Current Applications of the "Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information" to Meet the Objectives of the Sarbanes-Oxley Act of 2002
Authors: Harrell D.R. 
Published: December 2007

This paper focuses on the use of SPE standards in the mandatory reporting of reserves information to the U.S. Securities and Exchange Commission (SEC) under conditions imposed by the Sarbanes-Oxley Act of 2002 (the Act). E&P companies are assessing the potential impact of the Act on their shareholders, boards of directors and management. The Act may even affect companies at the employee level, i.e., "Whistleblowers" are now a protected classification under the Act.

Public issuers can suffer potential penalties by improperly reporting company financials. For an E&P company, reserves estimates, considered supplementary information to the financial statements, are the most significant measure of company value.

Even though the Act does not specifically address the reporting of reserves, most E&P companies are assuming that this type of reporting will be influenced by Sarbanes-Oxley legislation. The penalties under the Act are an ever-present reminder to management tofirst know and understand the relevant reporting requirements andensure that those responsible for providing information along the data chain are qualified and empowered to respond in an open, honest manner.

This paper proposes that industry adopt the "Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserve Information"1 (the Standards), which were initially published in 1977 to provide guidance to both preparers and users of oil and gas reserves information.

The Standards were revised in 2001 to incorporate the 1997 issuance of petroleum reserves definitions jointly by the SPE and the World Petroleum Congresses2 (WPC). The Standards require the adherence to "statutory and regulatory provisions" that apply to the preparation and ultimate use of reserves information and are not limited to applications related to SPE/WPC reserves definitions.

The goal of this paper is to explain and recommend certain steps that will ensure that the reporting of proved petroleum reserves are consistent with relevant SEC requirements.

Introduction

The revisions made to the Standards in 2001 were necessary because the 1977 Standards were limited to proved reserves and did not mention or make a distinction between deterministic and probabilistic methodologies.

The professional standards defined in the 1977 document remain unchanged in the 2001 update but, as described and discussed in this paper, they have taken on renewed importance regarding the reporting of proved reserves consistent with the SEC definitions given the increased level of attention from company management, boards of directors, investors, regulators, financial auditors and the press.

Most E&P companies have always complied with the relevant reporting requirements and will continue to maintain that bond between the company and its shareholders. However, the Act may require a reinforcement of these former procedures to remove any doubt about complete, absolute compliance with the Act and the expectations that accompany its enforcement. Corporate governance is an expression that continues to be refined in meaning over time by regulators, elected officials, shareholders and corporate management.

The intent of the Act would seem to require that those individuals responsible for the estimation and/or auditing of oil and gas reserves to be reported to the SEC should be qualified professionals with abilities and standards equal to those individuals charged with preparing the company financial reports.