Oil and natural gas reserves are the most important asset of an exploration and production company, and long overdue discussions on this topic are finally occurring.

There is no cookie-cutter, one-size-fits-all model the industry can use when it comes to measuring a resource that you can't see or touch. So investors should consider a number of factors such as the technical tension in a company's internal review process, the diversity of its properties, its track record of production and reserve adds or revisions, and how clearly management retains the responsibility and accountability of reserves estimates.

Anadarko has 2.5 billion boe in proved reserves. Its non-price-related revisions over the past decade have averaged a positive 0.2% of estimated reserves.

The company relies on an internal staff of more than 150 highly skilled engineers and geoscientists to review every well in every field every year so its risk of performance surprises are greatly reduced. It also has a very diverse set of properties with its largest field representing only 7% of total proved reserves.

Significant reserve additions and changes are reviewed by a five-member formal corporate reserve review team that includes Anadarko's chief engineer, chief geologist, manager of corporate reserves and economics, and a senior engineer. The fifth person on the team is a senior vice president from the petroleum consulting firm Netherland & Sewell Associates Inc.

We've heard a lot of discussion in the market recently regarding the benefits of an outside audit versus an outside review. Both help validate the processes and procedures used to arrive at estimates. Anadarko has used both concepts throughout its history, and neither system is perfect. The largest negative revisions we've had in the past have been on audited reserves, as have some of the more notable revisions announced by other companies in the recent past.

At the end of the day, the US Securities and Exchange Commission (SEC) and Anadarko's investors are going to hold Anadarko accountable for our reserve estimates - not an outside consulting firm. We have a comprehensive understanding of our properties and utilize a vigorous process with the right intellectual capital working on our reserve estimates.

We believe Anadarko's disclosures will provide a model for investors to use in asking for similar information from the other companies in which they invest. For our company this annual vintaging process (disclosing the age of estimated proved undeveloped reserves, or PUDs) gives us the ability to monitor the conversion rate of PUDs into proved developed reserves, manage the investment plans for economically developing those reserves and ensure compliance with SEC guidelines. We pay particular attention to the older PUDs, specifically those 3 years old and older, to confirm we still have a current plan of development.

Everyone knows that not all reserves are created equal. How long PUDs stay on the books, where they're located, their infrastructure requirements, and their production-cost and sales-pricing structures all have important implications for the current value of these booked reserves.

Another quick test for investors is to look at a company's history of production growth relative to reserve growth, including PUDs. They will rarely match up exactly for any given time period, but they ought to be close to ensure that the booked reserves are not just staying on the books forever but are actually being produced.

The reserve estimation and reserve quality issues are not going away, nor should they, since we're talking about the most significant portion of a company's valuation. Anadarko is committed to being at the forefront of best-practice adoption in reserve estimation, and we will continue to improve our practices as new ideas are tested.

These comments by Jim Hackett, president and chief executive officer of Anadarko Petroleum Corp., were excerpted from a presentation at the Howard Weil Energy Conference and are used with company approval.

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