The quest for black gold

Spearheaded by ONGC, energy-hungry India is stepping up the hunt of oil and gas

Additional reporting: Surajeet Dasgupta

The SEC cloud over oil estimates

This is not a comforting thought for those who worry about India's already scant proven energy supplies. If ONGC adopted the standards set by the Securities and Exchange Commission (SEC), the estimated proved crude oil amount announced by the company might be lower than anyone believes right now.

That gloomy admission comes from ONGC itself in its preliminary prospectus for its share sale released in February. "If at some point in future we were to adopt SEC standards, the estimate may come down significantly," the document says. SEC standards are being adopted increasingly by global oil majors for their widespread acceptability.

At the moment, the company says it uses "internally-developed definitions" to calculate its proved domestic reserves. Those definitions are based mostly on international standards set from March 1995 by the Society of Petroleum Engineers, or SPE.

These standards, referred to as the SPE International Standards, take into account not only the probability that hydrocarbons are physically present in a given geological formation but also the economic viability of recovering the reserves.

But there are vast differences between the SPE standards and SEC Standards. How different? Well, crucially, the SPE standards are looser.

Under SPE, proved reserves must be based on "current economic conditions, operating methods and government regulations."

The SEC Standards require that proved reserves be based on the "existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made.

Also under SPE, reserves in undeveloped drilling sites that are located near a commercial producing well may be classified as proved reserve if there is a "reasonable certainty" that success will be achieved.

Under SEC, it must be "demonstrated with certainty" that there is continuity of production from the existing reservoir before an unexplored location near a current commercial producing well can be classified as proved reserves.

As far as project commitment, under SPE, proved reserves may be estimated as long as there is a reasonable expectation of project development.

The SEC requires a more firm commitment by the company to develop the project.

As a result, the ONGC document says, "The magnitude of any proved reserve difference between the SPE and the SEC standards could vary greatly. In some cases, the difference could be significant, whereas in other cases there could be very little difference.

The SEC Standards also are more restrictive in that they require the reserve estimates to use only the prices and costs in effect on the actual "as of" date.

If it adopted the SEC standards, for ONGC shareholders there is another sting.

A reduction in estimates would have a chain effect: it would impact the amount of depreciation and depletion expense, impairment charges or certain other financial information derived from or relating to such reserves amounts reported by ONGC in its financial statements in future. And that would all affect the crucial bottom line.