I told my husband at dinner about the new rule change (he teaches computer science, so is not really involved with this), and his reaction was much the same as yours. If a company does't have to actually prove that it can get the oil out, there is a lot more room for games-playing, especially when the oil is in very deep locations or other technologically challenging locations.

With more flexible rules, it is a lot easier to assume that if oil or gas can be seen with imaging techniques, it must be economically possible to get the oil out. The surprises come later, when one discovers the oil is mixed with a toxic substance that is difficult to remove, or reservoir pressure is very low, or some other unforeseen problem arises.

LOL! Yeah and pretty soon we'll have No-Doc reserves!

TS

LOL

In my attempts to formulate the laws of complex systems the top law is.

A complex system under stress will modify itself to hide its true condition.

I dare say this is another example of the law in action.
Its yet one more example of information becoming corrupted as we pass into a post peak world. I'm not suggesting conspiracy theories or any thing of the sort just that this is a very natural sort of change and expected if this law is valid.

comment deleted. I don't want to hijack Gail's thread on SEC Rule changes

I agree completely that we need a Manhattan Project to address the energy independence issue....the problem is we have Peak Oil colliding headlong with Peak Credit....like two freight trains about to collide. The credit situation is summarized on Jesse's post December 29, 2008 "Dancing on a Precipice: The Tenuous Balance in Global Finance" at
http://jessescrossroadscafe.blogspot.com/2008/12/dancing-on-precipice-ba.... We may be just weeks away from this situation precipitating the next Black Swan event http://www.fooledbyrandomness.com/ ...with the crash of the global economy, why would any government buy US Treasuries?
We need a cheap, abundant, proven source of domestic crude oil to power us out of this mess and help us bridge the transition to renewable energy. And we need it fast. That resource exists in Alberta and the technology to produce it in an environmentally responsible manor has been piloted and in operation for over two years. Please see http://eroi.theoildrum.com/node/4784#comment-453755. I will post the EROI analysis as soon as we complete the review of the technical data submitted in their Dec 2008 project application to the Alberta EUB. At $15,000/barrel CAPEX, $10/barrel OPEX and 14 months project approval to startup, I see no other economically feasible alternative that can deliver the quantity of cheap domestic oil we are going to require with the $US devaluation.

It was more like 20-25 years ago.

As elwood pointed out these changes won't allow any dishonesty that wasn't capable in the first place. I've done independent audits as well as have had them done for me when I was in management. Inside the industry we knew which companies we could pay for the "right numbers" as well as the ones you could trust. I always knew how to discount numbers from the audit whores (that's actually what we call them).

There are valid reasons for the changes. If you didn't know the monetary values of all audited reserves were based upon the price of oil/NG on 31 Dec. Needless to say this always offered an unrealistic high estimate of monetary value. And this naturally lead shareholders to overvalue their stock. As far as allowing probable and probable reserves this is probable a response to rules changes years ago when the SEC went overboard trying to correct previous bad practices. I've audited reserves under those new rules which grossly underestimated volumes and actually hurt investors who then undervalued their stock values IN SOME CASES. The insiders knew the truth and took advantage of the misrepresentation. There were companies which greatly benefited from those tighter rules by doing stock buybacks and corporate acquisitions for less then they were actually worth and thus cheated the shareholders with the blessings of the SEC. Underestimating stock value is just as costly to shareholders as overestimating.

I also suspect part of the reason for the change was to provide increased visibility to the unconventional NG plays. Typical volumetric analysis doesn't work with these reservoirs (long explanation...it’s why they are called unconventional in the first place). Thus company undrilled assets were grossly undervalued by previous SEC rules. This also underestimated stock value for shareholders and allowed unfair trades. Reserve estimating by analogy isn't a fool proof method but it does allow some approach to presenting the true vaule of undeveloped assets. Unconventional NG was also undervalued when it came to credit availability. The new rules should allow some reasonable improvement of credit availability/cost with the new rules. This might have a huge impact on maintaining the high NG rates we've gained from the expansion of the unconventional NG plays in the last couple of years. I consult for one of the biggest UNG players in the country and we just cut our UNG 2009 budget from $1.4 billion to under $700 million. We’ll be dropping 40% of our rigs in the next couple of months. Most of the other UNG players are doing likewise. We have a sufficient credit line but don’t want to add credit costs to the current pricing uncertainty. Thus we’ll be drilling only from cash flow. It’s clear that this cut back in UNG drilling will likely send us into something of a NG cliff in the next couple of years if the slow up continues. The rapid decline rates of UNG wells are well known. As quickly as the national NG rate rose it will also decline. Even if demand destruction continues with a worsening economy we might actually see NG prices rise. Certainly not a scenario we want to see.

