Royal Dutch Shell Evaluation of Oil Reserves — страница 9

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oil reserves lifted. The general problem with the oil reserves definition today is that the SEC principles, which were created in the 70’s mainly for the North American oil reserves, are used nowadays for almost 40% of world oil production and 10% of the reserves (a majority of which is not held by US companies), due to the fact that in the last 20 years SEC has virtually became the world regulator. Although, SEC’s underlying principle of “reasonable certainty” for defining proved reserves remains robust, it has become increasingly difficult for companies to reconcile the SEC’s interpretation of this principle with how the companies themselves are actually working. This has created an environment in which data disclosed in compliance with the

regulations may not be serving the needs of investors and is not providing the appropriate information to make informed investment decisions (CERA, 2005, p 4 sqq). To conclude this, one can say that when dealing with company’s oil reserves, one is in fact dealing with random log normally distributed value. In order to provide the complete information regarding this variable, company should have provided the complete density function or at least some key points of the distribution as it does in internal reports. Instead, current reporting system tries to represent this random distribution as a single figure, which in turn makes company to conduct two separate reporting systems and leads to confusion and sometimes to misrepresentations. 2.2 Standardized Cash Flow Calculation

under the SEC and FASB Rules. Now let us focus on another estimation that the companies reporting under SEC regulations are obliged to represent on their annual report, namely the cash flow that the existing oil reserves are expected to produce in the future. The requirement of standardized measure of cash flow is stated in the SEC Rule 4-10 and the guidelines are represented in Financial Accounting Standards Board Standard 69. In its guidelines, FASB sticks with the conservative approach in the general spirit of the SEC reporting strategy for oil reserves. The principal rules on how the standardized measure of discounted net cash flow from producing proved oil and gas (SMOG) is calculated as well as the reasoning behind these rules are represented by FASB back in 1982 and

remained practically unchanged since than. A standardized measure of discounted future net cash flows relating primary to an enterprise's interests in proved oil and gas reserves shall be disclosed as of the end of the year in accordance with the principles and guidelines stated in FAS 69. This mash flow measure should provide the following information to the investors: a. Future cash inflows. These shall be computed by applying year-end prices of oil and gas relating to the enterprise's proved reserves to the year-end quantities of those reserves. Future price changes shall be considered only to the extent provided by contractual arrangements in existence at year-end. b. Future development and production costs. These costs shall be computed by estimating the expenditures to be

incurred in developing and producing the proved oil and gas reserves at the end of the year, based on year-end costs and assuming continuation or in other words assuming the continuation of the present conditions principle. c. Future income tax expenses. These expenses shall be computed by applying the appropriate year-end statutory tax rates, with consideration of future tax rates already legislated, less the tax basis of the properties involved. d. Future net cash flows. These amounts are the result of subtracting future development and production costs and future income tax expenses from future cash inflows. e. Discount. This amount shall be derived from using a discount rate of 10 percent a year to reflect the timing of the future net cash flows relating to proved oil and gas

reserves. f. Standardized measure of discounted future net cash flows. This amount is the future net cash flows less the computed discount (FASB Standard 69, 1981). In other words, FASB requires from the companies to reproduce some features of the NPV calculation and omits other features. In that way, oil reserves lifted in the future are to be the same as the oil market prices in the end of the year. The same assumption is used for the operational and development expenditures in the future and in the same time discount factor is to be applied. One of the obvious factors that make SMOG-approach difficult to use both for the investors and for the companies is the requirement to make the calculation in accordance with end-year prices. As we know, oil commodity prices are subject to