Oral-History:W. John Lee

About Interviewee

Known throughout the world as a leader in petroleum reservoir engineering, W. John Lee headed Exxon Company's US Major Fields Study Group where he supervised integrated field studies of Exxon's largest domestic reservoirs. Lee later went on to specialize in reservoir engineering for unconventional gas reservoirs as the executive vice president of S.A. Holditch & Associates. During 2007-2008, he served as an Academic Engineering Fellow with the US Securities & Exchange Commission (SEC) in Washington, D.C. where he was the principal architect of the modernized SEC rules for reporting oil and gas reserves.

About the Interview

W. John Lee: An interview conducted by Fritz Kerr for the Society of Petroleum Engineers, June 27, 2013.

Interview SPEOH000102 at the Society of Petroleum Engineers History Archive.

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Interview Video

Interview

INTERVIEWEE: W. John Lee
INTERVIEWER: Fritz Kerr
OTHERS PRESENT: Mark Flick, Paige McCown, Anthony Darby
DATE: June 27, 2013
PLACE: Houston, Texas


Background, Education, and Entry into the Petroleum Engineering Profession

FLICK:

John, tell me your full name and how to spell it. Thanks.

LEE:

John Lee, J-O-H-N, L-E-E.

FLICK:

Where do you live?

LEE:

I live in College Station, Texas.

FLICK:

And what do you do right now?

LEE:

I teach Petroleum Engineering at the University of Houston.

FLICK:

Wonderful. I am set to go.

KERR:

Okay. Thanks for that. So John, tell us in your own words, elaborate if you like, how you got into or how you became interested in the petroleum engineering industry.

LEE:

I became interested in the petroleum engineering industry as a result of summer jobs with Humble Oil and Refining Company starting in 1959. And then in 1960, I was a student at Georgia Tech, but I took summer jobs in the petroleum industry and enjoyed it so much and met so many people that were so talented that I never looked back. I interviewed one company when I finished my PhD and that was the Humble Oil and Refining Company.

KERR:

Can you elaborate just a little bit about that? You say you only interviewed one company. You were just so fascinated by it? So elaborate a little more. You got your PhD, you interviewed with one company, and then keep going. We’ll edit that.

LEE:

I was fascinated with the industry. I was fascinated with the kinds of problems that we were dealing with. And I was particularly fascinated with that particular company. Arguably, I should have looked at others to make sure that this was the best possible choice but I just… to me at the time, I just felt like there could be no other choice. The industry, the problems, so challenging, and the way that that company approached problems just sold me.

Changes He Saw in the Petroleum Industry during His Career

KERR:

That’s fantastic. Compare… or I should say what are some of the main things… you’ve been in the business since and I’ll let you tell me when you’ve been in the… since when you got in the business, but what are some of the main things that have changed from the time you started in the industry to fast forward to say the last several years or even now?

LEE:

The things that have changed since I started and now, tempting to say, almost everything. But certainly, certainly, really dramatic changes in several areas. So one thing that comes to mind, for example, is computer technology, information technology. I can remember when our production research group got its first Xerox machine back in the early 1960s and just a fascinating gadget.

Computers, early in my career, I did some computing on a machine and the kinds of problems that I was trying to solve now look pretty trivial. But I would put my instructions on some tape, type instructions in, put them on the tape, give them to the computer. It would run all night just on my problems, come back in the morning. If I typed something in wrong, too bad. If I’d done it all correctly, and believe me, we tried to be very careful at that time, then everything was fine. And then we might change something and do the same thing the next night.

So the evolution of the computer, or that sort of thing, can be done on the smallest, least powerful personal computers. It’s just been a revolution and I’ve seen it evolve through the years.

KERR:

That’s interesting. Everybody has answered that question very similarly. Harry was talking about using slide rules.

FLICK:

And punch cards.

KERR:

And punch cards, slide rules.

LEE:

Oh, yeah. Yeah.

Discusses His Most Significant Contributions to the Industry

KERR:

Slide rules was before that. Can you describe for us what you believe were some of your most significant contributions to the petroleum engineering industry?

LEE:

Some of my most significant contributions to the industry have been first, the publication of three textbooks by SPE. And I think publication of that first textbook which finally happened in the early 1980s probably has done more to shape the path of my career than any other single thing that I’ve done because it’s made me recognized by people all over the world and even today.

When I go into offices in Indonesia or Argentina or wherever, there will typically be someone who has one of my old books with my picture in it with hair asking me to autograph that picture in their book which they’ve kept all these years. I don’t know that they’ve ever used it but at least, it’s a good feeling to see the recognition that that has brought. And that recognition then brought other recognition, other opportunities. But I think that’s where it really started in a significant way with SPE.

Discusses His Work in Reservoir Description and Dynamics

KERR:

Your area of focus, your discipline, if you will, I was told is reservoir description and dynamics. Talk to us about your expertise and why did you focus on that, or why is that focus important to the industry?

LEE:

Well, my focus has been in what we now call broadly reservoir description and dynamics. Why am I there? Partly by accident but probably that’s the natural place for me to be. My education at Georgia Tech was in chemical engineering and a lot of the principles in chemical engineering are directly applicable to reservoir engineering. For example, the way that reservoir fluids behave when the pressure and temperatures change, that background comes from chemical engineering. The way that fluids flow in reservoirs and the relationship between flow rate and the driving force, the difference in pressure, the different points in the reservoir, those principles are fundamental in chemical engineering.

