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    Petroleum Reserves & The Needs of Financial Reporting: Michael Lynch-Bell

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    abdulrahman mohamed
    This document discusses financial reporting standards for oil and gas reserves. It notes that there is currently no consistency across different standards used in the US, UK, and International Accounting Standards. It also summarizes the major initiative to adopt International Financial Reporting Standards for listed companies by 2005. Additionally, it outlines some of the challenges with oil and gas accounting, including the use of historic costs that do not reflect reserve values, and inconsistencies between the full cost and successful efforts approaches. The document concludes by emphasizing the importance of the definitions used for oil and gas reserves in financial reporting and setting international standards.

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    Petroleum Reserves & The Needs of Financial Reporting: Michael Lynch-Bell

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    abdulrahman mohamed
    29 views22 pages
    This document discusses financial reporting standards for oil and gas reserves. It notes that there is currently no consistency across different standards used in the US, UK, and International Accounting Standards. It also summarizes the major initiative to adopt International Financial Reporting Standards for listed companies by 2005. Additionally, it outlines some of the challenges with oil and gas accounting, including the use of historic costs that do not reflect reserve values, and inconsistencies between the full cost and successful efforts approaches. The document concludes by emphasizing the importance of the definitions used for oil and gas reserves in financial reporting and setting international standards.

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    This document discusses financial reporting standards for oil and gas reserves. It notes that there is currently no consistency across different standards used in the US, UK, and International Accounting Standards. It also summarizes the major initiative to adopt International Financial Reporting Standards for listed companies by 2005. Additionally, it outlines some of the challenges with oil and gas accounting, including the use of historic costs that do not reflect reserve values, and inconsistencies between the full cost and successful efforts approaches. The document concludes by emphasizing the importance of the definitions used for oil and gas reserves in financial reporting and setting international standards.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    29 views22 pages

    Petroleum Reserves & The Needs of Financial Reporting: Michael Lynch-Bell

    Uploaded by

    abdulrahman mohamed
    This document discusses financial reporting standards for oil and gas reserves. It notes that there is currently no consistency across different standards used in the US, UK, and International Accounting Standards. It also summarizes the major initiative to adopt International Financial Reporting Standards for listed companies by 2005. Additionally, it outlines some of the challenges with oil and gas accounting, including the use of historic costs that do not reflect reserve values, and inconsistencies between the full cost and successful efforts approaches. The document concludes by emphasizing the importance of the definitions used for oil and gas reserves in financial reporting and setting international standards.

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    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 22

    October 2003

    Petroleum Reserves & The


    Needs of Financial Reporting
    Michael Lynch-Bell
    Partner in Charge
    Energy, Chemicals & Utilities, Transaction Advisory Services
    Ernst & Young LLP
    +44 20 7951 3064
    [email protected]

    1
    #
    Background

    • There is no consistency in Financial Reporting


    • There are several approaches
    • US
    • UK
    • International Accounting Standards
    • and many others
    • The International Community would like one standard
    approach

    2
    #
    Major Initiative In Progress

    • To adopt International Financial Reporting Standards


    (IRFS) for all listed companies by 2005
    • In European Union
    South Africa
    Australia

    3
    #
    Oil and Gas Accounting

    • Accounting standards for Oil & Gas companies even more


    confused
    • Specific standards in only a few countries:
    UK, US, Australia, Canada, Nigeria, Indonesia
    • Often scoped out or exemptions under existing UK and
    International Accounting Standards
    • And then, two inconsistent approaches:
    - Full cost
    - Successful efforts

    4
    #
    Oil and Gas Accounting

    • Accounting is historic cost-based (in the main)


    • Under any of the approaches, accounts do not reflect the
    value of the underlying reserves and resources
    • Balance sheet value based on any or all of:

    - Historic cost of exploration and development


    - Historic cost of licence acquisition
    - Fair value at the time of acquisition of exploration
    and producing interests
    - Revaluation of oil and gas interests
    - Reassessment for impairment

