• 20 hours PDVSA Booted From Caribbean Terminal Over Unpaid Bills
  • 22 hours Russia Warns Ukraine Against Recovering Oil Off The Coast Of Crimea
  • 1 day Syrian Rebels Relinquish Control Of Major Gas Field
  • 1 day Schlumberger Warns Of Moderating Investment In North America
  • 1 day Oil Prices Set For Weekly Loss As Profit Taking Trumps Mideast Tensions
  • 1 day Energy Regulators Look To Guard Grid From Cyberattacks
  • 1 day Mexico Says OPEC Has Not Approached It For Deal Extension
  • 1 day New Video Game Targets Oil Infrastructure
  • 1 day Shell Restarts Bonny Light Exports
  • 1 day Russia’s Rosneft To Take Majority In Kurdish Oil Pipeline
  • 2 days Iraq Struggles To Replace Damaged Kirkuk Equipment As Output Falls
  • 2 days British Utility Companies Brace For Major Reforms
  • 2 days Montenegro A ‘Sweet Spot’ Of Untapped Oil, Gas In The Adriatic
  • 2 days Rosneft CEO: Rising U.S. Shale A Downside Risk To Oil Prices
  • 2 days Brazil Could Invite More Bids For Unsold Pre-Salt Oil Blocks
  • 2 days OPEC/Non-OPEC Seek Consensus On Deal Before Nov Summit
  • 2 days London Stock Exchange Boss Defends Push To Win Aramco IPO
  • 2 days Rosneft Signs $400M Deal With Kurdistan
  • 2 days Kinder Morgan Warns About Trans Mountain Delays
  • 3 days India, China, U.S., Complain Of Venezuelan Crude Oil Quality Issues
  • 3 days Kurdish Kirkuk-Ceyhan Crude Oil Flows Plunge To 225,000 Bpd
  • 3 days Russia, Saudis Team Up To Boost Fracking Tech
  • 3 days Conflicting News Spurs Doubt On Aramco IPO
  • 3 days Exxon Starts Production At New Refinery In Texas
  • 3 days Iraq Asks BP To Redevelop Kirkuk Oil Fields
  • 4 days Oil Prices Rise After U.S. API Reports Strong Crude Inventory Draw
  • 4 days Oil Gains Spur Growth In Canada’s Oil Cities
  • 4 days China To Take 5% Of Rosneft’s Output In New Deal
  • 4 days UAE Oil Giant Seeks Partnership For Possible IPO
  • 4 days Planting Trees Could Cut Emissions As Much As Quitting Oil
  • 4 days VW Fails To Secure Critical Commodity For EVs
  • 4 days Enbridge Pipeline Expansion Finally Approved
  • 4 days Iraqi Forces Seize Control Of North Oil Co Fields In Kirkuk
  • 4 days OPEC Oil Deal Compliance Falls To 86%
  • 5 days U.S. Oil Production To Increase in November As Rig Count Falls
  • 5 days Gazprom Neft Unhappy With OPEC-Russia Production Cut Deal
  • 5 days Disputed Venezuelan Vote Could Lead To More Sanctions, Clashes
  • 5 days EU Urges U.S. Congress To Protect Iran Nuclear Deal
  • 5 days Oil Rig Explosion In Louisiana Leaves 7 Injured, 1 Still Missing
  • 5 days Aramco Says No Plans To Shelve IPO
Alt Text

The New Challenger To Lithium Batteries

The lithium-ion battery is head…

Alt Text

Oil Shows Weakness, But Don’t Expect A Plunge

Oil prices remained firm this…

Alt Text

Is OPEC Considering Deeper Output Cuts?

You could argue OPEC and…

Dwayne Purvis

Dwayne Purvis

Dwayne Purvis, P.E. is a reservoir engineering and management consultant based in Texas.  Find commentary and free resources at www.dpurvisPE.com. Besides writing and speaking on…

More Info

New Regulations May Come As A Rude Awakening For Oil Companies

Oil

An agency little-known outside accounting circles recently issued draft rules to change the standards which govern the verification of the year-end oil and gas reserves of public companies. The change would increase the burden of an audit, but the agency sees the need to tighten the scrutiny of such estimates. If they are right, then some companies will see downward revisions of reserves, their single greatest asset, as the rules become effective over about the next two years.

