By Asjylyn Loder and Isaac
Arnsdorf
Lee Tillman, chief executive
officer of Marathon Oil Corp., told investors last month that the company was
potentially sitting on the equivalent of 4.3 billion barrels in its U.S. shale
acreage.
That number was 5.5 times
higher than the proved reserves Marathon reported to federal regulators.
Such discrepancies are rife in
the U.S. shale industry. Drillers use bigger forecasts to sell the hydraulic
fracturing boom to investors and to persuade lawmakers to lift the 39-year-old
ban on crude exports. Sixty-two of 73 U.S. shale drillers reported one estimate
in mandatory filings with the Securities and Exchange Commission while citing
higher potential figures to the public, according to data compiled by
Bloomberg. Pioneer
Natural Resources (PXD) Co.’s
estimate was 13 times higher. Goodrich Petroleum Corp.’s was 19 times. For Rice
Energy Inc., it was almost 27-fold.
“They’re running a great risk
of litigation when they don’t end up producing anything like that,” saidJohn Lee, a
University of Houston petroleum engineering professor who helped write the SEC
rules and has taught reserves evaluation to a generation of engineers. “If I
were an ambulance-chasing lawyer, I’d get into this.”
Experienced investors know the
difference between the two numbers, Scott Sheffield, chairman and CEO of
Irving, Texas-based Pioneer, said in an interview.
“Shareholders understand,”
Sheffield said. “We’re owned 95 percent by institutions. Now the American
public is going into the mutual funds, so they’re trusting what those
institutions are doing in their homework.”
Mutual Funds
Investors poured $16.3 billion
in the first seven months of the year into mutual funds and exchange-traded funds focused on energy
companies, including drillers that create fractures in rocks by injecting fluid
into cracks to enable more oil and gas to flow out of the formation. That’s
almost twice as much as in the same period last year, bringing total assets to
$128.2 billion, according to New York-based Strategic Insight.
U.S. oil production surged to a
28-year high in 2014, bolstering the companies’ sales pitch and contributing to
a 20 percent drop in American oil prices since the end of June. U.S. output is expected to grow 12 percent next year,
to the highest level since 1970, according to the Energy Information
Administration of the U.S. Department of Energy. At the same time, U.S.
consumption will shrink 0.2 percent this year, the EIA said.
Annual Accounting
Marathon’s Tillman, who was
speaking at the Barclays Plc CEO Energy-Power Conference in New York on Sept. 3, said there are “risk and
uncertainties that could cause actual results to differ materially from those
expressed or implied by” his comments. Many company presentations remind
investors that publicly announced estimates are more speculative than the
numbers the drillers file with the SEC.
Figures the company executives
cite during presentations “are used in the capital allocation process, and are
a standard tool the investment community understands and relies on in assessing
a company’s performance and value,” said Lisa Singhania, a Marathon
spokeswoman. The Houston-based company’s shares have risen 1.6 percent in the
last year.
The SEC requires drillers to
provide an annual accounting of how much oil and gas their properties will
produce, a measurement called proved reserves, and company executives must
certify that the reports are accurate.
Resource Potential
No such rules apply to
appraisals that drillers pitch to the public, sometimes called resource
potential. In public presentations, unregulated estimates included wells that
would lose money, prospects that have never been drilled, acreage that won’t be
tapped for decades and projects whose likelihood of success is less than 10
percent, according to data compiled by Bloomberg. The result is a case for U.S.
energy self-sufficiency that’s based more on hope than fact.
Judy Burns, a spokeswoman for
the SEC, declined to comment on what drillers say during investor
presentations.
A Rice Energy spokeswoman
declined to comment on the difference between the numbers. A spokesman for
Houston-based Goodrich Petroleum didn’t return calls and e-mails seeking a
comment on the subject.
Predicting how much oil can be
pumped out of shale has been controversial since the boom began about a decade
ago. Companies combined horizontal drilling with fracking, or hydraulic
fracturing. Fracking involves blasting water, sand and chemicals into deep
underground layers of shale rock to free hydrocarbons.
Reasonable Certainty
Innovators such as Oklahoma
City-based Chesapeake
Energy Corp. (CHK) said that
drilling vast expanses of oil-soaked rock formations is more predictable than
the traditional, straight-down method of exploration. Regulators agreed and
requirements were loosened starting in 2010.
A spokesman for Chesapeake
Energy declined to comment on the rules for proved reserves.
To count as proved reserves to
the SEC, companies must have “reasonable certainty” that the oil and gas will
be extracted from existing wells and those scheduled to be drilled within five
years. The forecasts are based on fuel prices, geology, engineering and the
performance of nearby wells. Planned wells must be economically and technically
viable.
For Harold Hamm, the
billionaire founder, chairman and CEO of Oklahoma City-based Continental
Resources Inc., the five-year rule is too constraining. It will take longer
than that to extract a lot of his company’s petroleum, and he should be able to
cite those resources in regulatory filings, he told the
Senate Energy and Natural Resources Committee on Jan. 30.
