The SEC Surrenders to the Oil Industry 30 comments
an article to
-
Font Size:
-
Print
- TweetThis
What are the consequences of allowing multi-billion-dollar systemically important multinational corporations to report their assets using proprietary mark-to-model tools involving discredited Monte Carlo simulations? I think we all know the answer to that one. But unbelievably, after such shenanigans contributed enormously to the greatest financial meltdown in living memory, the SEC is now set to allow more or less exactly the same thing in the oil industry.
Otto points to a stunning report by oil consultant Alan von Altendorf which spells it all out. Up until now, oil companies needed to actually prove they had reserves before they reported proven oil reserves. Now, however, the SEC is allowing them to use internal, proprietary computer models to essentially pull their “proven reserve” numbers out of thin air (or the nearest friendly Monte Carlo simulation).
Von Altendorf goes into great detail about how such numbers are useless and meaningless, and how the “proven reserve” rules should probably be tightened, rather than loosened, given the number of enormous write-downs in proven reserves which have taken place across the oil industry in recent years.
So what’s the SEC thinking here? Frankly, it’s not thinking at all: This is just another case of regulatory capture. And a sign that, so far at least, nothing has changed at the unsalvageable and dysfunctional institution.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication in the last week
Seeking Alpha 100 » -
Fastest Climbers
Those with the largestSee all
increase in followers
in the last week
Fastest Climbers » -
Top Commenters
Top commenters,
as ranked by their peers-
1
User 353732
-
2
Moon Kil Woong
-
3
doubleguns
-
4
optionsgirl
-
5
Mayascribe
Top Commenters » -
1
-
Top Instabloggers
The 100 most activeSee all
Instabloggers.
Top Instabloggers » -
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
Most intelligent investors will examine previous year numbers (reserves and production volumes) and with any major changes, inquisitive intelligent minds that we have, make their own adjustments, or at the very least, call up the companies in question and get answers . Engineering reports are not exact- never have been. Modeling adjustments can differ 10 - 15% depending upon many input variables.
The fact that the SEC will be allowing the publishing of P2 reserves by companies in the future is very desireable - and shows a progressive posturing. In this respect - as investors, we'll be getting more transparent information that has been previously omitted. SEC rightful bashing aside- I think their on the right track in this regard. There are still rigid industry standards that engineers must embrace - and not everyone is "Madofish" in their professional ethics.
Write downs are more a function of "price triggers" (qualitative) than unsuccessful drilling efforts (quantitative), in my opinion. They are not a function of aggressive engineering estimates- but lower commodity prices, which make lease inventories more or less economical.
Mr. Reovest Financial sounds like Mr. Obfuscation.
On Nov 20 03:05 PM Reovest Financial, Inc. wrote:
> Reserve calculations are a "fuzzy science" at best anyway even if
> done independently. You can't expect all companies to pony up $80-
> $100K every year to satisfy the SEC can you- especially all those
> mini micro-caps ?
>
> Most intelligent investors will examine previous year numbers (reserves
> and production volumes) and with any major changes, inquisitive intelligent
> minds that we have, make their own adjustments, or at the very least,
> call up the companies in question and get answers . Engineering reports
> are not exact- never have been. Modeling adjustments can differ 10
> - 15% depending upon many input variables.
>
> The fact that the SEC will be allowing the publishing of P2 reserves
> by companies in the future is very desireable - and shows a progressive
> posturing. In this respect - as investors, we'll be getting more
> transparent information that has been previously omitted. SEC rightful
> bashing aside- I think their on the right track in this regard. There
> are still rigid industry standards that engineers must embrace -
> and not everyone is "Madofish" in their professional ethics.
>
> Write downs are more a function of "price triggers" (qualitative)
> than unsuccessful drilling efforts (quantitative), in my opinion.
> They are not a function of aggressive engineering estimates- but
> lower commodity prices, which make lease inventories more or less
> economical.
Until we start to acknowledge that government is just making things worse, and is in all probability involved in much of the idiocy, it will keep cycling around and around.
No - sorry, I do not. As an example, I had a look at the balance sheet of Exxon Mobil Corp. here www.sec.gov/cgi-bin/vi...
I see Inventories (that s where the reserves ought to be, no?) crude, products and - to be generous - other current assets, together abt 15 billion. Then there are Investments, advances and longterm assets at 32 billion. OK, let s again be generous and also include the 7 billion intangibles. That adds to 54 billion, total, right? Against that we have 112 billion equity. So in my simple book, they could write down all their inventories to z e r o - a couple of times over - and still have some equity left!
Can someone help, please?!?
Can P2 numbers be abused by overpromoters? Of course. So what? Any number can be abused, exaggerated, etc.
Inventories are above ground crude oil, gas, condensate, refined products in pipelines or storage. Investments and long-term assets refer to the sunk cost less depreciation of platforms, pipelines, tools, ships, refineries, truck transporters, offices, "working interest" in joint ventures, etc. You won't find the reserves on a balance sheet for big integrated majors like Exxon.
@ pelewis
Because I was afraid to fail
when I was junior staff
My subsea maps were accurate
and made the bankers laugh
But then I learned a special word
that made me CEO
The biggest word you ever heard
And this is how it goes, oh!
Montecarloprobablistic-
Schlumberpetreldocious
Even though the sound of it
is something quite atrocious
If you say it loud enough
you'll always sound precocious
Montecarloprobablistic-
Schlumberpetreldocious!
On Nov 20 02:49 PM Tony Petroski wrote:
> From the author:
>
> "What are the consequences of allowing multi-billion-dollar systemically
> important multinational corporations to report their assets using
> proprietary mark-to-model tools involving discredited Monte Carlo
> simulations?"
