Learn English – Indirect to Direct speech

Imagine that when person "A" says "this" or "that", he and the person spoken to (person "B") are looking at the same thing. It's as if they are pointing at the thing with a finger.

Now, when someone else (person "C") is reporting to person "D" the conversation between A and B, person C cannot point at the thing with his finger because the thing is not there, but is with A and B. So person "C" cannot use "this" when reporting speech between A and B.

A: I like this kitten.
B: -- I like that kitten too. Here, kitty kitty! Ouch! This kitten has sharp claws.

C: "A" said he liked the kitten.
D: --Did "B" like the kitten too? What color was it?

Here, the "thing" is not something with fur but an intangible:

A: You would be wise to remember this: a stitch in time saves nine.
B: -- I'll remember that.

C: A told B that he would be wise to remember: a stitch in time saves nine.
D: -- Did B say he would remember it?
C: I forget what he said.

He said that if he had had a pen, he could have written the letter. (= possibility)

This means that if he had had a pen at that point in time, he would've had the possibility to have written the letter, but not neccessarily have written the letter. It implies that he would've had the choice to write or not write the letter (if a pen had been available to him).

If you say

He said that if he had had a pen, he would have been able to write the letter.(= ability)

This implies that he would have had the ability to write the letter, and says nothing about his choice to do or not do so.