Royal Dutch Shell Evaluation of Oil Reserves — страница 7

Indeed, the sizing of equipment and facilities to produce oil and gas generally has to be specified and does not allow for a wide range of possible outcomes. Nevertheless, the decisions made by oil companies are often based on a thorough understanding of probabilistic reserves in the first instance (CERA, 2005. p 13). The latest and the most widely accepted version of probabilistic approach definition was issued by the Society of Petroleum Engineers and World Petroleum Council in 1997. These definitions represent a loose compromise between the probabilistic approach used in the industry and more conservative deterministic approach accepted by US Security and Exchange Commission. In order to understand what is standing behind the definitions proposed by the industry and by SEC and

to have a clearer picture of the expectations of the capital markets and the investors about the reserves booked under each category let us discuss the explanations provided by SEC for reserves booking. The existing SEC guidelines were first issued in 1978 under the regulations of financial accounting and reporting for oil and gas producing activities pursuant to the federal securities laws and the Energy Policy and Conservation Act of 1975 or so called “Rule 4 10” and later supplemented by various explanatory guidelines, the latest of which were issued in 2001. The reserves to be reported under the Rule 4-10 are the reserves that follow the definition of proved reserves: “Proved oil and gas reserves are the estimated quantities of crude oil, natural gas, and

natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions. …Reservoirs are considered proved if economic producibility is supported by either actual production or conclusive formation test… …Estimates of proved reserves do not include: (A) oil that may become available from known reservoirs but is classified separately as "indicated additional reserves"; (B) crude oil, natural gas, and natural gas liquids,

the recovery of which is subject to reasonable doubt because of uncertainty as to geology, reservoir characteristics, or economic factors; (C) crude oil, natural gas, and natural gas liquids, that may occur in un-drilled prospects…” (SEC Regulations §210.4-10, 1978) “Reasonable certainty” is explained by SEC as the concept, which implies that, as more technical data will be available for the particular reserves, the possibility of rescaling reserves upwards is significantly higher than the possibility of the downward rescaling (SEC Financial Reporting and Interpretation Guidelines §II F- 3, 2001). In other words SEC will require reporting a single most probable value of reserves under the existing geological data and the current oil prices, i.e.

the quantity that is to be recoverable given existing market conditions and the information provided by the by the company’s oil engineers (Laherrere, 2004, p4 sqq). The quality of data provided by the company and the standards under which it is provided will be discussed later as the special case of Shell will be assessed. Furthermore, SEC rules are defining two subdivisions of the proved reserves, namely developed and undeveloped proved reserves. Proved developed reserves are defined as follows: “Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods…”. Whereas proved undeveloped reserves according to SEC definition are: ”Proved undeveloped oil

and gas reserves are reserves that are expected to be recovered from new wells on un-drilled acreage, or from existing wells where a relatively major expenditure is required for re-completion. Reserves on un-drilled acreage shall be limited to those drilling units offsetting productive units that are reasonably certain of production when drilled…” (SEC Regulations §210.4-10, 1978) As it was mentioned earlier the existence of proved oil reserves will anyway require an economical viability of the reserves, therefore, from the SEC point of view this sub-definition should not add an uncertainty to the undeveloped proved reserves, but rather should indicate that an additional capital expenditure is needed in order to put it in to production (SEC Financial Reporting