Regulator & London Stock Exchange have disagreed on reporting UK petroleum reserves for years

Back in 2015, the Oil & Gas Authority (OGA), the UK regulator, adjusted its petroleum resource definitions to be more closely aligned with those espoused in the Petroleum Resources Management System (PRMS) of the Society of Petroleum Engineers (SPE).?However, the OGA definitions differ from those suggested by the SPE in that they define Reserves as those recoverable volumes in approved and producing fields only. The Resources from other significant discoveries where field development plans are under discussion (such as the Justified for Development (JfD) volumes, which are considered to be Reserves by the SPE) are regarded as Contingent Resources by the OGA. Only when the OGA has approved a field development is it considered Reserves by the UK regulator. This is shown in the graphic below which compares the two frameworks of the PRMS (left) and the OGA (right). Note that the "Play" sub-class in the Prospective Resources is also dismissed by the OGA.

This change resulted in a net re-classification of circa 600 million barrels of oil equivalent that had been reported previously as Reserves, but were now being shown as Contingent Resources in the UK Reserves and Resources report of 2016.

Regulators are completely within their rights to alter the PRMS guidelines to suit their needs. For example, there are concerns that JfD reserves can be booked, but then subsequently left to languish in the JfD sub-class, so the Dutch Regulator changed the PRMS guidelines to allow development projects a 2-year stay of grace only at the JfD level. During this time, the operator must obtain the outstanding approvals, otherwise the project would be re-designated as Contingent Resources. Indeed, the SPE allows such flexibility for regulatory agencies to tailor the PRMS application to their own purposes, as long as any modifications to its guidance are clearly identified. Hence, the OGA’s judgment that JfD volumes are Contingent Resources is regarded as permissible “tailoring” (and a view that I concur with).

The OGA view is enforced among the UK operators via the annual oil & gas field stewardship forms they must submit to the regulator as part of its management of the UK petroleum resources. And yet, the OGA ruling is not used by companies filing annual submissions to the London Stock Exchange (LSE) and its Alternate Investment Market (AIM), who continue to employ the PRMS guidance without the JfD change in classification preferred by the OGA.?Thus, we have the odd situation where, for the same assets, the UK Government uses lower Reserves figures than the UK stock market. Could this be a recipe for disaster?

When I asked the OGA why it hadn't communicated its reporting systems changes to the Financial Conduct Authority (FCA), so that stock market regulations on asset reporting could be amended accordingly, it replied that it was unable to address my question as it does not fall with its remit.

So, I contacted the FCA and asked why it had not adopted the OGA's change to the JfD Reserves classification and enforced the LSE-listed oil & gas companies to comply with it.?The FCA forwarded my query to its colleagues in the Primary Market Oversight (PMO) Department, who are responsible for monitoring market disclosures by issuers and enforcing compliance, as well as reviewing and approving prospectuses and circulars published by issuers whose shares are trading on the LSE.

PMO replied that under the LSE Prospectus Regulation, issuers in the oil & gas sector should report reserves and exploration results/prospects in accordance with one of the international reporting standards that is acceptable under the codes set out in Appendix I (Oil & Gas Reporting) of the guidance. According to this Appendix, issuers can use either the PRMS, or the Canadian Oil and Gas Evaluation Handbook (COGEH), or the Norwegian Petroleum Directorate (NPD) classification system for resources and reserves. PMO went on to say the PRMS was updated in 2018 to introduce changes to the classification framework and clarify areas such as the JfD sub-class and wondered whether this update addressed my concerns (unfortunately, it doesn’t). Finally, PMO admitted that it was unsure whether the OGA changed reserves definitions are intended to be congruent to PRMS, and suggested I contact OGA to discuss the matter directly with them. Round the houses we go (again).

This is not the first time I have found that OGA and FCA use different interpretations of the same oil & gas resources while claiming to use the same reporting system. I posted a LinkedIn article back in 2020, which showed that neither institution accepted responsibility for validating Competent Person Reports (CPRs) that are used by banks, investors, analysts and companies for reserves based loans, investments, M&A activities and the like. The OGA stated it was not its jurisdiction to certify CPRs, whilst the FCA claimed it was the responsibility of the auditors who wrote the CPR, which implies the poor auditors may end up carrying the can in any reserves disputes.

And so the UK does indeed have a disjointed Reserves and Resources reporting system, with the OGA using lower Reserves figures than those submitted to the stock market for the same UK assets. It's been going on since 2015 and doesn't seem likely to change. Where is Deputy U.S. Marshal Raylan Givens when you need him?