As many public oil and gas companies have made it through another year-end, it is a best practice to review what went right and what could be improved. Such questions to address include: Where did the reporting process not run efficiently? Is there a specific calculation that gave the company fits? Did the communication process between different departments seem like they were speaking two different languages? Or, is the math programmed into a spreadsheet calculation that has been handed down over the years with each preparer putting in their own spin? The Standardized Measure of Oil & Gas calculation (SMOG) checks the “yes” box to those questions at a lot of energy companies.
SMOG reporting is the combination of a reconciliation rolling the quantity of oil, gas and NGLs from year to year, a tax-effected present value of the reserves and a 12-component reconciliation of that value from the prior year to the current year that companies are required to do for their annual reporting. Trying to remember how to do all the pieces of SMOG when you only do it once a year is an inefficient process no matter how good the procedures are documented. Adding in the time pressures of 10-K annual reporting makes matters even harder.
The volume reconciliation rolls the prior balance to the current year balance for oil, gas and NGLs. The data can be obtained from the company’s reserve engineers for acquisition, divestures, extensions, discoveries and revisions. Asking reserve engineers the right questions to understand the movements in volumes to ensure compliance with U.S. Securities and Exchange Commission (SEC) rules isn’t as easy as it seems.
An added wrinkle is that the tax effect on the present value of reserves calculations are impacted by the “Tax Cuts and Jobs Act” (TCJA), which was signed into law on December 22, 2017. The tax planning and strategies developed around the TCJA will continue to have an impact on the tax model used for SMOG. If you’re using a spreadsheet model that has been passed down year-over-year, any change to the tax model should be a scary thought.
The value reconciliation from year-to-year is a complicated series of calculations that needs to be documented for each of the 12 components of the changes in value. Knowing what data to ask for from the reserve engineers (as it is a roll-forward of their data) is key to a good calculation. Having the experience to explain how the data affects each of the 12 components of changes greatly facilitates management and an auditor’s review.
Traditionally, we see outsourcing for daily activities – i.e., joint interest billing, revenue and payables – but the SMOG calculation also can be easily outsourced. Outsourcing SMOG expedites the review of the calculation as they’re set up in a repeatable, easy-to-review, recalculable solution.
Oil and gas outsourcing solutions provide a reliable option that offers a host of benefits, including engaging experts in the specific calculation, giving your staff back valuable time at their busiest point in the year, predictable budgeting costs, improved efficiency, improved profitability and easing of the auditor’s review time, to name a few. At a time when efficiencies are a must, outsourcing the SMOG calculation is a perfect solution that provides reliability and continuity year-over-year.