URTeC 2018: Veteran expert says PRMS may be better reserves reporting method than SEC

HOUSTON -- After modernization of the SEC’s reserves reporting requirements in late 2008, many folks in the U.S. oil and gas industry would have expected that the SEC and PRMS (Petroleum Reserves Management System) systems would classify, characterize and estimate reserves in a broadly consistent way, save for some obvious differences, such as prices and costs used in evaluations and some potential interpretation issues. However, this has not necessarily been the case.

This is the predicament that was explained to a Wednesday topical luncheon crowd at URTeC by the featured speaker, Texas A&M University Professor of Petroleum Engineering John Lee. But at the end of the day, Lee said that if forced to make a choice between the two systems, he would prefer the PRMS.

Lee’s word carries a lot of weight. Not only is he the current occupant of the DVG Endowed Chair at A&M, he became an SPEE Honorary Life Member in 2017; is a member of the National Academy of Engineering; is the recipient of SPE’s DeGolyer Distinguished Service Medal; is a recipient of the AIME/SPE Anthony F. Lucas Gold Medal; and is an AIME/SPE Honorary Member. Lee earned bachelor’s, master's and Ph.D. degrees from Georgia Tech, and then worked for Exxon Research Co. and Exxon Co. USA from 1962 to 1980. He also joined S.A. Holditch & Associates, Inc., in 1980 and retired as executive V.P. in 1999 before beginning his academic career. So Lee, as much as anyone, is qualified to sort out the SEC/PRMS mess.

The good professor said that SEC reserve definitions were changed in 2008, to be more compatible with the PRMS 2007 definitions. As stated before, the goal had been to make the systems much more compatible. And yet, said Lee, “examination shows that dramatic differences exist in many cases.” Making thing worse is that “comprehensive evidence to explain the differences is hard to find.”

However, in every case examined, the PRMS reserve figures for specific companies were higher. For example in 2016 tabulations, the PRMS oil figures for CNOOC were 101% higher; Petrobras was 28.5% higher; Rosneft was 18.1% higher, and Gazprom was 17.2% higher. On the natural gas side, the differences were even greater—PRMS was 37.4% higher for Petrobras; Rosneft was 32.6% higher; and Gazprom was 22.9% higher.

• “So, why the differences,” asked Lee rhetorically. He said the possible reasons include the following:
• Prices and costs used in economic evaluations
• Non-hydrocarbon sales and third-party revenue
• The  5-year rule for undeveloped projects
• Different interpretations, when the spirt of PRMS and SEC is the same
• Lease/contract/concession period entitlement
• Probabilistic reserves additions within a project
• A project’s commercial maturity.

On the first item, prices and costs, Lee said that this is probably a significant factor, given the practice of undeveloped project being de-booked under a constant price case. He also felt that non-hydrocarbon sales and third party revenue was at least a minor item, given that PRMS allows inclusion of these when assessing reserves. The SEC does not allow them to be included. This is a particular problem in the North Sea, where there are a lot of shared facilities.

Another factor of some significance, according to Lee, is that the SEC five-year rule is strictly enforced (with rare exceptions), whereas PRMS allows companies with longer-term developments to have 10 years or more to drill. Also, said Lee, “different interpretations could account for differences seen from 2011 through 2016.” The issue of probabilistic reserves additions was not found to be an issue.

So, Lee’s main conclusions are that large differences result from de-booking either 1) developed reserves; or 2) projects (undeveloped reserves) that are economic under a forecast price case, but are uneconomic under a constant price case. He said that the difference between SEC and PRMS is that SEC emphasizes relative comparability of companies. By contract, PRMS is geared toward a consistent set of standards, capturing the true value of developed reserves and the true value of undeveloped reserves.

During the Q-and-A portion of the luncheon, Lee amplified on his endorsement of the PRMS system, saying that “the most reliable reserve numbers come from the proper application of PRMS standards. The SEC doesn’t represent fair value or what is reasonably likely to happen.”