So I guess, among the things I studied, I saw the connections to my education more in reservoir engineering than in other areas. But I said part of it is accident and my early assignments had to do with problems in reservoir engineering. The very first assignment that I had after I accepted full time employment with Humble was to do some laboratory work on models of reservoir that could be developed and studied in the laboratory on a fairly small scale basis.

And the reason for doing that work, interestingly, was that there were a lot of people in Humble management that really were very suspicious of this new technology that was coming along called reservoir simulation, modeling reservoirs with computers. And there were a lot of skeptics. Now remember, this is 1962, so we don’t want to be too hard on these people. I think it’s probably a good idea to be skeptical of new, highfalutin things like computers modeling reservoirs, right?

So my job was to develop data relating flow rates and various quantities of fluids that flowed in the laboratory and then reproduce that work with this simulation technology that was just being developed in Humble by people like Don Peaceman and Henry Rachford who were well known names in early simulation technology but using their technology to try to reproduce what we observed in the laboratory. Well, that’s not a very scientific way of stating it. Trying to see whether or not we could reproduce with calculations what we observed in the laboratory. Surprise, surprise. It worked. So again, that’s another entry into reservoir engineering.

But probably what really had the most influence on my early career was work with a Humble engineer named Tony [unintelligible] who is since deceased in pressure transient testing as we now call it or just well testing as we called it then. Pressure transient testing basically involves measuring pressures in wells after some kind of change in rate, like shutting in a well completely, putting a gauge in the well, and seeing what happens to pressure with time.

In some cases, the pressure will build up very rapidly with time and quit changing after a few hours. In other cases, it will build up very slowly and keep changing for days and days and days and maybe weeks. Well, I worked with Tony [unintelligible] in putting together some materials for Humble and Humbles’ production department, the operators in the field, for how to analyze this pressure data. From the data, it turns out that we can estimate some important properties of that petroleum reservoir that are a great deal of interest to operations people and reservoir engineers in particular.

[OFF MIC CONVERSATION]

LEE:

So in this work, really Tony did the work in writing the document for use by the people in the field on how to apply this technology. But we began to get demands for teaching this technology to the operating people in the field and Tony and I shared that work. And when I got in to this explanation of this technology, I found that I really, really enjoyed explaining technology to people and I knew at that point, this was probably after two years with Humble Production Research, that this was an area that I would like to continue to concentrate on, the reservoir engineering, but also the communication of that engineering to other engineers in the company.

And that grew and then later, and in particular after I left Humble and went to The Humble Operating Company, I found a lot of demand for giving informal talks on this technology and I enjoyed it so much that eventually I said I’m really going to try to do this full time. So at that point, I started teaching at Mississippi State University. That was my first academic experience. And I went there in 1968, did some continuing education courses for people in that area.

But Humble also asked me to go to Libya. And at that time, I’m not going to call it Exxon. I think the proper name was probably Standard Oil of New Jersey for the full company. But Exxon had significant operations in Libya. This was just before or just after Gaddafi had taken over. So I got on the plane and flew the first significant distance outside the US in my life to Libya, put on a week-long course there training in well testing technology, found that to be really quite a good experience.

So I stayed at Mississippi State for three years teaching reservoir engineering-type subjects of all kinds, continuing to accept invitations to put on short courses here, there, and yonder. And at this time, I got an invitation from the SPE books committee to write a textbook on well testing or pressure transient testing and I accepted that invitation probably in the range of 1971, 10 years later after I was back with Exxon for seven years and progressed through various kind of reservoir engineering assignments, and then went to Texas A&M in 1977.

But about four years after I got to A&M, I finally got that book written, 10 years after the invitation which is pretty typical, I think, of the way that many of us work on those books. I mean, it feels good to get it done but it’s a real pain while doing it. But as I said earlier, having that book published probably meant more to my professional recognition and development than any other single item that I’ve done.

[OFF MIC CONVERSATION]

Discusses His Crowning Achievements in His Career

KERR:

What would you say, John, is one of your most… one of your crowning achievements, maybe writing the book or something that you’ve done that gives you the most pride?

LEE:

The thing that I’ve done that gives me the most pride was being selected for the SPE’s DeGolyer Distinguished Service Medal. I have received a lot of SPE awards which include the Honorary Membership which is said to be the highest recognition given to an SPE member, but the one that I’m most proud of is that Distinguished Service Medal because I just… it’s really very meaningful for me to provide service and to be… and I, like many other SPE members, do this without any thought of reward, but to receive recognition for the kinds of service that I’ve provided was really a reassuring experience for me. So that’s at the top of it all.

KERR:

That’s great.

Discusses His Involvement with the Society of Petroleum Engineers

MCCOWN:

Could you just follow up with a little bit more about what it means to serve in SPE?

KERR:

That’s a good lead in actually. So when we were previewing some things, I asked you… I told you that we were going to chat a little bit about what SPE has done for you and your career and then what you have been able to contribute back to SPE. So it’s kind of the same… along the same veins as you were just answering. So let’s start with the first part of that question. What has the Society of Petroleum Engineers meant to you, John, personally and also to your professional career?

LEE:

The Society of Petroleum Engineers to me personally and to my professional career has meant an opportunity to work with people with similar values to what I have, really to fulfill the mission of SPE which is to collect, store, and disseminate information as I see it. Of course, those are kind of general words, so I think I need to provide some specific examples.

