SEC recommends revising reserves-reporting rules
FOR THE first time in more than a quarter of a century, the US Securities Exchange Commission (SEC) has proposed modernising the rules energy firms must follow in disclosing their petroleum reserves in financial reports filed with the SEC. The regulatory agency oversees the estimates reported by companies that are traded publicly in the US and its policies affect around 10% of the world's oil and gas reserves.
The proposed rule change would expand the definition of reportable reserves to include non-traditional oil sources, such as oil sands, shale plays and bitumen, which represent a growing portion of some companies' asset portfolios as more conventional reservoirs become harder to find. At present, the regulations classify these resources as mining reserves instead of oil and gas.
Existing rules also limit disclosure to estimated "proved" reserves and prescribe the types of tests companies must conduct to determine if a reserve falls into that category. These tests are based on technology that existed when the rules were adopted in 1978 and 1982.
Reserves are considered proved if the tests can show with reasonable certainty that they can be commercially produced from known reservoirs under present economic, operating and regulatory conditions. Probable and possible reserves, whose recoverability is less certain, have been excluded from the reports on the grounds that they are too speculative and could confuse investors. However, technological advances have significantly improved recovery ability since the rules were drafted. If energy companies are able to demonstrate that new tools and processes contribute to reliable reserves estimates, the proposed ruling states, they would be allowed to take the technologies into account in determining reserves estimates.
According to the SEC, the proposed rule change would provide investors with a more realistic picture of a company's oil and gas reserves, which represent a substantial portion of a typical energy firm's asset base and serve as an important indicator of its future petroleum production and sales. "The more that precise, first-hand information from oil and gas companies is available to investors and the marketplace," an SEC media release explained, "the less ... the marketplace is forced to rely solely on information provided by speculators."
If adopted, the recommended rules would demand that companies verify, based on Society of Petroleum Engineers' criteria, the independence and qualifications of petroleum auditors who prepare their reserves assessments and to require additional reports from companies that rely on a third party to prepare reserves estimates or conduct a reserves audit. It would also require them to report reserves using an average price based on the previous 12 months instead of prices at year-end, which tend to be somewhat arbitrary. According to the SEC, this proposed change would "maximise the comparability of reserves estimates among companies and mitigate the distortion of the estimates that arises when using a single pricing date."
The proposed regulatory revisions were welcome news to the oil and gas industry, which has been asking the SEC to modernise its reserves-reporting standards for years. "Many industry participants had expressed concern that our disclosure rules are no longer in alignment with industry practices and, therefore, have limited usefulness to the market and investors," the SEC noted.
A report issued by Cambridge Energy Research Associates, a consultancy, in 2005, supported the industry's argument. It concluded that the SEC's existing reserves-reporting requirements are "stranded in time against the backdrop of a fast-changing world" and that they distort important corporate performance metrics. An obvious benefit to oil and gas companies is that the proposed reporting system would mostly lead to significant increases in the stated value of their reserves.
Having announced its plan to modernise its regulations on 26 June, the SEC set a period of 60 days for final public comments. Its members will then vote on whether they will become final.