Several big oil companies released a report yesterday that they had commissioned that challeges the way in which U.S. regulators require oil companies to measure how much oil and natural gas the companies have in the ground. Reserve numbers are a critical measure for evaluating the long term health of an oil and gas company. Here is the executive summary of the report.
Cambridge Energy Research Associates prepared the report, and it sharply criticizes the method that the Securities and Exchange Commission requires that oil and gas companies use to assess oil and gas reserves. The report contends that the SEC’s method is obsolescent and that the results of using the method actually mislead investors because it underestimates the oil and gas industry’s success in discovering or tapping new reserves of oil and gas. The results from using the different methods is startling — it can amount to hundreds of millions of barrels of oil at one company alone. As a result, the report recommends that the SEC revise its reserves-accounting methodology to reflect changes in the oil and gas industry since the guideline was implemented 27 years ago.
This is a key issue for the oil and gas industry because because the long term prospects of companies in the industry is largely dependent on their ability each year to find enough new oil and gas reserves to replenish reserves that the company has generated. In short, reserves are akin to a sign of how much money an oil and gas company has in the bank.
Absent from the Big Oil sponsors of the report was Royal Dutch/Shell Group, which has been hammered over the past year by a scandal in which the company admitted that it had massively overstated its reserves. As a result, Shell has revised its reserves by about a third over the past year, and it still faces continued scrutiny from investigators in the U.S. and Europe.