But probably the first meaningful experience that I had with SPE was with the Gulf Coast section in Houston where Humble Production Research was located. And I volunteered to serve as a committee member with SPE. And I think, if my memory is correct, the first thing I did is work with student affairs. I’ve told you that I like to teach but part of my liking to teach is because I really like to work with less experienced people including, but not limited to, students.

And so I worked with the student affairs committee in Houston with the Gulf Coast section. And that’s an opportunity to do something that really needs doing but it’s also an opportunity to do something that I think most people would reasonably consider to be very personally rewarding. Now, what did that work entail? Well, at first, being liaison with the SPE Student Chapter at Texas A&M.

I knew nothing about A&M at the time. I knew they had a petroleum engineering program and that’s really about as far as it went. But I attended a lot of their monthly meetings, drove up from Houston to College Station, attended their meetings, got to know the faculty members, got to know some of the students. That group also when the Annual Technical Conference and Exhibition came to Houston, although in those days it was simply called the Fall Meeting, when that came to Houston, there would be a need to get a lot of student volunteers. And so I could talk with the people at A&M and round up some A&M students to serve as these volunteers. As a result of this committee work and I think that particular area is pretty highly visible, then I was elected to several offices in the Gulf Coast section. I was at one time secretary, treasurer on other committees.

At the time, the Gulf Coast section had a practice of nominating two people for each position and I was nominated to be chairman but another person that was nominated was named Jim Jordan. And Jim, apparently, just beat the socks off me in the election. Jim later became president of SPE International so I don’t feel too bad about losing that particular race. But anyhow, I worked my way up through the ranks which provided more and more opportunities to serve and in turn to be recognized. The culmination was the publication of that first book even though that’s what, 20 years after I first joined SPE.

But shortly after that book was published, the Gulf Coast section nominated me for the SPE Reservoir Engineering Award, which is a technical award which presumably recognizes achievement in that particular technical specialty. And surprisingly, they nominated me and I received the award in about the third or fourth year of that program which says that I was perceived as being a far better reservoir engineer than I really was, to be the third or fourth person to receive that award with… my goodness, the quality of people that I had worked with over the years was so tremendous. But I think receiving that award…

[OFF MIC CONVERSATION]

LEE:

All right. The fact that I was given the SPE Reservoir Engineering Award really has more to do with perception than fact. But the perception came because of the volunteer work that I had done with SPE particularly in the Gulf Coast section but a little bit outside of that. By this time, I had begun to serve on society-wide committees like the Student Affairs Committee, education and professionalism, some more technical committees. I think that by this time, I had been nominated to serve as a distinguished lecturer for SPE in my area of specialty. At least, these things came at a pretty close time.

And being nominated for these things again, I think it really depends fundamentally on being a volunteer, getting to know people, networking, getting recognized, and then a person is called on to do these things when the opportunity arises. And as a result of saying, “Yes, I will do it,” then awards come. And there’s so many people in SPE that are so much more capable than I am that have never received any awards. Why? Because they’ve never made themselves known in SPE by getting involved.

So in that sense, I think the SPE Awards Program is really a great program because I think it’s a great motivator. I think it’s a great incentivizer for people to volunteer and to network and to get to know people. I think, again, we should do that because it’s a good thing to do but there can be rewards from doing that. And if we don’t do that, I’m afraid that in many cases, the quality of our work will really never be very widely perceived.

Discusses His Work Classifying Reserves and Working with the Securities and Exchange Commission

KERR:

Your humbleness is kind of amazing with all the things you’ve accomplished and all the probably thousands of engineers that you’ve talked to and trained. Pretty good. So I previewed this one with you earlier. Tell us about your work with classifying reserves and working with the Securities and Exchange Commission, how that is linked. You gave me a quick, little summary and it didn’t dawn on me until you told me. So I’ll rephrase it. Tell us about your work with classifying reserves and how it relates to working with the SEC.

LEE:

My work in classifying reserves and working with the SEC really started formally in 2004. That’s one of the few dates I can really remember something happening in a specific year. In 2004, there were a number of very widely publicized cases where companies wrote down their reserves and essentially confessed to the public, voluntarily but still confessed to the public, that they had overstated their reserves.

And of course, this got a lot of publicity throughout the world and resulted in a lot of lawsuits and so forth. Well, at that time, Steve Holditch who was head of the Petroleum Engineering Department at Texas A&M where I was located at the time, Steve sent a note to the faculty and says, “This reserves business is something that we should be seriously concerned with. And I think,” Steve says, “that it will be a good idea for us to set up some courses in teaching reserves and perhaps do some research work in reserves. So anybody that would like to do that, please let me know.”

Well, at this point, I had been doing well testing and pressure transient testing and related things for many years and I felt I’ve done lots and lots of things in my career that all tie into reserves. I had never formally estimated reserves. Informally, I had earlier in my career after I moved from the upstream research group to Humble Operations. Eventually, I made some forecast of production from some reservoirs in South Texas and generated some numbers. That turns out to be reserves estimation.

I didn’t… I wasn’t a part of putting those reserves on Exxon’s books. It’s just I came up with some numbers which the reserves people used, in some cases unchanged, and put them on the books. Then later, I was district reservoir engineer in Humble’s Houston District and I supervised 15 or 20 young reservoir engineers, each of whom frequently made forecast of production which amounted to reserves. So I had worked with, had audited this work for many years, and I had worked with a group in Exxon that did what we call integrated field studies, really at a time before that became the buzz word in the industry, groups where we put together geologists and reservoir engineers and production engineers and others, and as a team made production forecasts.

