New SEC Oil Accounting Rules

On December 29, the SEC announced updated accounting rules for oil and gas companies. The new rules are expected to be effective a year from now, with financial statements issued December 15, 2009, and subsequent. Full details are not yet available, but in general, the new rules allow companies to make greater consideration of technology in setting reserves. The SEC will also allow companies to disclose probable and possible reserves to investors, in addition to proven reserves. A third change is that average prices during the previous twelve months will be used, instead of prices as of the statement date.

According to the SEC's press release:

The new disclosure requirements approved by the Commission include provisions that permit the use of new technologies to determine proved reserves if those technologies have been demonstrated empirically to lead to reliable conclusions about reserves volumes. The new requirements also will allow companies to disclose their probable and possible reserves to investors. Currently, the Commission’s rules limit disclosure to only proved reserves.

The new disclosure requirements also require companies to report the independence and qualifications of a reserves preparer or auditor; file reports when a third party is relied upon to prepare reserves estimates or conducts a reserves audit; and report oil and gas reserves using an average price based upon the prior 12-month period rather than year-end prices. The use of the average price will maximize the comparability of reserves estimates among companies and mitigate the distortion of the estimates that arises when using a single pricing date.

Full details are not yet available. This summer, the SEC announced proposed rule changes. It is not known whether today's announcement will match exactly. Details will be announced later. The proposed rule changes were

• Permitting use of new technologies to determine proved reserves if those technologies have been demonstrated empirically to lead to reliable conclusions about reserves volumes.

• Enabling companies to additionally disclose their probable and possible reserves to investors. Current rules limit disclosure to only proved reserves.

• Allowing previously excluded resources, such as oil sands, to be classified as oil and gas reserves. Currently these resources are considered to be mining reserves.

• Requiring companies to report the independence and qualifications of a preparer or auditor, based on current Society of Petroleum Engineers criteria.

• Requiring the filing of reports for companies that rely on a third party to prepare reserves estimates or conduct a reserves audit.

• Requiring companies to report oil and gas reserves using an average price based upon the prior 12-month period-rather than year-end prices, to maximize the comparability of reserve estimates among companies and mitigate the distortion of the estimates that arises when using a single pricing date.

It is expected that the new rules will become effective with financial reports a year from now--those filed on or after December 15, 2009.


Financial statements prepared as of December 31, 2008, based on current accounting rules are likely to look pretty bleak. Not only are oil and gas prices much lower, but reserves based on these lower prices are likely to be lower as well, since at a lower price, less oil or gas may be economically recoverable. If the new accounting rules do not become effective for another year, they will not immediately help the financial statement problems of oil and gas companies.

Using average prices in the future will help smooth out volatility. This is good from a stability point of view, but can have a positive or negative impact for any given year. If the new rules were in effect for statements effective December 31, 2008, oil and gas companies could have used a much higher price for valuing reserves at December 31, 2008, which would have been helpful to balance sheets. Next year, it is quite possible that the opposite effect will take place. Oil prices are low now, but could very well rise by the end of next year. If this happens, using a 12-month average price will penalize companies for low prices now.

One of the problems with lower oil prices is the impact they have on the ability of companies to amortize unsuccessful exploration costs. It is expected that by averaging prices over a 12-month period, the "ceiling test" (which is applied each quarter-end and has the effect of limiting this amortization), will have less impact. This is an article regarding how the ceiling test works. Of course, if the new rules are not effective until next year and prices are very low for December 31, 2008, statements, ceiling test write-downs are still likely to be a problem this year-end.