“Those numbers are totally
pessimistic,” Hamm said about proved reserves. Continental shares have risen
8.3 percent in the last year.
Lobbied SEC
Energy companies also lobbied
the SEC to let them file more speculative estimates, known as probable reserves
and possible reserves. Only three companies take that option, according to data
compiled by Bloomberg. The rest report only proved reserves to the SEC and save
their other estimates for public presentations, which the SEC doesn’t
supervise.
The data include year-end 2013
SEC filings, the latest available, compared with 2014 marketing materials,
press releases, company websites and executives’ speeches for the 73 shale
drillers. The presentations rarely explain how the drillers calculated the
figures. The numbers sometimes change from one presentation to the next.
Total Estimate
Many of the companies use their
own variation of resource potential, often with little explanation of what the
number includes, how long it will take to drill or how much it will cost. The
average estimate of resource potential was 6.6 times higher than the proved
reserves reported to the SEC, the data compiled by Bloomberg News show.
Several companies, including Sanchez
Energy Corp. (SN), don’t provide a total estimate. Instead, they publish
variables such as the number of well locations and the estimated output from
each one. Analysts often use these figures to independently compute the total.
Even though Sanchez Energy
provides the variables for analysts to calculate its resource potential, the
Houston-based company doesn’t publish a total estimate. Executives debated
whether to include one and decided against it, said Gleeson Van Riet, senior
vice president for capital markets andinvestor
relations.
‘Garbage Out’
“We don’t think that a lot of
the guesstimates that go behind those sorts of things will ultimately be
constructive to investors,” Van Riet said. “Put another way, garbage in,
garbage out.”
Denver-based Cimarex Energy Co.
is one company that doesn’t report a different number to investors than it does
to the SEC. “We want to have things on the books that are part of our near-term
drilling plans,” Karen Acierno, a Cimarex spokeswoman, said in an interview. “A
lot of people appreciate our conservative nature, a lot of investors.” Cimarex
shares are up 19 percent in the past year.
The investor presentation by
Canonsburg, Pennsylvania-based Rice Energy shows 2.7 billion barrels. Rice,
which went public in January, reported 100 million barrels to the SEC in March,
records show.
At Pioneer Natural Resources,
the number they cite to potential investors has increased by 2 billion barrels
a year in each of the last five years -- even as the proved reserves it files
with the SEC have declined.
The rising number is “a game
changer for this company,” said Sheffield, the CEO. “It’s a game changer for
this country.”
‘Great Resource’
Pioneer’s numbers aren’t
misleading; they’re conservative, Sheffield said. He said he’s shared them with
Senators Mary Landrieu of Louisiana and Lisa Murkowski of Alaska, the
Democratic chair and Republican ranking member, respectively, of the Senate
energy committee.
“Obviously it’s helped us in
regard to making headway on convincing people to lift the export ban,” Sheffield
said. “We want to convince them that we have this great resource. We don’t want
it trapped here in the U.S. That’s for the public, the administration and
Congress. So if we’ve got this great resource, why don’t you allow us to export
it?”
The message is getting through.
While Landrieu said she favors more study, Murkowski said she supports ending
the ban.
A loosening of trade
restrictions imposed after the 1973 Arab oil embargo would be worth billions to
drillers such as Pioneer, Marathon and Continental because the price of oil on
the international market in the past year has averaged 8.5 percent more than in
the U.S.
Bakken Shale
“If you don’t allow the exports
of this oil, they’re going to reinvest someplace else where they can market
this oil,” Senator Heidi Heitkamp, a North Dakota Democrat, told CNBC Sept. 15.
“And so it’s going to reduce the development and the dollars coming in.”
Joining her that morning was
John Hess, the billionaire CEO of New York-based Hess Corp., who said, “We’re
in a period of supply strength.”
Hess’s company told the SEC it
had the equivalent of 659 million barrels of proved reserves in the U.S. The
latest investor presentation said the company had 1.2 billion barrels just in
the Bakken shale, in Heitkamp’s home state. Hess shares have increased 7.9
percent in the last year. A Hess spokesman didn’t return calls seeking comment.
Lee, the University
of Houston professor,
said in an interview that he’s alarmed by the inconsistent and overly
optimistic estimates published by shale companies.
Shale Engineers
In August, Lee led a workshop
in Houston on the best practices of reserves estimation. The audience in the
ballroom of the Hotel Derek included engineers for shale drillers such as
Marathon, Continental and Rice.
Pamela Allen, a senior reserves
coordinator for Marathon, raised her hand and told Lee that she was worried
that using outsized forecasts in public presentations would run afoul of the
SEC and “come back to haunt us.”
Singhania, the Marathon
spokeswoman, said she was unable to comment on Allen’s remarks without seeing a
transcript.
“If a lot of people get burned
-- and I think a lot of people can and will be burned -- by these numbers in
the investor presentations, there may be a push by investors to get the SEC to
do something about it,” Lee said during the workshop.
To contact the reporters on
this story: Asjylyn Loder in New York at aloder@bloomberg.net; Isaac Arnsdorf in New York at iarnsdorf@bloomberg.net