That’s reserves. And I thought with all my experience, so much of it is really related to reserves. I’m going to volunteer for that job that Steve has mentioned in putting together a reserve program at Texas A&M. And so I began to develop courses slowly but surely and began to read the reserves literature pretty widely. And I’ve been doing this for a couple of years. And the SEC posted an announcement which I never saw but a friend of mine at A&M said, “There was an article in the Wall Street Journal that the SEC is looking for an engineering fellow to come to Washington and work with them in updating the rules for reporting reserves.”

And I thought that’s exactly what I’d like to do at this point in my career. So I responded to that call for an engineering fellow. SEC interviewed me, another very young person at A&M. I don’t know that anybody else volunteered, probably not, because what it meant was moving to Washington for a year or two working on these new rules and then coming back home. And it’s exciting work but it’s still kind of a pain in the neck to have to go through all that. Well, anyhow, I did.

And we developed new rules within about 18 months starting with a call to the public asking, “Do you think we need any new rules or are the old rules okay?” And of course, people overwhelmingly said, “We need new rules really badly. So guys, get to work.” So we did and we went through a couple of iterations. And on my last day at the SEC which was in late December 2008, the commissioners had not yet approved the rules. Again, this was my last day there.

The way that they were approving these rules was not to have a formal hearing with all the commissioners and then voted up or down. Instead, they were passing the proposed rules from one commissioner to the other and anybody that didn’t like them could just sit on them if that person chose to do so. And usually, the staffs of those commissioners would call in, me and the lawyer that actually did the drafting of the rules and maybe my supervisor and talk about what we had done.

Well, in late December, everybody’s gone. Now, this is December 2008. There had been an election that year, if we may recall. And a republican administration had been replaced by a democratic administration which meant new commissioners being appointed. And there are seven commissioners and the majority is always from the majority party. Well, everybody knew this change was coming. It wouldn’t be until after inauguration. But anyhow, the head of the SEC resigned and was gone. The person that was the Director of the Corporation Finance Division of SEC in which I worked had resigned and left.

And again, I want to remind you, we’re talking about my last day there. We didn’t have approval from the final commissioner who had not yet ruled on these rules. Well, I packed up all my stuff out of my office in Washington thinking, “Gosh, I’m going to go back to Texas. We don’t have approval. With the change in administration, with the change in commissioners, this may never happen.”

[OFF MIC CONVERSATION]

KERR: While he’s doing this, I want you to keep elaborating on this, tell us along these same veins the impact of this and how it impacts government institutions as well as financial markets, financial investors, how your interaction with the SEC and the reserves and how they relate to the asset, if you will, of that company.

LEE:

All right. On this last day, I’d packed up my stuff, put them in a box, went back to my apartment where my wife was waiting for me. And I left midday. No point in hanging around the full day on your last day, of course. I got a call at about 3 o’clock saying this final commissioner who we thought was really not favorable to having these kinds of rules, simply as a matter of principle, no objection to the rules themselves because he didn’t understand what [was out], but I got a call saying that he was willing to talk to us about the rules.

So I got back on the subway back to the SEC office and the lawyer that drafted the rules and I really were the only people that had worked with the rules that were still there in the office in late December with all the top bosses resigned, gone, doing something else. We talked to the commissioner. He seemed to be sympathetic and understanding and I think we persuaded him that it was in the interest of everyone, investors, oil and gas operators, to have a set of rules which could more completely reflect the assets that oil and gas companies had.

This would promote efficient raising of capital in the US markets. And it would also help investors by being much more transparent about what these assets were so that they could make better decisions on where to invest.

I think that he was persuaded although he didn’t acknowledge it at that point. But anyhow, after that, our meeting with the commissioner, I went back home. And about 5:30 that evening, again my last day, I got a call from one of the people I worked with and the call said the commissioner has signed off. The rules are approved. And so then we could all feel like we had really accomplished something. But it was incredible to have happened on the last day, at a time where many of us were afraid it would never happen, that the whole effort would have to begin again, and satisfy the new political party in power there.

It gave me a great deal of faith and the fact that government can work objectively in many cases, even with people with different value systems and different points of view. I think the commissioner knew that we were straight shooters and we’re telling the truth. Now, these reserves rules have tremendous impact on the companies and on investors. An oil and gas company, or at least independent exploration and production companies, its assets are its oil and gas reserves. And even with an integrated company which has other parts of its business like perhaps refining, although there’s less and less of that anymore, is part of intergraded companies. But refining marketing to the extent that that occurs, still a major part of that company’s assets are its oil and gas reserves.

It’s tremendously important to get the rules for how to estimate reserves, how to define reserves, how to report those reserves. It’s really important to do that right in everybody’s interest. And I said earlier that the point that got me started in my career was, in the sense of public recognition, was probably that first textbook published by SPE. And the work with the SEC would never have happened had I not published that first textbook and gotten the recognition. Let’s say I had credentials which the SEC would have accepted.

But the recognition that came after working with those rules and having the new rules put in place has just had a tremendous impact on my career. And ever since that time, I’ve just had countless invitations to provide luncheon speeches, to work with programs talking about reserves for SPE. I got one coming up in Houston in August, for example. I got one coming up in London next March. Recently, I’ve had such a workshop in Lima, Peru, Mexico City. I turn down more of these than I accept.