The Public Company Accounting Oversight Board (PCAOB) governs the auditors which validate the financial filings of public companies in the U.S. It was created along with Sarbanes-Oxley reforms and endowed with the power to license, discipline and revoke licenses for the auditors themselves, and it has become the official gate-keeper of one set generally accepted accounting practices. Both the public companies and the PCAOB answer to the U.S. Securities Exchange Commission (SEC). Its decisions, thus, have about the same import as the regulations of the SEC itself.

Early this summer, after more than two years of discussions with auditors and third-party specialists, PCAOB formally proposed two rule changes for public commentary concerning:

Approximately 200 oil companies fall under the governance of the SEC and PCAOB when reporting reserves, and, of those, about 80 percent use third-party engineering firms. Some rely mainly on internal reserve estimators but overlay a review by a third-party consulting firm to audit reserves, in the aggregate. In many cases, companies hire a third-party engineering firm to conduct the reserve calculation independently.

Though the engagement may take several forms, the third-party engineering firm usually works directly for and with the company and then supplies to the accounting auditor its credentials and a letter or report of its findings. For decades, the system has been accepted, but the PCAOB has now found it necessary to "strengthen requirements for evaluating the work of a company's specialist" whether that specialist is "employed or engaged by the company." 

Due to the fact that the engineering firm is hired by and works directly with the company, its work could no longer be regarded by auditors of public companies with the same deference and assumption of independence. Instead, the work would be assessed by the auditor with the same "professional skepticism" as other estimates promulgated by management. In short, if a company hires the "third party engineer" then the results could be treated with no more deference than if the reserves were prepared by internal engineers. Related: Daily OPEC Oil Prices Now Public For The First Time Ever

Auditors who previously were able to rely on the estimation or valuation work of specialists both internal and external with little additional testing will soon be required to apply more rigorous standards of examination to estimates from both sources. The second in the pair of proposals "emphasizes that auditors need to apply professional skepticism and devote greater attention to potential management bias when auditing accounting estimates" by prescribing more about how the audit should be conducted. The PCAOB explained that they intend "to prompt auditors to devote greater attention to addressing potential management bias" by imposing three themes:

  1. prompting “auditors to devote greater attention to addressing potential management bias in accounting estimates, while reinforcing the need for professional skepticism
  2. extending key requirements for substantive testing beyond merely understanding, and
  3. integrating risk assessment standards. (That is, expand the standards for describing risks the company faces generally to apply more uniformly to specific accounting estimates.)

The proposed rules also detail what they expect from substantive testing, including

  • examination of assumptions, data and methods to confirm that they are reasonable and supported by verifiable documentation,
  • a process audit of how the company went about preparing and controlling the estimates, and
  • evaluation of a "company's intent and ability to carry out a particular course of action".

Applied to reserves estimates, these new standards will require a deeper and wider analysis from auditors than they have exercised previously. The triangle of companies, engineering firms and auditors will have to rearrange itself substantially.

Comments from the general public are due to the PCAOB by the end of August, including on the time frame for implementation of the new standards. If history is a guide, changes in the proposed rules will be modest and they will come into effective in short order, likely by yearend 2018. Even for private companies, the standards set by the PCAOB affect what the auditors and other bodies see as the standard for “best practices.”

In a few years, the process of year-end reserves could look a lot different than it does today, and the process of implementing the new rules could make for a rude awakening to oil companies and their investors if the engineering work and its documentation do not satisfy the closer inspection of a truly independent reservoir engineer.

By Dwayne Purvis for Oilprice.com

More Top Reads From Oilprice.com:




Back to homepage


Leave a comment
  • RD on July 25 2017 said:
    This should be interesting.

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News