Under the new regulations, companies will be able to consider reserves to be proved if reserves can be demonstrated using modern technology, instead of actually having to drill test wells to prove the existence of the reserves. According to the statement, new technologies are permitted "if these technologies have been demonstrated empirically to lead to reliable conclusions about reserve volumes." It seems likely this new rule will be interpreted to permit the use of 3D seismic imaging in determining reserves. It may also allow consideration of the impact of fracturing techniques in estimating reserve amounts. This rule change is should be beneficial to oil and gas companies, since proved reserves are likely to be higher with the expanded definition of what is proved. Implementation of the rule should provide a one-time increase in proved reserves. Also, new discoveries are likely to be booked more quickly in the future, since the amount of a new discovery can be estimated by a technique such as 3-D seismic imaging before wells are drilled in the new location.

The new rules also allow companies to disclose probable (2P) and possible (3P) reserves. Investors are already aware that there can be wide differences in these amounts, so it is not clear that this will have a material impact.

Thanks for posting that Gail,

I'm pretty pessimistic about the outcomes of this change. It really opens the door wide open for a ponzi scheme to develop in this industry. Essentially Madoff was reporting to his clients that they had nice sized deposits when in fact they weren't there. The Oil companies would now be allowed further latitude for valuing their reserve assets without having to prove that they truely exist. This leads to overvalued companies and the financial decisions that are made because of that.

While there may be some benefit if the companies stay in the spirit of the law with this new rule change, I can't say that I have much faith that they will. It's pretty well known that all the OPEC countries have overstated their reserves because it means more money to them. There's plenty of financial motivation for Oil companies to do the same.

I'm not a fan of this change at all.


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.

I've heard some very unfavorable opinions of the SEC's work, for instance in this FSN interview with Bud Burrell; also from Bud (pdf): Has Naked Shorting Gone So Far Out of Control, It Could Meltdown the Financial System? That was written in 2004, btw.

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

Exactly. And with the American public becoming aware that the US only has ~3-4% of the world's oil supply, raising reserve levels (and announcing probable and possible reserves additionally) seems intended to give the US citizen a false sense of security that maybe the oil reserves in the US aren't declining like some of those kooks say.

If oil shale is somehow included in this rule change (as possible or probable, for example), then that would skew perceived reserves by such a margin as to completely bamboozle the average American.

I think your are right that the changes could act to bamboozle the average American. I hadn't thought about oil shale. It is hard to imagine how one could consider it to be economically recoverable.

you are correct, gail.

oil shale deposits would only be considered reserves if and when they are demonstrated to be economical to produce.

What is the basis for that statement? What price point would be used to determine if it were 'economical to produce'? Where in the rule change is this stated, especially in light of probable and possible reserves?

"Where in the rule change is this stated, especially in light of probable and possible reserves? "

this is not stated in the rule change, but is in the basic definition of proven reserves. wrt possible oil shale reserves i suppose someone could call them possible reserves, based upon estonia, but imo, that is even a stretch. i dont think anyone gives any credibility to possible reserves anyhow.

Sub-prime reserves

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


More like No-Doc seismic. Trust us, it's there.

And negative depletion fields, the more you produce, the more you have in reserve.

Moody's and S&P can get into geological audits. They need something. "For $50k, we will give all the reserves you want."


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.

We really need to get on about the business of becoming energy independent. This past year and the record gas prices played a huge part in our economic meltdown and seriously damaged our economy and society.We keep planning to spend BILLIONS on bailouts and stimulus plans.Bail us out of our dependence on foreign oil. Make electric plug in car technology more affordable. It cost the equivalent of 60 cents a gallon to drive an electric plug in car. The electric could be generated from wind or solar. Get with it! Utilize free sources such as wind and solar. Stop throwing away money on things that don't work. Invest in America and it's energy independence. Create cheap clean energy, create millions of badly needed green collar jobs. Put America back to work. It is a win-win situation. We have to become more proactive citizens, educate ourselves and demand our elected officials move this country forward into the era of energy independence. Jeff Wilson's new book The Manhattan Project of 2009 Energy Independence NOW outlines a plan for America to wean itself off oil. We need a plan and we need it now!

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 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 We may be just weeks away from this situation precipitating the next Black Swan event ...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 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.