    5
    #
    Standard setters have attempted to bring
    consistency to oil and gas company accounts,
    started by the SEC

    6
    #
    Schedule of Applicable SEC Rules

    • Introduced 1977
    • Regulation S-X
    Article 4
    210. 4-10
    • FASB Statements 19, 25, 69, 109, 144
    • SEC Financial Reporting Release
    • SEC – Division of Corporation Finance, current issues

    7
    #
    Basic Rules

    Basically
    • Use proved reserves
    • Year-end prices for estimates
    • Disclose reserve quantities and standardised measure of
    value
    • Extremely conservative approach

    8
    #
    Clarification Guidance issued, which
    demonstrates how the SEC is thinking

    • Reasonable Certainty
    • Existing Economic and Operating Conditions
    • What is not proved
    • Continuity of production
    • Probabalistic methods
    • Web site disclosure

    9
    #
    SEC Corporation Finance Division
    Current Issues

    In order to attribute proved reserves to legal locations


    adjacent to such a well (i.e. offsets), there must be
    conclusive, unambiguous technical data which supports
    reasonable certainty of production of those volumes.

    10
    #
    SEC Corporation Finance Division
    Current Issues

    If an improved recovery technique which has not been


    verified by routine commercial use in the area is to be
    applied, the hydrocarbon volumes estimated to be
    recoverable cannot be classified as proved reserves unless
    the technique has been demonstrated to be technically and
    economically successful by a pilot project or installed
    program in that specific rock volume.

    11
    #
    SEC Corporation Finance Division
    Current Issues

    This requires the use of physical pricing determined by the


    market on the last day of the (fiscal) year.
    A monthly average is not the price on the last day of the
    year, even though that may be the price received for
    production on the last day of the year.

    12
    #
    UK Approach

    • Proved plus probable reserves


    • Management’s view on prices
    • Reserve quantity disclosure

    13
    #
    Measures of Performance

    • Reserve replacement
    • Reserve valuation
    • Finding cost per unit
    • Production cost per unit
    • Reserve life
    • Value replacement
    • Reserve distribution
    • Standardised measure of cash flow

    14
    #
    Other Disclosures which depend on
    reserve definitions

    • Amortisation
    • Impairment
    • Decommissioning provisions
    • Standardised measure of cash flow
    • Other performance measures

    15
    #
    IASB

    • IASB have established a group to develop a standard


    • Unlikely to be a standard until 2007

    16
    #
    Current IASB Thinking:

    • Only a revised form of successful efforts will survive (no full


    cost)
    • Want one definition for reserves and resources ie
    commercially recoverable reserves
    • Would like it to be the same as (consistent with) mining
    definitions
    • Value-based accounts unlikely
    • Value-based disclosures very likely
    • Agree that the use of year-end prices for estimates could
    be misleading (but this is not the SEC view)

    17
    #
    Where do we need to get to?
    • Any reserve definition to be useful for financial reporting
    must reflect the following
    Commerciality of reserves
    • Likely future prices to be received for the reserves
    produced:
    - Forward sales contract
    - Hedging
    - Management view
    - Forum curve
    • Timing of production
    • Cost of production
    • Use of technology, existing and likely future
    18
    #
    Most Sensitive Issues
    • Views on future prices
    • Views on availability of technology
    We need help in demonstrating that any approach is
    not aggressive

    Less Sensitive Issues


    • Cost of production
    • Timing of production
    • Geology

    19
    #
    Conclusion
    • Output of what you are doing is very important to financial
    reporting

    BUT

    • SEC concerned about using any definition other than


    proved
    • IASB has not got extractive industries very high on the
    agenda, and reserve definitions even lower down the
    priority list, however by 2005 they will be looking for an
    answer

    20
    #
    You have the time to influence the
    international accounting debate

    21
    #
    Thank you!

    The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales
    with registered number OC300001 and is a member practice of Ernst & Young Global.

    22
    #

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