Outsourcing the Standardized Measure of Oil & Gas (SMOG) Calculation
By Dave Loucks
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.
What is SMOG?
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.
Benefits of Outsourcing SMOG
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.
SMOG Reporting: We’re Here To Help
Opportune has prepared an average of more than 50 SMOG calculations annually for clients over the past 10 years. We have the industry expertise and best practices built into our processes with the bandwidth to help you during your busiest times—whether it is at the end of the year or during a transaction. Clients rely on Opportune’s deep oil and gas operational expertise and knowledge so they can focus on other internal business functions. If you need a team of experienced energy consultants that can provide comprehensive solutions for your oil and gas transactional processing and reporting challenges, contact Opportune’s experts today.
For more information on SMOG, please call Dave Loucks at 303-606-7578 or email him at firstname.lastname@example.org.
About the Author:
Dave Loucks is a Director in the Complex Financial Reporting group at Opportune LLP where he is primarily responsible for assisting clients with financial reporting for oil and gas operations. Dave is one of the country’s foremost experts regarding the reporting for asset retirement obligations (ARO) and SMOG. Dave and his team developed and now implement the proprietary Assent 143 (ARO) and Assent SMOG software applications for Opportune clients, which are the only applications of their kind available in the market. They also have developed an application leases. Additionally, Dave works with the Petroleum Development Institute at the University of North Texas to instruct classes on the determination and presentation of hydrocarbon reserves for financial reporting purposes. Prior to joining Opportune, Dave spent 14 years in public accounting, where he managed the audit engagements of clients in the energy and software industries. He also was the CFO of an Inc. 500 software company from 1998 to 2000.