Study Examines Incremental Method vs. Split Conditions in Reserves Booking
The authors write that the deterministic incremental reserve assessment method may mislead investors if used wrongly.
After the oil-price crashes of 2014 and 2020, several merger and acquisition deals ended in litigation because operators canceled major projects or infills wells that were booked in “probable” reserves only. In the complete paper, the authors challenge the compatibility between the deterministic incremental reserve assessment method and the concept of split condition, which is not allowed for reserves booking under the Petroleum Resources Management System (PRMS). With some examples, the authors argue that the incremental method may mislead investors if used wrongly.
The Two Approaches
PRMS is a simple, fit-for-purpose system. However, it still allows for reporting volumes under slightly different methods that may lead to very different results based on the definition adopted for the “project” by the evaluator. The text of the PRMS is quoted extensively in the complete paper in defining these methods.
The authors write that the deterministic incremental method seems to be favored by evaluators educated under, or heavily exposed to, pre-2010 US Securities and Exchange Commission regulations, in which proved reserves were only disclosed.