SEC and PRMS Proved Reserves: Differences Due to Varying Interpretations of Final Investment Decision

Abstract In a previous paper ( Morales and Lee 2018 ), the authors described reasons why differences continue to exist between proved reserves disclosed by entities using SEC regulations and in documents in which they disclose proved reserves following PRMS standards. At that time, we deferred discussion of project maturity as one of the potential root causes for such differences. Different interpretations of the SEC guidance requiring a “final investment decision (FID)” have been identified as a potential root cause that may result in an unconscious under estimation of disclosed SEC proved undeveloped (PUD) reserves. This paper completes the discussion of the differences between PRMS and SEC proved reserves and focuses on the available evidence that explains what the SEC actually requires to support a claim that an “FID” has been reached, and its alignment with PRMS guidance. We examined exchanges of comment letters between the SEC and 110 Oil and Gas companies that disclosed PUD reserves in filings from end 2009 to end 2018, where the keywords “Final Investment Decision,” “FID,” “Adopted Development Plan,” or “Development Plan” were mentioned in the exchanges. The objective was to determine the criteria that filers used to satisfy the requirements for an “FID” and how the SEC treated these arguments. The SEC presented its requirement for an “FID” in its 26 October 2009 “Compliance and Disclosure Interpretations [CD this means that the SEC takes a conscious and liberal, rather than a literal, view of the requirements for an “FID”, consistent with its general approach to enforcing its regulations on a principles-, rather than prescriptive-, basis. However, we also found that some companies still seem to require, as an internal control procedure, satisfaction of the literal definition of “FID” as a prerequisite for disclosure of resource volumes as SEC PUD reserves. The extent to which this criterion is applied has not been fully disclosed. We conclude that this approach is sufficient, but not necessary, to classify a project as having PUD reserves and comply with SEC regulations and that a literal interpretation of “FID” can also account for some of the differences in PUD reserves estimated using the PRMS and SEC systems. This paper, coupled with its predecessor ( Morales and Lee, 2018 ), provides to the industry a logical and needed explanation of why SEC and PRMS proved reserves sometimes differ despite the belief by many in the industry that, after the introduction of PRMS in 2007, its update in 2018, and the modernization of the SEC reserves regulations in 2008, the PRMS and SEC proved reserves would be essentially the same. The implications that these differences in interpretations may have in reflecting the company’s true value and growth potential (from the undeveloped projects portfolio) are not addressed in this paper.