Didn't the Saudis already pull a stunt like this several years ago?
There was a graph that suddenly showed more oil reserves than previously reported.... Voila! We're actually flush, not depleting!

It was more like 20-25 years ago.

"Permitting use of new technologies to determine proved reserves if those technologies have been demonstrated empirically to lead to reliable conclusions about reserves volumes."

reserve evaluators have been able to assign reserves by analogy for a long time already. i dont see this as a seismic(pun not intended) change.

and wrt probable and possible reserves, this just brings the sec into agreement with the rest of the world's p50 and p10 designations.

sec rules havent kept unethical companies from outright lying in the past and they won't in the future.

that forward looking statement disclaimer should be a warning to investors, but in fact it is a license to tell whatever lies they choose to spew. investor beware.

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’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.

Thanks for your insights.

What price does natural gas need to stay above to keep the unconventional in play--or does this vary from one location to another?

It varies, but I have been told strip under $6.50 (which it is now), will cause massive laydown in rigs. You saw the NY Times article yesterday on pipeline companies lacking credit and shutting down projects - that doesn't help bringing expected future stranded gas to mkt. That won't help either.

With 40%+ OVERALL decline rate, and drilling 10,000+ feet deep, using mile wide laterals, and basically going to source rock, we are scraping bottom of nat gas barrel. We have already dropped rig count significantly down to 1350 from over 1600 and Canada dropped 90 last week alone down to 279. Plus we are still in Q4 and companies are spending remainder of their 2008 budget and have dropped 09 capex estimates dramatically – so you could easily see rig count drop to 1000 or lower in Q1. There are many who think that if nat gas prices stay low due to short term oversupply and lack of industrial demand that we go all the way down to 500 rigs. Then the treadmill REALLY speeds up.

Costs are now coming down, but if we see a $4 handle, we have NG armageddon. The question is NOT, nor has ever been, how much gas is out there, but how much is out there that society/capital investments can afford to produce (and purchase).

I agree with Nate: we haven't begun to see the full fall out yet. I won't offer a guess as too how low the rig count will go but it's definitely dropping faster then the public realizes. My ex works for a drilling rig builder and they’ve had all future contracts suspended with the exception of some rigs for overseas ops. As far as minimum pricing goes I can’t give a supported answer: I’m too deep into operations and much removed from economic analysis. I think if the economy were doing OK then sub $6.50 wouldn’t cause too much of a slow down. Based upon latest costs anything below $4.50 would certainly be a killer. It’s this price uncertainty combined with higher credit costs which has caused us to pull our horns back in IMO. The real question right now is what will NG prices be 3Q2009 and the following 12 months. The UNG wells produce the great majority of the profit in the first 18 months. Catch low prices just as soon as you begin flowing and you’ve killed your margin. Not many operators can afford to choke back a well during low pricing periods: it is, above all else, a cash flow business. I can offer from an operational stand point that we are not too disappointed by cutting some rigs loose. Maintaining that rapid drilling schedule was very demanding. It also led to ever increasing costs as manpower and equipment was stretched almost to the breaking point. Even if NG prices did drop a good bit (10 -20%) over the next 12 months or so we may actually see an improvement in new well economics given lower future costs. Improved technology has greatly increased productivity but at a very high cost.

A significant reduction in US NG rates will certainly put a stronger floor under pricing. It’s unfortunate that it will also bring additional pressure to the country’s efforts towards economic recovery.

It will be interesting to see if Likvern's scenario of an NG shortfall in the UK happens in the coming months. This would, we'd hope, act as a wake up call. Long before actual blackouts happen in the US I'd guess quite a few stringent rationing measures would be implemented - interruptible customers would take it on the chin, and some of the profligate waste would be trimmed away: LED Streetlights : Innovation in Lighting the Night

A quick glance at a satellite image of the lit-up earth outlining the continents of the world easily show the energy demand civilization imposes on the night. Streetlights and other other lighting across the globe consume up to 20% of total electrical energy produced. In the United States 22% of electricity consumed is used for lighting.


