In the complex world of petroleum reserves evaluation, accurate reporting is not just a regulatory requirement.  It is the foundation of financial credibility, investor confidence, and strategic decision-making.  Yet, experienced operators and their technical teams frequently encounter pitfalls that can lead to non-compliance, restatements, or missed business opportunities.

Based on our decades of experience conducting thousands of reserves audits and evaluations at Wright & Company, we have identified at least three mistakes that appear repeatedly across operators of all sizes.  Understanding these pitfalls is your first line of defense.

Mistake #1: Inadequate Documentation of Proved Undeveloped (PUD) Locations

Inadequate PUD documentation remains one of the most frequent findings in reserves audits, and the SEC has intensified scrutiny of PUD booking practices in recent years. 

Pitfalls Identified

  1. Non-compliant Development Schedule
    • Many operators fail to provide timelines for drilling within the 5-year window.  Under SEC guidelines, PUDs must be scheduled for development within 5 years, unless specific circumstances warrant longer timelines. 
    • Lack of a credible drilling and completion plan supported by offset well data and past performance
  2. Missing Capital Commitment
    • Operators often fail to document capital budget allocation or demonstrate funding commitment
    • Continually fluctuating plans tend to be a red flag for the SEC
  3. Booking PUDs Without Economic Reassessment
    • Material changes can transform previously economic PUDs into non-economic projects
    • Operators sometimes leave PUDs booked without updating for changing economic conditions

The Solution: For each PUD location, maintain supporting documentation

  • Offset well list for justification, analog well set performance, and relevant production modeling
  • Current drilling and completion cost estimates
  • Development schedule with firm timelines
  • Demonstrated funding commitment and management approval
  • Economic analysis showing positive NPV under current SEC pricing
  • Consistent tracking of initial disclosure date

Mistake #2: Improper Application of SEC 12-Month Pricing Rules

The SEC mandates specific pricing requirements for reserves valuation that many operators misunderstand or misapply.  Proper pricing is critical because it directly determines whether reserves are economically producible and thus qualify as proved.

Pitfalls Identified

  • Using spot prices instead of the appropriate 12-month average of first-day-of-month prices
  • Failing to update pricing at each reporting date
  • Incorrect calculation of the 12-month average
  • Not documenting the source and calculation methodology for the pricing deck
  • Improper calculation of base pricing differentials
  • Lack of supporting documentation for price contracts

The Solution: Implement a rigorous pricing process

  • Clear documentation of SEC-mandated 12-month average pricing methodology
  • Documented price sources (WTI, Henry Hub benchmarks)
  • Formal process to update pricing at each reporting date
  • Separate tracking of SEC-compliant pricing versus alternative scenarios
  • Use representative historical base prices and realized prices to calculate base price differentials
  • Provide supporting documentation when utilizing contract pricing

Mistake #3: Confusing “Probable” with “Possible” Reserves

The SEC prohibits companies from combining unproved reserves, those classified as probable or possible, with the proved reserves figures presented in primary financial statements.  That said, companies may choose to disclose unproved reserves estimates in SEC filings outside the financial statements as long as those estimates satisfy the SEC’s defined certainty requirements.  The SEC’s definitions are precise, but the difference between probable and possible reserves remains one of the most common sources of confusion.

  • Proved reserves are those with “reasonable certainty” of recovery under existing technology and economic conditions.
  • Probable reserves are those more likely than not to be recoverable, meaning there should be at least a 50% probability that actual quantities recovered will equal or exceed the sum of estimated proved plus probable.
  • Possible reserves have a lower probability of recovery than probable reserves.

Pitfalls Identified

Many operators incorrectly classify reserves as probable when they genuinely qualify only as possible.  Alternatively, operators may book probable reserves using data that supports proved status, thereby undervaluing the asset.  This creates reserves reports that may trigger SEC scrutiny and inquiry during audits for mergers and acquisitions.

The Solution: Apply objective engineering judgment consistent with SPE/SPEE guidelines

Although Wright & Company does not recommend including unproved reserves in filings made to the SEC, when a company chooses to do so, it is crucial to apply objective engineering judgment consistent with SPE/SPEE guidelines.  When in doubt, Wright & Company recommends that operators use a documented, systematic approach to categorize each well and/or location. Our standard practice involves running multiple scenarios and clearly documenting the technical rationale for each classification.

The Cost of These Mistakes

Inaccurate reserves classification is not merely a technical error; it carries genuine business consequences.

  • Investor credibility: Restated reserves damage trust and can affect stock price for public companies
  • Financing challenges: Lenders rely on reserves reports for collateral valuation
  • M&A complications: Overstated reserves can derail transactions or trigger litigation
  • Regulatory risk: SEC enforcement actions have increased in recent years

How Wright & Company Helps

Wright & Company brings rigorous, independent evaluation to every reserves engagement.  Our team combines extensive technical expertise with up-to-date regulatory knowledge to deliver classified reserves that withstand scrutiny.

Our services include:

  • Full-scope reserves evaluations (proved, probable, possible)
  • SEC-compliant reserves evaluation/audits
  • Fair market value assessments for transactions and financing
  • Independent technical expert witness services

Whether you are preparing for an M&A transaction, seeking financing, or conducting annual reporting, our team ensures your reserves are accurate, defensible, and optimized.

Need to Strengthen Your Reserves Compliance Process?

Check out our “SEC Reserves Compliance Checklist”, a comprehensive guide covering the 11 most critical compliance points for operators.

Or contact our team directly to discuss your next reserves evaluation.  We will help you avoid these common mistakes and position your assets with the confidence that comes from rigorous, independent expertise.

Ready to get started?  Contact us here or call (615) 370-0755 to speak with one of our experienced and professional consultants.