Jumps in Proved Unconventional Gas Reserves Present Challenges to Reserves Auditing

Abstract

Summary This study analyzes the typical challenges and opportunities related to unconventional-gas-reserves maturation and asset performance. Volatility in natural-gas prices may lead to downgrading of formerly proved reserves when the marginal cost of production cannot be sustained by the wellhead prices realized. New US Security and Exchange Commission (SEC) rules have accelerated the growth of unconventional-gas reserves, which in a way is an additional but unintended source of volatility and hence risk. Concerns about security of investments in unconventional-gas assets are fuelled by the effects of volatile natural-gas prices on production economics and by uncertainty about stability of reported reserves. This concern is exacerbated by an unprecedented rise in proved undeveloped gas reserves (PUDs) reported by unconventional-gas operators, arguably effectuated by favorable interpretations of PUDs when applying the new SEC accounting rules. This study includes a benchmark of proved reserves reported by two peer groups, each comprising four representative companies. The peer group of conventional companies includes Exxon, Chevron, Shell, and BP, and the unconventional peer group is made up of Chesapeake, Petrohawk, Devon, and EOG. Possible sources of undue uncertainty in reported reserves are highlighted, and recommendations are given to improve the reliability of reported reserves, especially from unconventional field assets.