Towards your street lighting subject, I caught a bit of a press release just today regarding a "Lights Out" demonstration of sorts to be conducted by at least two US cities soon. I believe the theme was to highlight (pun intended) the dangers of global warming. The cities will go dark for one hour I believe. I'm sure the organizers are well meaning folks but the true meaning will likely come through to the rest of the world as those cities turn the lights back on for the other roughly 4400 hours of the year. The true meaning IMHO: Screw You (and us too).

Lights Out America. Rather shallow gesture, yes. See also: Earth Hour.

"Lights Out" is also the title of a crudely written novel depicting a US post-EMP - high altitude nuke bursts permanently damage electrical grid. Good Doomer Porn despite the 6th grade literacy.

Earth Hour is at least an attempt to bring awareness to people, much like car-free days. While it may not make a huge difference right off the bat, it can set the stage for a culture change with respect to understanding how energy is consumed. We've seen here on TOD how such initial events can spark real change.

The "Lights Out" post-nuclear novel is somewhat entertaining for those who like post-apocalyptic fiction, but the lead character beats the odds way too many times, and the final battle is rigged to put all of the MZBs in a non-believable mow-them-down scenario. And the continuing food deliveries don't match up with anything I consider reality.


I'm not denying their motives but how many people do you know who aren't aware that downtown skylines are alight all night long? No doubt the folks directly involved in the effort are very aware of the situation. But so is the other 99% of the population that don't care as long as they're getting what they need. I'm all in favor of such "feel good" events. Folks need such encouragement to keep up the good fight. But I see little possibility of these events causing any ground swell of change. Harsh economic realities change the way we live our lives. Little else seems to have any effect.

But HAPPY NEW YEARS all the same to you Will and the rest of the Todders!!!

• Permitting use of new technologies to determine proved reserves if those technologies have been demonstrated empirically to lead to reliable conclusions about reserves volumes.

Is there a possibility that a company with inflated reserves wouldn't drill in some area because it might prove that there reserves were inflated? So in theory you have some company that is producing small amounts, but the reserves say the can produce that amount for a number of years. Creating an overvalued stock, much like a Mortgage broker banking on bad loans well into the future. When the revenue just isn't there.

Is there any precedence to this? A reverse-Iraq? We don't want to find out what's not there.

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.

Hi Gale,

I think that the SEC has gone backwards in one respect. It’s not the net reserves, but the Net energy that can be derived from them that is of most value. Allowing the oil companies to combine reserves from regular fields, ones that need fracturing and oil sands, etc., will just make it all the more difficult to determine the energy value of a the quoted reserves.

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.


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 did some deals with the old Sun Oil Company back in the Eighties and the reserve allocation rules were truly weird. Proven production resulting from direct offsets was credited to Sun Production Company, while proven production resulting from wells more than one direct offset away from production was credited to Sun Exploration Company, and the two divisions were basically run as separate companies.

WT....Your story brought back many memories of such strange arrangements. I'll add just one more. When heading a development department I once refused to drill a well with my budget because it wasn't "proved reserves" by any stretch. So they reclassified it as exploratory and then preceeded to throw away $10 million. This was the last well the operator drilled before they filed bankruptcy and were sold off. Management didn't tell me the end was near and the reason they insisted on drilling this particular piece of crap was that it was their last chance to save the company. If they had let me in on the plan I could have directed them towards a better opportunity that might have saved us. But I was deemed too low on the organization chart to share such secrets with. BTW....this was a company that went under the same time that oil prices peaked in the early 80's. They never had a chance.


I am a semi-retired petroleum engineer and in a former job, I used to review between 50 and 100 detailed oil and gas company reserves reports per year. The colloquial expression for these reports in the business was "Engineering Reports", as they were nearly always prepared by an independent firm of professional petroleum engineers.

