SEC comment letters show why reserves & planning go hand in hand.

Our recent blog post Product Focus and Vision opened with the statement “You can’t plan without reserves data, and you can’t book undeveloped reserves without a development plan”.  I’d like to expand on those two points.

...planning data includes many of the same measures as reserves data

First, note that reserves data includes both booked reserves as well as the production forecasts and economic profiles establishing those proved reserve volumes.  At the same time, planning data includes many of the same measures as reserves data in order to evaluate exploration and development plans:

• Capital budget requirements (including funds to develop PUD reserves)
• Residual cash flow
• Production targets (by product, business unit, etc.)
• Reserve replacement ratios
• Reserve life index
• Drilling activity and facility capacity requirements

With the exception of exploration programs and early investment plays, planners typically use this data to create development plans that fund future development with cash flow generated from proved reserves.

The relationship between reserves and planning data, specifically development programs and proved undeveloped reserves, is fixed by the SEC Final Rule, which specifes that:

"Undrilled locations can be classified as having undeveloped reserves only if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances, justify a longer time."  -SEC

The term “adopted” is perhaps a bit vague, so the SEC clarifies somewhat in their Q&A section with:

• Question: The definition of "undeveloped oil and gas reserves" requires that the company have adopted a development plan with respect to the reserves. What constitutes adoption of a development plan?
• Answer: The mere intent to develop, without more, does not constitute "adoption" of a development plan and therefore would not, in and of itself, justify recognition of reserves. Rather, adoption requires a final investment decision. [Oct. 26, 2009]

...since the modernization of reserves reporting rules in 2008, SEC comment letters are the only public source to glean how the SEC is interpreting such regulations.

This rather begs the question what constitutes a “final investment decision”. By most interpretations, it means that there is both a development plan detailing when locations with proved undeveloped reserves will be drilled, and that the plan has received management approval. Furthermore, it means that the funding required for that development plan is reasonably likely to be available to the company. Unfortunately, since the modernization of reserves reporting rules in 2008, SEC comment letters are the only public source to glean how the SEC is interpreting such regulations. Miles Palke of Ryder Scott gave an excellent presentation this September on current themes and trends in SEC comment letters.

It is imprudent to report proved undeveloped reserves without a defensible and approved development plan.

Even considering potential for further modernization of SEC reserve reporting rules, reserves reporting and development planning will likely remain intimately tied for the foreseeable future. It is imprudent to report proved undeveloped reserves without a defensible and approved development plan. Therefore, it is essential for publicly traded E&P companies to have reliable tools to show in real time how changing reserves and economic conditions will impact development plans, and how changing development plans will impact reserves.

I’ll write more in future posts about how E&P companies without SEC reporting requirements can benefit too from combined reserves & planning workflows.