>
> My answer: Huh?
>
> His answer: "I think we all know the answer to that one."
>
> Didn't they have any English teachers at Cambridge or Harvard?
For many years the SEC sensibly allowed the oil companies to report their natural gas proven reserves as part of their proven oil reserves using the BTU ratio which, I believe, is approximately 17 units of NG being equivalent to 1 unit of oil. Recently, however, that practice has allowed some major oil companies to report much longer proven life reserves of oil then they, in fact, have. Given the explosion in natural gas volumes which has become accessible over the past four years using new fragging and other extraction practices and the fact that natural gas is not, in practice, actually being used in substitution for petroleum to the degree supposed by the 17/1 ratio, one can see how reporting proven life reserves of oil would become problematic.
If I understand the points being made by Salmon and von Altendorf correctly, this natural gas related problem in accurate reporting of a company’s proven life reserves of oil will be greatly compounded by the proposed SEC acceptance of new relaxed rules for proving reserves in the ground. Given the nature of off shore and deep shale natural gas deposits, the application of these new rules would allow massive reserves of natural gas to be ‘proved’ by questionable projections based on questionable initial testing. This, in turn, would significantly bump up the reportable proven oil reserves for the reasons outlined above.
Have I got this right? If so, this is a significant further problem for potential investors evaluating oil companies proven oil reserves.
Salmon is a graduate of the University of Glasgow.
Thanks much for info. So, if it is not on* their balance sheets, I conclude that the risk of over-, under- or vague evaluation of reserves of the oil & gas industry may be annoying to shareholders, energy planners and the taxman but can hardly be qualified as "systemic" (meaning: the known oil & gas world would collapse if the reserves of one or the other would turn out to be bogus, grossly overvalued - btw wasn't t that the case with Shell, some years ago?)
Have a good day
*And if it is off their balance sheets, it does not really affect the solvency and capital adequacy, no? This is in stark contrast to the notional** trillions of derivative contract values of dubious quality with their on-balance sheet billions of positive/negative replacement values at financial institutions, with their comparatively minuscule equity but still very much intact monstrous government bail-out guarantees.
**GS' trillions of "notional" contracts www.marketoracle.co.uk... BIS OTC Derivatives Stats Q2 09 www.bis.org/statistics...
The reason financial compamies fail is based mainly on the fact that the owners of the bank are not allowed to see the risk that the management is building up in order to pad their own salaries and short term gains. It is unconscionable.
On Nov 20 05:29 PM tripleblack wrote:
> As Ronald Reagan so famously said: "Government is not a solution
> to our problem, government is the problem."
>
> Until we start to acknowledge that government is just making things
> worse, and is in all probability involved in much of the idiocy,
> it will keep cycling around and around.
> From the author:
"What are the consequences of allowing multi-billion-dollar systemically important multinational corporations to report their assets using proprietary mark-to-model tools involving discredited Monte Carlo simulations?"
My answer: Huh?
His answer: "I think we all know the answer to that one."
Didn't they have any English teachers at Cambridge or Harvard? >
On Nov 20 10:06 PM berated wrote:
> So, after reading Salmon's post and von Altendorf's report, sentence construction what you choose to comment on!? Interesting.... >
------------
Perhaps he was being facetious, but I didn't quite understand why the slam against Cambridge & Harvard. Mr. Salmon never claimed an education from either that I am aware of. According to his bio:
"Salmon is a graduate of the University of Glasgow."
Though it's a fairly complex sentence, I personally didn't see anything wrong with it, but I'm certainly no English major and may only be showing my own ignorance.
But as you imply, that distracts from the main issue here, and a very important one at that, namely that the SEC is changing the rules in a way that apparently opens the door to those who might vastly overstate reserves. That would not only deceive and cheat a lot of investors, but could have massive consequences that could reverberate throughout the economy, perhaps bringing it to its knees once again.
Some others comment that P2 and some of the other reserve estimates might be better and more accurate measures than the historical methods used. Perhaps that is true, but if so, wouldn't it be less confusing to change the methodology dramatically mid-stream? Why not have them report reserves by the historical standards, but list P2 or the Monte Carlo simulations separately and let people come to their own conclusions?
Using the same terms in the reports, but changing underlying formulas makes the comparisons from year to year confusing at best, and meaningless in many cases. Why not just allow them to add footnotes for other estimates companies think might be more accurate and let them make their case there?
On the other hand, even a bit of socialism intelligently conceived and applied sometimes works well. For example I just reserved copies of the two books John Mason recommended this weekend and from our municipal public library and should be able to pick both up in a couple of weeks.
On Nov 20 05:29 PM tripleblack wrote:
> As Ronald Reagan so famously said: "Government is not a solution
> to our problem, government is the problem."
>
> Until we start to acknowledge that government is just making things
> worse, and is in all probability involved in much of the idiocy,
> it will keep cycling around and around.
"I have a patent for a perpetual motion machine, want to buy some shares in my company?"
So please don't bore us with dribvel from Saint Ronald, history will show he's the one who started us on the path to our current fiasco: gutless regulators asleep at the switch, fantasy insolvent banks or (now) fantasy oil companies. Tulips, anyone?
On Nov 20 05:29 PM tripleblack wrote:
> As Ronald Reagan so famously said: "Government is not a solution
> to our problem, government is the problem."
>
> Until we start to acknowledge that government is just making things
> worse, and is in all probability involved in much of the idiocy,
> it will keep cycling around and around.