Managers of publicly held companies often face pressures thatrncan tempt even the most principled to push the envelope ofrncredibility in efforts to buoy investor confidence and thusrnincrease stock value. In an age of instant gratification andrninflated expectations of return on equity, companies oftenrnstruggle with long range strategic planning while at the samerntime striving to meet expectations of the next quarterlyrnearnings report. The quest for increased market capitalizationrnoften leads these harried managers to look under every stonernfor anything that will entice more investors to buy into theirrncompany.rnThe assets of oil and gas companies consist mostly ofrnhydrocarbons in the ground – reserves. In typical annualrnreports one often finds proved oil and gas reserves stated inrnvery precise terms. These reserve numbers are, in reality, veryrnimprecise because of the variability and uncertainty in thernearth and in the industrial and economic world. This is whyrnthe industry is moving increasingly away from deterministicrnreserve estimates to probabilistic, or stochastic, reservernestimates. Ironically, it is the very uncertainty associated withrnreserves that has enabled and preserved a practice that has,rnover the last twenty years, destroyed value and led manyrninvestors down the primrose path – reserve overbooking.rnReserve overbooking occurs for many reasons, amongrnthem poor estimating practices, misguided incentives,rnignorance, competition for investors, and lack ofrnprofessionalism. Any temporary benefits companies mayrnderive from overstating reserves disappear whenever reservesrnmust be de-booked. The resulting loss of confidence byrninvestors and analysts is often made more painful by the factrnthat it could have been avoided. Reserve overbooking is arnproblem that may be solved through consistent, professionalrnreserve estimating and reporting, and leadership,rnprofessionalism and accountability by informed andrnknowledgeable managers.
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