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Abstract This paper presents a quantitative approach, using disclosed annual revisions of proved reserves, to judge the reasonable certainty of the underlying proved reserves. We identified issues that affect proper categorization of annual reserves changes in a previous SPE publication (SPE 209695) and incorporated them in this paper to quantify the technical revisions of disclosed proved reserves (and their reasonable certainty) during the period 2010 to 2020. Both over- and under-stated certainty of reserves estimates can impact a company's relative valuation, asset impairment, internal depreciation, profit/loss, standardized measure, unit development costs, and other indicators based on proved reserves.
We analyzed 141 companies and extracted annual proved reserves changes disclosed from 2010 to 2020 in their SEC 10-K and 20-F forms or from comment letters for total, developed, and undeveloped reserves (in barrels of oil equivalent). As described in SPE 209695, we excluded, when available, (1) the impact due to changes in commodity prices and (2) other factors that distort the estimated technical revisions.
We present, with examples based on actual data, the importance of separately analyzing developed and undeveloped proved reserves and the key drivers of the significant differences in average annual revisions between them. If these drivers are not carefully considered, results will lead to incorrect conclusions.
Of the 141 companies analyzed, only 70 provided disclosures for five or more consecutive years of revisions for their total and undeveloped reserves during the 2010 to 2020 period. Of these, only 31 (or 22% of the 141) also disclosed revisions due to price changes in their total and undeveloped reserves. Other non-technical revisions are also required to estimate the technical revisions and judge the reasonable certainty of the disclosed developed and undeveloped reserves. However, the number of companies providing sufficient information to estimate technical revisions decreased to only 27 (or 19% of the 141) when we also considered the issues raised in our previous publication.
Results indicate that, for many companies that provide the information required for proper analysis, the certainty level of their disclosed developed and undeveloped proved reserves can be significantly different, and appears to be much lower than the reasonable certainty, or high degree of confidence, required for proved developed and undeveloped reserves quantities, pointing towards an apparent over-estimation of historically disclosed proved reserves for many companies. We also highlight the issues that may still affect the estimated technical revisions, which may limit the validity of any conclusions drawn using the disclosed information.
Our analysis shows the dubious quality and lack of reliability and consistency of some proved reserves revisions disclosed and highlights the limited value of current practices in disclosures of revisions in annual proved reserves. We provide evidence that call for FASB and/or SEC to provide complementary guidance in critical areas that currently limit the value and reliability of revisions to proved reserves disclosed.
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