Anadarko executive: Management integrity vital to reserve estimates

March 30, 2004
In estimating oil and gas reserves, producers need to look beyond the current fevered focus on primarily third-party engineering to "the more important aspects of internal reserve estimation processes. . .," said Jim Hackett, president and CEO of Anadarko Petroleum Corp., Houston.

By OGJ editors

HOUSTON, Mar. 30 -- In estimating oil and gas reserves, producers need to look beyond the current fevered focus on primarily third-party engineering to "the more important aspects of internal reserve estimation processes which are management integrity, external track records of reserve performance, and public disclosures," said Jim Hackett, president and CEO of Anadarko Petroleum Corp., Houston.

"There is no cookie-cutter, one-size-fits-all model the industry can use when it comes to measuring a resource that you can't see or touch," Hackett said Monday at the annual Howard Weil Inc. energy conference in New Orleans. Investors should consider such factors "as the technical tension in a company's internal review process, the diversity of its properties, its track record of production and reserve adds or revisions, and how clearly management retains the responsibility and accountability for reserves estimates," he said.

Not all reserves are created equal, Hackett observed. "How long PUDs [estimated proved undeveloped reserves] stay on the books, where they're located, their infrastructure requirements, and their production-cost and sales-pricing structures all have important implications for the current value of those booked reserves," he said.

"Another quick test for investors is to look at a company's history of production growth relative to reserves growth, including PUDs. They will rarely match up exactly for any given time period, but they ought to be close to ensure that the booked reserves are not just staying on the books forever but are actually being produced," he said.

Anadarko has 2.5 billion boe in proved reserves. The company relies on an internal staff of more than 150 engineers and geoscientists to review every well in every field each year, so that its risk of performance surprises are "greatly reduced," executives said.

The company also has a diverse set of properties, with its largest field representing only 7% of its total proved reserves.

Significant additions and changes in Anadarko's reserves are reviewed by a five-member corporate team that includes the company's chief engineer, chief geologist, manager of corporate reserves and economics, and a senior engineer. The fifth team member is a representative from the consulting firm Netherland, Sewell & Associates Inc., Dallas.

As for the merits of an outside audit vs. an outside review, Hackett said, "Anadarko has used both concepts throughout its history, and neither system is perfect."

Ultimately, the US Securities and Exchange Commission and investors will hold Anadarko—not an outside consultant—accountable for reserve estimates. "We have a comprehensive understanding of our properties and utilize a vigorous process with the right intellectual capital working on our reserve estimates. Because of these combined factors, we have considerable confidence in our numbers," Hackett said.