<Oilwatch Monthly - July 2008The Oil DrumDrumBeat: July 17, 2008>

57 comments on Solving the "Enigma" of Reserve Growth

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SamuM on July 16, 2008 - 1:17pm Permalink | Subthread | Parent | Comments top

Thank you Rockman, your post was extremely enlightening.

May I ask a personal opinion from you on this:

Do you think it might be possible that the executives in IOCs (or even NOCs) and might not fully be aware of these reserve game shenanigans and the ramifications they bring along to the numbers they themselves use in their decision making? How about the board level members? Those are usually way out of the loop already.

I'm asking because I know from experience that unless the people at executive positions are really hardcore numbers people (and I don't mean the way economists are, but the way physicists or engineers can be) and unless they possess strong hand on experience from the lower ranks in the company, then the higher level abstracted numbers can easily deceive them.

That is, they don't know how the numbers get cooked, why they get cooked, how much they are skewed and which way. They may not even suspect anything. They deal with high level decisions, so this kind of 'measurement stuff' is details to them and they expect the guys below them to 'get it right'.

Do you think this kind of 'reserve numbers folly' could be prevalent in the oil industry, barring the few smaller exceptions where there's been a real astrophysicist running the company with a fairly small amount of reserves.

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ROCKMAN on July 16, 2008 - 1:56pm Permalink | Subthread | Parent | Comments top

SamuM,

When I began my career in 1975 most management came out of the engineering side. Many still do. And they all know exactly how the books can be cooked. In the last 20 years more financial guys have risen to the top management and some of them could be clueless. The typical motivation for cooking numbers is to make the board/shareholders happy (many of whom have no O&G background and are easily fooled). Happy board/shareholders make for good promotions and bonuses. But just like musical chairs, sooner or later someone's left holder the bag. A few years ago Shell Oil's cooked numbers got so far from reality they made a 20% or so downgrade in their booked reserves in one quarter. This was a huge number and an even bigger embarrassment. I suspect they had been warned by the SEC to come clean before they went after them with a meat clever.

With the public attention and shareholder scrutiny after the Enron fiasco I'm sure a lot of companies are playing straight. I'm currently consulting for a big independent and if they caught someone intentionally misrepresenting reserves (just on an internal basis) they would be fired on the spot. But you still need to be careful with the very small public companies. The payoff for misrepresenting assets is huge these days. And human nature is what it is.

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