Deloitte urges regulators to update reserves reporting

March 21, 2005
Deloitte & Touche LLP has urged regulators worldwide to update their oil and gas reserves reporting requirements and to expand the scope of mandatory disclosures in annual reports and financial statements.

Deloitte & Touche LLP has urged regulators worldwide to update their oil and gas reserves reporting requirements and to expand the scope of mandatory disclosures in annual reports and financial statements.

Victor A. Burk, chairman of Deloitte’s Global Oil & Gas Group in Houston, said changes are needed to promote disclosure of a fuller and more meaningful picture of oil and gas reserves information.

He believes a universal set of reserves definitions can be adopted worldwide, although he stops short of forecasting when that might happen.

The Society of Petroleum Engineers is working with the American Association of Petroleum Geologists, the World Petroleum Council, and others under United Nations auspices to produce worldwide reserves categorization definitions, he noted.

Burk and Peter J. Newman, managing partner of Deloitte in London, wrote their company’s reserves disclosure report, which was similar to a report released by Cambridge Energy Research Associates (OGJ, Mar. 7, 2005, p. 31).

Deloitte released its paper, including recommendations on improving reserves disclosures, in February. Burk sent a copy to the US Securities and Exchange Commission. He had not received any response from the agency as of Mar. 15.

Last year, reserves disclosure policies drew attention after Royal Dutch/Shell Group and other companies downgraded estimates for proved reserves (OGJ, Feb. 21, 2005, p. 5). Burk said the downgrades were widely misunderstood.

SEC policy limits reserves disclosure to proved reserves. This contributed to misperceptions and confusion about what happened to reserves quantities shifted out of the proved category to probable, he said.

“It would be a very positive advance for market regulators and accounting standard-setters to extend the required disclosures about reserves to embrace the category of probable reserves,” Burk said. “Regulators should work together globally and adopt the definitions and categorization structures already endorsed by the petroleum experts and widely used within the industry today.”

The Deloitte report primarily examined reserves disclosure policies in the US, UK, and Canada. Last year, Canada implemented uniform, updated reporting standards (OGJ, Jan. 19, 2004, p. 30).

In the US, SEC reserves disclosures and definitions are based on rules adopted in 1978. Since then, petroleum engineers have updated definitions for categorizing reserves based upon sophisticated technology not reflected in the SEC rules.

“The continuing focus only on proved reserves information is limiting and is prone to misinterpretation. Confidence has waned in this area following the restatements over the last year of reserves previously reported,” Burk said.

Industry bases its investment, planning, and portfolio decisions on both probable and proved reserves, he said.


The report makes the following recommendations:

• Mandatory disclosures should be expanded by market regulators and accounting standard-setters to include reporting on probable as well as proved reserves. Information on expected timing of production from both categories should be provided.

• Reserves information is essentially “forward-looking” and should all be presented within the Operating and Financial Review, or in the US, the Management Discussion & Analysis, in both narrative and quantitative form, rather than as unaudited notes to the accounts.

• Reserves estimates disclosed in annual reports and accounts should be prepared only by suitably “certified” engineers, whether they be internal employees or external consultants, in accordance with standards and guidelines under preparation by the petroleum engineering profession.

• Corporate governance regulations on internal financial control processes, such as Turnbull in the UK and Sarbanes-Oxley 404 in the US, should apply to the compilation and reporting of reserves. In estimating reserves, managements should be permitted to interpret the “current economic conditions” so as to apply reasonable price and cost assumptions that are consistent with their overall plans and budgets.

• Although independent audit of oil and gas reserves should remain optional, a framework of standards and guidelines governing independence, competence, audit procedures, and prescribed forms of reporting needs to be more fully developed.


Burk said the most important step is for regulators to require that reserves estimates disclosed in annual reports and used in accounting calculations be prepared by certified engineers in accordance with SPE and Society of Petroleum Evaluation Engineers standards and guidelines.

“Certified engineers in this context will thus include oil companies’ internal employees and those engaged through petroleum engineering consulting firms,” he said. Geoscientists and engineers involved in reserves estimates need a certification process similar to the process implemented for certified public accountants, he said.

The report added, “We believe that the regulatory requirement for reserves information to be prepared by certified engineers should help to restore investor confidence. This in no way reduces the responsibility of the management and the board to ensure that reserves disclosures comply with all aspects of the regulatory requirements.”

Currently, there is no standard outlining the processes to be completed in order to undertake an audit or a review of reserves estimates. There also is no standard report form that consistently identifies the role and scope of the audit work, Burk said.

Independent audit of reserves disclosures should continue to be optional for oil companies, but these audits should be undertaken in a developed framework of standards and guidelines that include prescribed forms of reporting, the report said.