AAPG members are investors, through company or individual investment
plans, 401(k)s, IRAs, SEPs and private accounts. So the recent rash
of revelations about corporate fraud, scandal and bankruptcy —
and resulting loss of value — generates in most of us, in a very
personal way, righteous anger.
revelations concerning blatant conflicts of interest among well-known
securities companies and prominent accounting firms only strengthen
our deep sense of betrayal.
understand economic cycles. As investors, we accept that markets
go down as well as up. As explorationists, we understand risk.
all those directors, officers, auditors and analysts understand
that their individual and collective malfeasance have now produced
a massive loss of investor confidence — and wasted a great deal
of our hard-earned money?
happened to the concept of stewardship of the stockholder's interests?
happened to trust?
happened to integrity?
identify with such sentiments, isn't it? Not only because of personal
loss, but also because we know that the proper functioning of market
economies depends upon stockholder confidence, which in turn depends
on personal integrity and honoring the rules.
here about the long-term health of our economic system, the most
productive system in history.
a lot of discussion going on in AAPG just now about ethics — what
role AAPG should be taking in setting standards, what our obligations
ought to be to each other as members, and to the overall reputation
and image of our profession. Good business depends upon the confidence
of our clients and stakeholders in our work and in our counsel.
Our sustained objectivity and sagacity leads to their trust — after
all, millions of dollars are being invested in our professional
of our current concerns, however, there are some practices that
go on in the E&P business world that maybe we should consider:
and I gave a paper on this issue last year at SPE's Hydrocarbon
Economics and Evaluation Symposium (SPE No. 68580). Reserve overbooking
is another E&P taboo — a problem no one wants to talk about!
It damages stockholder confidence and thus stockholder value. We
believe it is a professional and ethical problem, not a technical
overbooking occurs for many reasons — poor estimating practices,
misguided incentives, ignorance, competition for investors and lack
of reserve overbooking have been blamed upon changes in corporate
accounting methods, i.e., from "Full Cost" to "Successful Efforts."
culprit here, however, is not the accounting method, or the change
in methods, but rather accounting manipulations whose purpose is
to maximize various tax provisions, which may become liabilities
under a different method.
case, the solution lies in thorough interaction of reservoir engineering,
economics, accounting conventions and tax codes, combined with the
professional intent to convey reality, so that such problems may
be anticipated, accommodated and communicated.
the cause, any temporary benefits that companies (and individual
managers) may derive from overstating reserves disappear whenever
reserves must be de-booked.
it, eventually, the truth will out. The bill comes due. And the
resulting loss of confidence by investors and analysts is made more
painful by the fact that it could have been avoided, just by saying
independent prospector presents a prospect for sale, he/she may
shortsightedly "pump up" the venture in order to sell the deal,
or to preempt anticipated negative negotiating ploys (besides, the
operative ethic is caveat emptor, right?).
real E&P pros understand that they're better off playing it
straight, and knowing enough about business and economics to spike
such negotiating ploys on their own faults.
about the corporate "geo-salesman" who does the same thing, figuring
the goal is to get the prospect drilled, even if it's inferior to
other candidate prospects?
this amounts to overselling to your own stakeholders! Result? The
corporate portfolio is not optimized. The stockholder is penalized.
We have all seen examples where the interests of the corporation
were sacrificed for the interests of the local business unit (which
are usually short-term).
a classic conflict of interest!
corporate prospectors still don't see this kind of thing as unprofessional,
which could be avoided just by saying "no."
times in my work as an expert witness, I have observed geoscientists
and engineers giving testimony in hearings, depositions and even
in the courtroom that were technically outdated, biased or even
erroneous (but always in favor of their client or employer!). This
amounts to technical fraud, and it is always disquieting to observe.
it can be successfully challenged and discredited through testimony;
sometimes not. Even though blatant offenders can be disqualified
by principled judges, sealed court decisions often protect such
"hired guns" from exposure, so they continue to serve in future
cases, to the discredit of the whole profession.
guidance for the principled expert witness. Serve your client by:
- Helping to design
a defendable case that optimizes his/her position.
- Identifying and attacking
the weaknesses in the opponent's position.
- Once you're in deposition
or the courtroom, remember that you're the servant of the court,
and play it absolutely straight.
- And remember — any
employer or client who asks you to shade the truth is someone
you don't want to work for anyway! Just say "no."
So — maybe
we shouldn't get to feeling too righteous, just yet. While our sense
of ethical propriety is still affronted by what has been going on
recently in the financial and investment communities, maybe we ought
to clean up some of our own E&P practices!
what can we do to improve the general ethical standards of our professional
community? I welcome your comments.
in the long run, shabby ethics are bad for our profession and bad
Reading: A practical classic about the functioning free
market that deserves revisiting, especially in these times: "Free
to Choose," by Milton and Rose Friedman (originally published 1980
Harcourt Brace [out of print], reprinted in paperback 1990 Harvest
— you'll like it!