Why Does My Company Need an Independent Reserve Report?

This is a question I have often heard during my career in the oil and gas industry. As it turns out, it is a good question that needs a serious answer. In the following paragraphs I will provide reasons why your company would benefit from an independent reserve (or resource) report. First though, I’d like to discuss a little about myself to show that I’m qualified to answer this question. I graduated from college with a BS in Petroleum Engineering and a BS in Geology. My first job was working as a logging engineer for several years. When I decided to stop chasing drilling rigs, I took an engineering job at a major oil company in their reserves department. Several years in that job led to accepting a bank engineer position which lasted for about 10 years. I did contract work for a few years and eventually signed on with a large petroleum engineering firm performing reserves and resource evaluations. After 16 years at that firm, I started a small petroleum consultancy with an associate, Aeon Petroleum Consultants. So, having looked at reserves from all sides, I would say I’m qualified to answer questions related to oil and gas reserves and resources.

There are several reasons a company would need an independent reserve report. Listed below are the major reasons a company would benefit from an independent reserve report:

1) There is a lack of bias on the part of an independent reserve estimator. A truly independent reserve estimator has no ownership in your company, is not related to anyone in your company, and is not paid dependent on the reserves estimated for your company. The only drivers for the outcome of the reserve estimations are the data. Although company personnel may think they may not have any bias in estimating reserves, there are several factors that can have an influence on the outcomes. These factors include project loyalty, reporting hierarchy, salaries and bonuses, and job retention. Over the years I have seen all of these affect reserve estimates.

2) Independent reserves estimators generally have more experience estimating reserves than company personnel. Most companies perform reserve estimates once or maybe twice a year. Independent reserve estimators do their work year-round. Also, the principals at the firms estimating reserves typically have at least 10 to 20 years of experience estimating reserves, resources, and petroleum economics.

3) Independent reserve estimators can provide the company with a fresh look at the data. Independent reserve estimators look at data for both quality and quantity. They can provide your company with an assessment of the quality of the data used to estimate reserves and point out areas where more data may be required to firm up reserve estimates. From my experience I would say that most companies do not make an internal effort to look at their data in this way.

4) Independent reserve estimators can provide trusted reserve assessments for potential investors, bankers, and sale or acquisition of properties. Since the reserve evaluation by and independent reserve estimator is not affiliated with the company that owns the reserves, it is more likely to be trusted by those outside the company.

5) Independent reserve estimators are privy to information that company estimators are not. Remember that independent reserve estimators perform work for other companies and look at other companies’ data. Although independent reserve estimators cannot directly use that data when estimating your company’s reserves, they do keep that data in mind when estimating your company’s reserves. Examples of this are b-factors, future decline rates, water production, gas-oil-ratio changes, etc.

6) Independent reserve estimators can help protect against potential internal company fraud. Reserves are an oil and gas company’s assets and belong to the stockholders of the company. Therefore, proper accounting and reporting of reserves to the stockholders is of critical concern. Although an independent reserve estimator is hired by company personnel to evaluate the reserves, the independent estimator is actually working on behalf of the company stockholders.

7) Independent reserve estimators can help train a company’s reserve staff. While working on company reserves, the independent estimator will be in close contact with the company’s reserve staff. Discussions between the two can highlight both similarities and differences in how both have estimated reserves.

8) Independent reserves estimators may use both deterministic and stochastic (Monte Carlo) methods to estimate reserves and resources. For oil and gas projects that are immature, independent reserve estimators will likely use stochastic methods to obtain low, best, and high estimates of reserves and in particular, resources. This is in contrast to most companies that use a deterministic low, best, and high method. Using a stochastic (Monte Carlo) method typically provides a better range of estimates when there is a wide range of values for the input data.

All of these are compelling reasons to obtain an independent reserve report for your company. Our firm performs independent reserve evaluations.