I should also point out that these rule changes have no bearing on reserves reported by the KSA or any other non-US public companies. None of the other sources are required to play by any rules.

It seems like it would depend on where the technologies had to be proved to work -- same company, same type of reservoir, same water depth, same country, same oil-price. As with everything else, the devil is in the details.

Most oil companies are valued based on their production and financial performance. Only when a relatively major discovery is made that will have a material effect on future production will the stock price jump, due to disclosure of relevant facts.

There was a case about 12 years ago, where a Canadian junior oil and gas company seemed to deliberately inflate its reserves: it reported raw gas reserves and production before shrinkage, and also separately reported the NGL reserves and production contained within the raw gas.

Inflated non-producing reserves was more of a problem with Canadian junior gas producers around 20 years ago when there was a lot of stranded gas due to lack of markets and pipeline access. I remember that a lot of non-producing gas reserves and PUD reserves did not pan out that well in later years when they were actually drilled and brought on production. It turned out that the standard areal assignment of 640 acres assumed was overly optimistic. A lot of wells had negative reserves revisions of around 40% of the original reserves estimate. In most cases, this overestimation of reserves was probably not a deliberate act.

However, the old reserve-based natural gas contracts in effect up to the early 1980's probably influenced some producers to inflate their gas reserves estimates, as the allowed gas production rate under the sales contract was based on a proportion of the reserves under contract. The higher the reserves booked, the higher the allowed production.

There will always be some amount of cheating when there are financial incentives to do so, however, I have never witnessed anything in oil company reserves reporting to come close to the widespread accounting, securities, and mortgage frauds we have seen perpetrated over the past decade in the USA.

duffo,

I've dealt with clients who found themselves in exactly that situation: drill and run the risk of disproving reserves. Bad enough to drill a drill hole but to then loose proven reserve base only compounded the sin. This is actually the case in all drilling projects involving “proved” acreage...legitimate and shady. The SEC does have rules limiting the life of such untested reserves. Essentially drill it or loose it. I haven't seen the details of the new rules so I'm not sure what the present protocol may be.

Back before the SEC tightened up the rules in the 90’s an operator could drill a successful well and then book dozens of "proved" locations across the prospect acreage. After getting burned many times the SEC change the rules: you could only count potential locations immediately offsetting the discovery by one drill site. Unfortunately, while this did stop some of the abuse of over booking, in some cases it also denied a booked valuation of reserves that were actually viable. Thus shareholder stock values were undervalued. I once worked on a project where we specifically hunted for such undervalued stocks as potential acquisitions. This will always be the problem with one-size-fits-all rules. We'll have to wait and see how the new rules work but there will always be a way to slip through the cracks and cheat.

I know what you mean about adjustment factors. We actually had different factors for different engineers in some companies. I once had to travel to an auditor's office in OK because the same company's office in Houston wouldn't cook the numbers as the client wished.

I suspect the analogy estimation is designed specifically for the unconventional NG players. If you haven't worked with some of these shale gas plays it's truly mystifying. You look at the data and you can't see the potential of a zone to produce one mcf of NG let alone 5 million mcf. And yet you drill one good well after another. I watched one horizontal shale gas well drilled 5 ppg underbalanced with no gas show.
After fracing it came on for 20 million cf/day. No interconnected porosity....no effective permeability. Zero provable producible NG. Yet the well will make at least a 3 to 1 return. Of course not all wells will do as good as their offsets. But there are probably many hundreds of truly proven BCF out there which aren't on the books. Those stocks are grossly undervalued by the general public and thus some folks are quit venerable to being cheated.

My apologies to the non-techs out there but I thought red dog would appreciate the story.

wrt k-factor, they did do some good work, the developers of the doe's boast (black oil applied simulation tool).