The Forthcoming Dramatic Fall of Reported Oil Reserves

Michael Giberson

The forthcoming dramatic fall of reported oil reserves is due to falling prices and reporting requirements, not ‘peak oil’ or the manipulations of greedy industry executives.

Geoff Styles offers a timely discussion of how SEC requirements for reporting oil and gas reserves and current low prices will combine to force a potentially dramatic drop in reported oil and gas reserves as of the end of the year. In brief, current SEC rules require that oil and gas reserves reported on financial statements be limited to quantities very likely to be recoverable at the end-of-year market price for such resources. Given the quite low price expected at year end 2008 – current prices are under $40/bbl while 2007 prices ended over $95/bbl, companies owning oil and gas reserves will report sharply lower amounts of oil and gas in reserve.

Un-savvy investors may be alarmed – where did all that oil go? – and un-savvy political commentators will find the reports as more evidence for peak oil. But as Styles points out, the reserves are not going anywhere, and the resources are still there to be had for a price.

Styles explains that while current SEC rules require reserves reports to be based upon a single day’s price, industry practice has long shifted to using less-volatile metrics for reserves evaluation. The SEC has proposed adapting its rules so as to reduce the effects of price volatility on reserves reporting, and Styles says the upcoming dramatic “loss” of reserves demonstrates the urgent need for such a change.

(One apparent error in Styles’ otherwise excellent post: he suggested that changing prices may result in companies moving reserves from the “proved reserves” to the “probable reserves” category, but such a shift would indicate changing estimates of recovery based upon technological factors. Less favorable commercial conditions are appropriately reflected by shifting estimated quantities of petroleum from “reserves” to “contingent resources” categories in the standard industry framework for modeling petroleum resources.)

UPDATE: Aweek after the above post, the SEC adopted the revisions mentioned. See my follow-up post.

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