This doesn’t mean everybody likes the rules that we came up with because they don’t. There are some parts of the rules which are particularly hard for the industry to believe are really necessary. And part of them are considered to be a burden but the SEC staff just felt like there were some things that just had to be done in what they perceived the interest of the industry to be.

I would like to hope that by and large, though the industry and the public believes that these rules are fair, that the public’s opinion was heard in the various calls for public comments that we got. And that given all the different interests, from investment banks, from ratings agencies like Standard & Poor’s, from securities analysts as with the major brokerage companies, and with the industry, I think taking all these interests into account, I think we came up with just as fair a set of rules as we possibly could.

But I got back to Houston in late December and by the middle of January, I gave my first talk on these new rules to The Society of Petroleum Evaluation Engineers in Houston, completely full house, question and answer periods so long that it had to be shut down. There’s been tremendous interest since that time.

Discusses His Opinion and Involvement in the Petroleum Resources Management System (PRMS) Development

MCCOWN:

I have a quick question. John, were you involved in the PRMS [Petroleum Resources Management System] development?

LEE:

No.

MCCOWN:

Is that related to this or is that different?

LEE:

It’s related.

MCCOWN:

It is related. Okay. But you weren’t involved?

LEE:

I wasn’t involved in that but I was… we at the SEC used PRMS as a starting point for the SEC’s new rules.

MCCOWN:

Oh, okay.

LEE:

So it had a tremendous bearing on what the SEC did. If I had had my druthers, we would have adopted PRMS with very little change. That wasn’t satisfactory to many of the commission’s staff. There are parts of PRMS that they just can’t accept.

MCCOWN:

Could we talk about that a little?

LEE: Sure.

KERR:

So help me frame the question, if you would, because that… so it sounds to me like there was a set of rules prior to you being…

MCCOWN:

Well, SPE put them together.

KERR:

Oh, SPE put them together?

LEE:

Yeah, SPE put together some rules which…

KERR:

Okay.

MCCOWN:

[Unintelligible] system that companies use to report their reserves.

KERR:

Got it. Okay. So this was pre your involvement and then they were probably a good set of rules. It sounds like you pretty much agreed with them already.

LEE:

Oh, yeah.

KERR:

Because you said there was very… really very little need for modification but that wasn’t good enough for them. So help me frame the question. Bear with me one second.

LEE:

That’s all right.

KERR:

Okay. So she’s going to frame the question. You look at me still.

LEE:

Okay. Okay, but I can help you frame the question before you start.

KERR:

Even better. Okay [laughs].

LEE:

How did the SPE’s Petroleum Resources Management System rules affect what you did at SEC, in the SEC’s rules? Something like that, I think, is the question.

[OFF MIC CONVERSATION]

Discusses SPE’s Rules and Elaborates on SEC Rules

KERR:

So go ahead and elaborate about these SEC rules and how they already had a set of rules that SPC had already drafted and…

DARBY:

SPE.

KERR:

SPE.

MCCOWN:

Too many acronyms. We have a lot of acronyms.

KERR:

Yeah. I’m working on that two-hour sleep thing.

LEE:

[Laughs] The SEC didn’t develop its new rules in a vacuum. Instead, the SEC in particular took into consideration definitions for reserves and resources generally that the SPE had developed in what it called its petroleum resources management system. The SPE in cooperation with the American Association of Petroleum Geologists, the Society of Petroleum Evaluation Engineers, and World Petroleum Council, as a most recent step in evolutions of definitions that it used, had adopted a really comprehensive set of rules in this PRMS. And the SPE board adopted these rules in 2007. And the boards of directors of the other professional societies also endorsed these rules in that same year. So they became effective in 2007. Well, the SEC started its reserves definitions and reporting requirements effort formally in 2007 but after PRMS had already been adopted. PRMS was a carefully thought out, systematic set of definitions of resources.

Now, PRMS is not everything that the SEC wanted to do. The SEC in addition to having definitions for reserves and resources also wanted guidelines for reporting those reserves and resources although not to a great extent for resources. Basically, the SEC wants reports of reserves.

All right. When the SEC work began, we had PRMS. It was out. It had been approved. And that was the starting point for the new SEC rules. Now, the SEC did not adopt PRMS formally and didn’t adopt all of PRMS and in some cases didn’t adopt some of the specific definitions that are in PRMS but instead adopted change definitions.

The reason for this was that the SEC staff and management felt that while some parts of PRMS might be acceptable to the petroleum industry, internationally and broadly, there are certain requirements in the US that the SEC felt like just had to be changed. For example, PRMS says that estimates of future reserves can be calculated using estimates of what the price of oil and gas is going to be. And of course, the higher the price, typically the larger fraction of the hydrocarbons in a resource can actually be recovered economically before we have to abandon it.

And so reserves estimators were allowed to use their best estimate of future prices and disclose what they were in PRMS. The SEC, the accounting staff in SEC, said, “Absolutely not.” Accounting guidelines call for a snapshot in time. On one day, what were the assets of this company based on conditions at that day, based on prices as of that day, based on costs of that day, based on regulations as of that day, environmental requirements that have to be met as of that day? No anticipating the future. This was probably the single most difficult change that we were able to make in the new rules.

Companies said, “No, this is ridiculous. You want a December 31st price for reserves? What if there’s been overflow of a regime in the Middle East in mid-December? The price of oil will go through the roof. On the other hand, there can be political or other events which take us off the long term trend which could depress the price.

