibility of a joint industry associations
program to certify geoscientists and engineers in the practice
of reserves estimates and evaluations. Such a program could
establish better standards, define recommended geoscience and
engineering practices and provide ethics training.
WHAT ARE THE MERITS OF CERTIFICATION?
In
general terms, certification may provide a valuable process
that allows our industry to demonstrate, that we, have the
competencies, as professionals, to accurately estimate and
validate oil and gas reserves. Certain oil and gas companies
already have internal certified reserves evaluators from both
the geoscience and engineering disciplines, while others do
not. Since certification should be an entirely voluntary program,
people and companies can choose to join or not.
Companies
may see a distinct advantage to participate in this program
to ensure that their employees have the required training in
methods, definitions, standards and ethics regarding reserves
estimation and disclosure. For individuals the program may
provide needed training, develop a clearer understanding of
reserves definitions, develop additional technical skills and
brush up on the ethics component from both a domestic U.S.,
as well as global perspective. Finally, individuals can obtain
an industry-wide certification recognized by well established
associations and hopefully in the future by state and federal
agencies as well.
Certification will acknowledge that a geoscientist or engineer
has successfully completed a training program, passed a required
test in his or her respective technical area and meets the qualifications
established by the industry's respected professional organizations.
In addition, annual continuing education will keep the certified
evaluator updated on reserves law changes, definitions changes
and new techniques applicable to reserves determinations.
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SCA
is involved in a lot of reserves evaluation work from exploration
prospects, to field acquisitions, to company audits. During
our 15 plus years in the consultancy business, I must state
that most of the problems we see with reserves estimates are
NOT the result of fraudulent activities. Errors in the estimates
of reserves, up or down, often are the result of a lack of
knowledge of reserves definitions, lack of standards, limited
training in the proper geoscience and engineering technical
methods and techniques required to generate sound reserve estimates
and/or careless work resulting from an overload of work and/or
limited time.
If
you have time, review our Fall and Winter 2003 geoLOGIC Technical
Newsletters at www.scacompanies.com... These articles cover
two geologic areas important for determining accurate reserves
estimates. The reserves estimation process includes both the
geoscience and engineering disciplines. Without good geology,
accurate reserves cannot be determined.
With
hearings being held by Congress and the question of whether
or not the government should step in to regulate and determine
how reserves estimates and evaluations are done, I believe
that you will be hearing a lot of discussion on this subject
in the coming months. Whether you are for certification or
not, or undecided at this time, the topic is on the table and
we as an industry must address the issue.
On
September 29, 2004 the first meeting of a newly formed Intersociety
Committee on the Certification of Petroleum Reserves Evaluators
was held in Houston, Texas. This committee is sponsored by
both the AAPG and the SPEE, with representation from the SPE
as well. Their mission is to evaluate the merits of establishing
a program for the Certification of Petroleum Reserves Evaluators.
The committee has several subcommittees including: Certification,
Definitions, Qualifications, Recommended Practices, and ethics.
The committee has a management team composed of Daniel J. Tearpock
representing the AAPG, Richard Miller representing the SPEE
and Ron Harrell, At Large. The committee has a very distinguished
list of members who provide the necessary expertise, experience
and professionalism to effectively meet their mission goals.
Whether
you wish to invest in an exploratory prospect, purchase a producing
field or determine the value of a company, reserves is one
of the single most important factors in the decision. With
worldwide reserves valued at over $600 Trillion, it is vital
that oil and gas companies and governments have reliable reserves
estimates. A certification program for geoscience and engineering
reserves evaluators may be a plausible solution for our energy
industry to provide the evidence to government, that we as
an industry, have the experience, expertise, ethics and professionalism
necessary to provide accurate and reliable oil and gas reserves
estimates and thereby being one step closer to self-regulation. |
