Feedback: Management pressure blamed for faulty reserves reporting

Dear Editor:

I read “The Reserves Reporting Dilemma” in the March OGFJ and Nick Snow did a very good job of laying out some of the problems. Sadly, as a registered geologist and state-certified appraiser, I nod my head in sympathy with those who get the axe after a company restates reserve estimates.

The problem is not inept evaluators and estimators. It is not untrained reservoir engineers. It is management pressure. Unrelenting, whether subtle or direct, it is management that encourages inflating reserves and it is management which has a financial state in having those reserves over-stated. Management compensation relates to reserves via increased stock prices and options, or helps build reserves that can be used as borrowing or acquisition leverage.

If the problem was inept science and accounting, then 50% of all erroneous reserve estimates would be understated and 50% overstated. The bias is always to the “too high” side simply because from geologist to engineer to accountant, the numbers are pushed, prodded, and massaged - in other words, inflated under the pressure of upper management. With the estimator’s job hanging in the balance, it is nearly impossible to escape the consequences of that pressure.

Even hiring an outside engineer or appraiser does not solve the problem. The manager sits the top guy down in his office privately, and simply states his case. He either threatens to withhold compensation if the numbers are not satisfactory or holds out the carrot of future work if “things work out.”

Australia has taken one step further and requires the mineral appraiser to give management a draft report and allows them to contest the figures used by the appraiser. Can you ever imagine management protesting the results as being too high?

The problem is further exacerbated by Sarbanes-Oxley and other federal legislation that mandates transparency on the one hand and privacy on the other. Many banks, corporations, and others with close held information are reluctant to share such information with the appraiser even when federal regulation requires the appraiser to make the effort to obtain such financial data. Lacking knowledge of the inner machinations of the “deal,” the appraiser often fails to find and account for factors that have otherwise affected the market value of the property.

Further, as the ongoing trials of energy traders proves, top management can claim ignorance and point fingers at the accountants, engineers, and appraisers, whose signed certifications prove their culpability.

The engineers fired for overstating reserves are mere scapegoats. Nothing the SEC can do or has proposed will stop crooked CEOs. There is no solution to the problem.

Terrel Shields
[[email protected]]
Siloam Springs, Ark.