Anadarko
CEO Jim Hackett on best practices for estimating oil and gas reserves
Posted: 29 March 2004
"Oil and natural gas reserves are the most important asset
of an exploration and production company and long overdue discussions
on this topic are finally occurring," said Anadarko Petroleum
Corporation President and CEO Jim Hackett at today's Howard Weil
Energy Conference in New Orleans.
"However, we need to look beyond the current fevered pitch
that is focused primarily on third-party engineering by placing
the majority of our attention and debate on the more important aspects
of internal reserve estimation processes which are management integrity,
external track records of reserve performance, and the public disclosures
of the companies in which we all invest," Hackett said.
"There is no cookie-cutter, one size fits all model the industry
can use when it comes to measuring a resource that you can't see
or touch," Hackett said. "So, investors should consider
a number of factors such as the technical tension in a company's
internal review process, the diversity of its properties, its track
record of production and reserve adds or revisions, and how clearly
management retains the responsibility and accountability for reserves
estimates."
Anadarko has 2.5 billion barrels of oil equivalent (BOE) in proved
reserves. Its non-price-related revisions over the past decade have
averaged a positive 0.2 percent of estimated reserves.
The company relies on an internal staff of more than 150 highly
skilled engineers and geoscientists to review every well in every
field, every year so its risk of performance surprises are greatly
reduced. It also has a very diverse set of properties with its largest
field representing only 7 percent of total proved reserves.
Significant reserve additions and changes are reviewed by a five-member
formal corporate Reserve Review Team that includes Anadarko's chief
engineer, chief geologist, manager of corporate reserves and economics,
and a senior engineer. The fifth person on the team is a senior
vice president from the petroleum consulting firm, Netherland, Sewell
& Associates Inc. (NSA).
Anadarko hired NSA at the beginning of 2003 to review the processes
and procedures by which the company estimates reserves. As part
of that process, NSA reviewed about 70 percent of the company's
2003 reserve additions, as well as about half of Anadarko's existing
reserve base. NSA's letter of confidence was filed with the company's
fourth-quarter earnings on Jan. 30 and was included as part of its
2003 Annual Report on Form 10-K.
"We've heard a lot of discussion in the market recently regarding
the benefits of an outside audit versus an outside review. Both
help validate the processes and procedures used to arrive at estimates,"
Hackett explained. "Anadarko has used both concepts throughout
its history, and neither system is perfect. The largest negative
revisions we've had in the past have been on audited reserves, as
have some of the more notable revisions announced by other companies
in the recent past.
"At the end of the day, the U.S. Securities and Exchange Commission,
and Anadarko's investors, are going to hold Anadarko accountable
for our reserve estimates -- not an outside consulting firm. We
have a comprehensive understanding of our properties and utilize
a vigorous process with the right intellectual capital working on
our reserve estimates. Because of these combined factors, we have
considerable confidence in our numbers," Hackett added.
Anadarko has continued to expand disclosure and transparency around
oil and gas reserves reporting to give investors a clear picture
of the value of the estimated reserve base. The company's 2003 Form
10-K includes disclosure of the "vintage," or age, of
its estimated proved undeveloped reserves, known as PUDs.
"We believe Anadarko's disclosures will provide a model for
investors to use in asking for similar information from the other
companies in which they invest," he said. "For our company,
this annual vintaging process gives us the ability to monitor the
conversion rate of PUDs into proved developed reserves, manage the
investment plans for economically developing those reserves and
ensure compliance with SEC guidelines. We pay particular attention
to the older PUDs, specifically those three years old and older,
to confirm we still have a current plan of development. More than
90 percent of our PUDs that were booked in 2003 are in North America,
and we typically convert those to developed reserves within 18 to
24 months. Longer-term projects such as improved oil recovery, arctic
Alaska satellite tie-ins, deepwater development and selected international
programs may take longer than two years, but the vintaging and additional
10-K disclosures help point our investors to the future capital
costs and timing of those projects, while ensuring that economic
development plans are in place," Hackett added.
"Everyone knows that not all reserves are created equal. How
long PUDs stay on the books, where they're located, their infrastructure
requirements, and their production-cost and sales-pricing structures
all have important implications for the current value of those booked
reserves.
"Another quick test for investors is to look at a company's
history of production growth relative to reserves growth, including
PUDs. They will rarely match up exactly for any given time period,
but they ought to be close to ensure that the booked reserves are
not just staying on the books forever but are actually being produced.
Anadarko has an excellent track record in this regard over an extended
period of time."
The company has implemented several new controls to further strengthen
its estimation process. This year, the Audit Committee of Anadarko's
Board of Directors was given oversight of the company's proved reserve
estimates. The Audit Committee chair has spent his career in the
petroleum industry and since 1976 has served as chairman of a reservoir
engineering company. In May, we will be asking the Audit Committee
to hire the external reserve engineer just as they hire the independent
external financial auditor each year. To enhance the objectivity
of the internal reserve review process, the company is also removing
the employees who serve on the internal corporate Reserve Review
Team from any portion of the incentive bonus plan that is specifically
related to reserves bookings.
"The reserve estimation and reserve quality issues are not
going away, nor should they, since we're talking about the most
significant portion of a company's valuation. Anadarko is committed
to being at the forefront of best-practice adoption in reserve estimation,
and we will continue to improve our practices as new ideas are tested,"
Hackett concluded.
Anadarko Petroleum Corporation is one of the world's largest independent
oil and gas exploration and production companies. Anadarko's operational
focus extends from the Gulf of Mexico and prolific Texas, Louisiana
and Mid-Continent basins, up through the western U.S. and Canadian
Rockies and onto the North Slope of Alaska. Anadarko also has significant
production in Algeria, Venezuela and Qatar and is executing strategic
exploration programs in several other countries.
More information is available at www.anadarko.com.
Posted by Richard Price,
Editor Pipeline Magazine
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