I agree that the new SEC rule changes regarding reporting of oil and gas reserves were long overdue. My colleagues and I used to joke about some of the SEC's more arbitrary and arcane rules.

Biggest improvements IMO are 1) the use of yearly average oil and gas prices, 2) allowing disclosure of probable reserves, and 3) inclusion of oil sands (bitumen) reserves. Use of 3-D seismic to demonstrate reservoir continuity should also be useful.

The biggest impact on the oil and gas business will most likely be that in future, "Proved plus Probable" reserve estimates will become the de facto standard for reserves comparisons between companies, and in measuring performance of individual companies (reserve replacement ratios, and cost per Boe added), as well as in disclosure of reserves transactions and M&A activity. This has already happening in non-US jurisdictions over the past several years.

In discussion of oil and gas reserves, I always stress that no one actually measures reserves until they are produced, that reserves are always only estimates with associated uncertainties, and that revisions are continuously made to reserves estimates at all levels (from individual well reserves, to field total reserves to total company reserves).

"Proved" reserves estimates are always required to have a conservative bias, defined as reasonable certainty. In statistical terms, this is generally presumed to be a 90% confidence level (ie, on average, subsequent reserves revisions should be positive approximately 90% of the time). 2P or "Proved plus Probable" reserve estimates are supposed to have no bias, being close to a median or expected value, and on average, subsequent revisions should be positive 50% of the time and negative 50% of the time.

Problems of reserve aggregation are less of a problem when dealing with 2P reserves as you can normally just sum them up arithmetically, whereas summing up 1P reserves results in an increased confidence level. Most reserve evaluators recognise this intuitively, even if they don't use probabilistic methods in their analysis. They will give you a Proved reserve estimate for each of a varied group of wells and just add the estimates up to provide a total Proved reserve estimate that they feel comfortable with at the aggregate level.

Contrary to some other opinions expressed here and in other places, in my nearly 40 years experience in providing oil and gas reserves estimates and reviewing independent reserves reports, in North America, Europe, SE Asia, the Middle East, and Australia and NZ, I have only rarely seen reserve estimates which I would judge to be unreasonable. These were generally in connection with property sales in which the seller's engineering report was provided in order to secure financing for the acquisition. On occasion a firm would be identified by the community of petroleum engineers involved in the preparation and use of reserve reports, as being wildly optimistic in its reserves estimates. Most old-timers in this community will recall a US Petroleum Engineering firm practising around two to three decades ago in which it was considered appropriate to apply a "K-factor" to the reserves estimates contained in their reserves reports. (where K<1.0) In my opinion, standards of professional practise today are much higher today, and deliberate inflation of reserves is relatively rare.

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 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.

Somewhat comparable to the early days of CBM (Coal-Bed Methane) development in the late '80s and early '90s. I recall the difficulties in doing performance-based analysis(ie decline analysis) on CBM production during the early de-watering phase of production as daily gas production kept increasing month after month for up to two years. Extrapolation of production data could result in infinite reserves. Some engineers assumed immediate decline rates of 10%, even though production rates had not reached their peak. The volumetric estimates of reserves based on sample analysis turned out to be reasonably accurate, but it was very difficult to model the production profile, especially the peak production rate.

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

Yeas, I know, a friend of mine ran one of their offices for a time, and he was a gentleman, an honest person and a fine engineer.

I suspected we were talking about the same folks. It always amazed me how certain bankers would accept numbers from certain companies. I suppose it really wasn't much different then the motivation behind mortgage companies who wrote all that sub prime paper. When the bubble would eventually pop the paper would belong to someone else or those bankers would be in another shop. In the meantime there was commission to be made only if you closed the deal.

That whole philosophy is a big part of the reason I shifted from A&D towards operations. I fought enough windmills in my youth (as I suspect you did) and have the scars to prove it. Now my work product is relatively independent and I sleep better at night.