The accounting staff for the SEC just held the line to almost in and finally relented to this extent. And they said, “Okay, guys, we will allow you to use an average price for the last year to reflect the price for that year rather than the price on the last day of the fiscal year. But there can be no speculation about what conditions are going to be in the future.”

Now that’s, I think, a fairly clear example of the kind of thing that the SEC staff and the management said, “We must differ with PRMS on this point and certain others.” So the new SEC rules are similar. In fact, they are identical to the SEC rules in many cases. But there are important specific instances where they’re different. And the reason that they’re different is because the SEC not only has to convince the industry that its disclosure requirements are to fully reveal the company’s assets, but it also has to be done in a way that protects investors, that satisfies the interest of environmentalists. There are many other constituencies that had to be taken into account that just didn’t have to be taken into account in PRMS.

KERR:

It’s fascinating. Don’t you agree?

Discusses Reporting of Reserves into the Future

MCCOWN:

What’s your opinion on the future of our current reserves reporting system from the SEC or something like that?

KERR:

So reporting of reserves leading into the future?

LEE:

My opinion is that the reserves reporting requirements for the future will evolve. I really don’t expect any dramatic change in what’s been done. In fact, one of the things that we tried to do with the new rules which went into effect as a result of our work approved in late 2008, one of our objectives was to try to develop general and flexible rules. This is what’s called a principles based rule system where there’s not… and that’s as opposed to a prescriptive system which says, “You must do things in a certain way. You must use certain technology.”

Technology becomes dated. Principles, to say you must use technology that’s reliable without saying what that technology is, can last for a long, long time. So I think the rules that we came up with are going to be in place well into the foreseeable future because there is a lot of flexibility there. And so as things continue to change in the industry, as there are advances in technology, as unconventional resources become more and more important, as the international nature of the industry becomes even more integrated throughout the globe, the SEC’s rules should be able to handle that.

There will come a time when that’s no longer true. And when that’s true, the rules would have to be changed. But I think that’s several decades into the future and I think the new rules are really flexible enough that people will be able to operate under these rules. And in addition, the SEC staff periodically issues guidance on the new rules, telling filers what they should do with these rules in response to specific questions that they raise that aren’t addressed directly in the rules.

And that guidance also provides a lot of flexibility. There hasn’t been as much of that as I would have hoped but interestingly, there was some guidance issued on May 13, 2013. I believe I have the date correct. At least, it was in May 2013, addressing a new issue which was important and which hadn’t been addressed clearly in the rules themselves. So I think with this combination of flexibility and the ability to provide guidance on how to interpret the rules in today’s situations, I think the rules ought to last for a long, long time.

KERR:

That’s good. So long as the technology that people use… it doesn’t have to be specific technology but it’s got to be relevant technology. It’s got to be relatively up to date technology. You can’t be using technology from the 60s to evaluate your reservoirs and be on the same level playing field as somebody who’s using 2013 technology and they are evaluating their reservoirs.

Discusses Old Technology versus New Technology

LEE:

It’s a very relevant question and the answer is the old technology can be used if it’s still reliable. New technology can be used if it’s proved to be reliable. I’m really not an original thinker. But one of my contributions to the rules was definition of a term that we’ll call reliable technology, that is you can use reliable technology to establish the credibility of your reserve estimates if that technology is based on sound scientific and engineering principles and if it’s been used in the field, in practice, and has led you to the correct conclusion the vast majority of the time.

See, that doesn’t date it. That says it could be 1960 technology. If it works, if you use that technology and you’ve come to the correct conclusion… you got to check your reserve estimates ten years later. Were they right? You got to keep checking what you predicted in using the technology on which it was based. But if you’ll check and it proves to continue to be reliable, then you can use it. And that’s true of old technology. It’s true of brand-new technology.

In fact, the rules allow filers to use proprietary technology. They don’t have to disclose to the public what technology they used if that would give away some sort of competitive advantage. They may have to tell the SEC staff what they’ve done if the staff questions that, but it will remain confidential with the staff. And the SEC staff is really good about maintaining confidentiality.

KERR:

That’s interesting.

MCCOWN:

You’re learning all sorts of things today.

Discusses the Evolution of Service Companies from When He First Entered the Industry

KERR:

Oh, my god! It’s fabulous. That was great. My last question I have, Paige and Anthony, is really just about the evolution of the service companies and the various operators of these service companies and how that relates to where we are now.

LEE:

The service companies have certainly changed since I entered the industry. At the time, I think, it was clear that the service companies had good, reliable technology to offer to the industry but not so much technology. There were a lot of needs that the industry had that simply the service companies didn’t meet, didn’t try to meet.

A lot of technology was developed within the research labs of the companies. And a lot of the technologies that the service companies adopted simply came from licensing the technology developed in the research labs, like Humbles Production Research Company, as an example. Over the years, those research labs have become far fewer in number. In fact, most, even of the majors, no longer have a research lab. They may have technology specialists. They may have gurus that know the technology well. But by and large, most of the companies are not doing research. Instead, they are now funding research at universities and with service companies and other places like this. And so the services that the service companies provide are much, much more sophisticated than they were when I entered the industry.

They do their own research in many cases, not funded by industry but funded on their own account, and in many cases provide services to less sophisticated operators such that they will basically tell the operator how to operate the field and perform all sorts of tasks. Gather all sorts of information really is a better way of stating that. That service is provided almost like the service company was the operator of that field. In fact, there are cases where their contracts were… that’s essentially the case. So there’s been a huge evolution in sophistication and scope of the service company activities.

KERR:

Do they ever get to that point since they’re no longer…? They don’t necessarily have a research facility within their own company. They’re funding it through other research facilities or universities like you said. Is it something they call either build or buy? Is that… are you familiar with that term?

LEE:

I'm not familiar with that term enough to…

KERR:

Do we build it ourselves? John’s developed something over here that’s… we can’t afford to do it ourselves so we’re going to license it from you or we’re just going to buy your little company.

LEE:

Yes. Yes. Yes.

KERR:

That’s why a lot of companies basically scrap their research and development departments because you have all these young entrepreneurs out there, smart people that are well funded, that are building the technology, are coming with new technology that didn’t exist two years ago. And I’d rather buy or license your technology instead of going and doing all the research and having done it ourselves.

LEE:

Yes. The build or buy philosophy has really become more and more moving toward buy not only with the operating companies in the industry but with the service companies themselves. I can think of Schlumberger with a number of acquisitions that it has made to buy a sophisticated electronics information type technology capabilities rather than investing the company resources in doing that. Yeah, that’s more and more prevalent.

KERR: We’ll stop there for just a second, create another file.


Discusses His Experience as an Educator at Texas A&M and the Price of Oil Dipping in the 1980’s

KERR:

You’re going to have to remember what she had said. So tell us about your experience as an educator in the industry asking Texas A&M to train more PEs, and you’re going to elaborate about the price of oil dipping so badly back in the 80s. So we can run from there.

LEE:

All right. An important issue for me as an educator since my early experience at Mississippi State and then later at Texas A&M starting in 1977, I’ve been concerned with the issue of supply and demand of petroleum engineers to the industry. What happens is that petroleum engineering enrollment will grow in response to increased demand from industry which is reflected in higher starting salaries.

When enrollments are low and the price of oil goes up, there are not enough petroleum engineers, so the starting salary offers will go up. People will flock into petroleum engineering. And historically, this has been happening for a long time but it became particularly clear in my work in the 1980s at the time of the oil embargoes that the United States experienced. The price of oil went on an inflation adjusted basis to a historic high, and there was suddenly a scramble to develop lots of oil and gas. And so people became interested in petroleum engineering and the industry said to the schools, “Provide the engineers for us.”

And some of the schools said, “Okay, we’ll do that but if things dip back down, we want to be assured that these people can get jobs.” “Oh, yeah. No problem.” Well, so enrollment zoomed. And I forget the year, maybe 1981, within two, three years of that, one out of every seven students, one out of every seven freshmen entering Texas A&M, went into either petroleum engineering or geology. One out of seven. A&M has 10,000 to 12,000 entering students every year. It wasn’t quite that many back then, but I think that puts it in perspective.

Four years later, prices had collapsed and people absolutely could not get jobs. Offers that had been made in some of those years were rescinded. And so people really became very disillusioned with the industry. Now, I don’t think it’s fair to blame the industry too much. It is a business. And if there’s no work, well, how can we make job offers? Well, there was the implied promise there would be jobs. I think we need to be concerned about that.

But we also need to be concerned about encouraging people to staff up to handle that many students. So at A&M at the time, we said, “No more. We’re not going to do it like this.” And in the 1990s, late 1990s, we adopted the philosophy that in petroleum engineering at A&M, we had classrooms that would handle a maximum of 50 people. And we decided that we would handle as many as two sections of junior and senior courses with as many as 50 people in them at the maximum.

And if demand dropped off, we might have only one section and it might only have 20 people in it, but we would put… we would at least put that upper limit on what we could handle. Well, that was our philosophy going into the 2000s, and then we’ve, as we all know, we’ve had a boom since then and the industry has said, “We don’t have enough petroleum engineers, guys. Accept more students, turn out more students.” And not only that, the universities themselves, like A&M but by no means limited to A&M, University of Texas, we’ve all been doing the same thing.

The colleges of engineering want to increase their enrollment. So they’ll put pressure on the departments to up those limits a bit. Well, as an example, at A&M now we have junior and senior classes with 170, 180 students in them, in one section for junior and senior class. I question the kind of education that we can provide with groups that large, but it has to be that way because you can’t increase the number of professors such as you can have reasonable sized classes so that you can communicate and interact with students.

But my solution to the problem would be to do something that people seem to be reluctant to do, but that is to continue to put the caps on enrollment at schools like A&M and Texas and the others, put reasonable caps based on capacity to handle the students’ ability to interact with them effectively so that the students know the faculty, trust the faculty, have time to talk with the faculty, and get the kind of education that’s possible. And if the demand from the industry exceeds what the schools can turn out, I really would strongly recommend that industry be encouraged to hire mechanical engineers, chemical engineers, and so forth, and provide some training to get them up to speed in petroleum engineering.

Now this threatens the turf of petroleum engineers. And it doesn’t provide to the industry people that are ready to hit the ground running. I think that’s a price though that has to be paid to provide some stability in the industry. And given advances in technology again with let’s say distance learning, A&M has a great distance learning program currently, I think the enrollment is in the range of 170, 180 students working on Master of Engineering rather than Master of Science which are research degrees but Master of Engineering which are professional degrees.

And they’ve developed a system which promotes interaction between the professor and the students and the teaching assistants. And if a student can take two courses per semester while employed, that student can finish the degree in two years. And then, of course, there are training companies in the industry. I really pretty strongly believe that that’s the direction we should go, the most important fact of which is we really do need to put limits on enrollment in petroleum engineering programs.

We’re essentially at the enrollment level for petroleum engineering throughout the country overall that we had reached in the early 1980s. And if prices collapse for some unforeseen reason, it’s all going to happen again. And I think it will continue to cycle through this boom and bust but I think we can minimize the effect of this if we just say there’s a certain capacity that we can deal with not only in the interest of the students so that they can have more interaction time with the faculty, but also to prevent this building up of resources within a department and then a collapse and no need for all those professors and classrooms and so forth.

As a result of the last bust in the 1980s, a lot of petroleum engineering programs around the country just shut down shop. The University of Houston where I’m located now abolished its petroleum engineering program. And there were many other programs. Oklahoma State had a petroleum engineering program. Mississippi State, where my first teaching assignment, shut down its petroleum engineering program. We have only a fraction of petroleum engineering programs in the country that we had back in the 1970s and earlier.

So I’m really concerned about the total enrollments that we have today. And I think in interest of full disclosure, I’ll have to say that at the University of Houston, we currently have almost 500 undergraduate students. Our program at the University of Houston was restarted at the undergraduate level four year ago. We graduated our first class this year. And we already have 500 undergraduates and it’s growing. The industry wants the students. The university, the administration wants lots and lots of students [unintelligible] program.

I think the risk is there just as it is at UT and A&M, both of which have put caps on the enrollment, fortunately. I’m afraid it’s likely to turn out to be a too high level but at least they have put caps on the enrollment. Now, I’ve told you why from a stability of department standpoint I think we need these enrollment caps at a reasonable level, but also from a standpoint of satisfaction on the part of the student and the teacher.

I got into petroleum engineering education as I said earlier because I found that in this early work with Humble Production Research Company, I really enjoyed explaining technology to my fellow engineers and it sort of grew from there. But I also really like to work and help develop the whole student. I really enjoy working with these young people. They’re pretty naïve. But we’re fortunate in the petroleum industry to have a lot of students that are very highly motivated and what they want is simply to be given a sense of direction. And they’re open to suggestion of certain ethical values, for example. They’re very open to the SPE ideas.

KERR:

We need to stop there.

LEE:

Okay. Right in the middle of…

KERR:

And you were saying they’re very naïve.

LEE:

Yeah. The petroleum engineering students, they know that there’s a lot that they don’t know but they’re… so many of them are so motivated, so eager to learn, willing to accept values that make sense because they can identify with needs of society probably better than my generation could. They’re really concerned about the environment, for example. They’re really concerned about the way people are treated on the job. They’re really concerned about dual professionals in the family.

And they want guidance but they know there’s a right and there’s a wrong. And it’s just a tremendous opportunity to provide that guidance and to suggest values that are important to the professors like me to these students so that they might adopt these and carry on this tradition of voluntarism within SPE, carry on just helping out, carry on trying to ensure that the profession is sensitive to environmental issues, to societal issues, to understand that people outside the industry sometimes don’t like what they think we’re doing. They don’t like what they see about hydraulic fracturing and it’s easy to say, “Well, that’s because the public just simply doesn't understand.” Well, there’s more to it than that. They have their own personal concerns.

And at least, I think our students are learning that we need to talk with other people and find what they’re concerned about before we can just dismiss them as the ignorant masses who just don’t understand that there’s no risk in this technology, there’s no danger. We need to talk with other people. And I think communicating to the students those kinds of values, it’s a tremendously important part of teaching. It’s a tremendously gratifying part of teaching to see that many of the students will really and truly become reasonable citizens.

KERR:

It’s fantastic.

MCCOWN:

So just on a final question, John, are you familiar with the work SPE is doing now to recruit and retain professors?

LEE:

I’m familiar with it but I don’t… I’m going to be skeptical about how effective that’s going to be unless somebody is really willing to put up really big bucks because the salaries just aren’t competitive with industry salaries. Unless somebody is willing to, out of the goodness of their heart, put up that kind of money, I’m really skeptical about how effective that’s going to be.

Discusses His Inspiration to Go to Work Everyday

KERR:

One of the questions that we haven’t asked and I didn’t intentionally skip this but what was your inspira-… what has been very inspirational to you… I know you just find the actual question. I know.

MCCOWN:

I think we made it up, yeah.

KERR:

Yeah. What inspired you to get up every day, get dressed, shave, go to work? And what was your ultimate motivation to keep doing it?

LEE:

It’s difficult to…

KERR:

Can I ask you to repeat my question?

LEE:

Yeah, I will. It’s difficult to say, to point to a single thing that inspires me and has inspired me through the years to get up every day and get ready to go to work and work long, hard hours, and then come back and do the same thing day after day after day. But I would say that among the factors that led me to keep doing that even through today is the kind of people that I have had the opportunity to work with and be inspired by in this petroleum industry. And I think this is a unique industry to that extent.

When I see so many SPE former presidents who have long since retired, who are spending a major fraction of their time volunteering for SPE, when those people call me and say, “Will you serve on the committee?,” how can I say no? So it’s the example of other people that I think has really been dominant and inspirational in keeping me going.

Another factor for me because of my particular niche in the petroleum industry, in education, has been the response of students. They don’t all come up and hug me at the end of the semester by any stretch of the imagination, but there will be an occasional student who will really say either then or maybe five years later, “You really helped me.” And when people say that, you just got to keep going. I mean, it has been worthwhile.

KERR:

That’s fantastic.

MCCOWN:

Excellent!

DARBY:

Oh, good! We got it.