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SEC oil reserves-reporting changes: now for the fun part

The US Securities and Exchange Commission (SEC) last month introduced updated guidelines for its system for oil and gas reserves-evaluation, the most commonly used accounting standard

Modernisation has been a long time coming. Unchanged since 1978, the SEC's rules had failed to take proper account of numerous technological developments that had altered the way companies evaluated their reserves. The regulations weren't in tune with industry thinking and practices, and tended to give an overly conservative picture of reserves. The changes are a welcome improvement on the prior system, but grey areas persist.

Year-end pricing, which could easily result in misleading distortions in reported reserves figures, has gone. Companies are now able to use an average 12-month price – a more stable basis for assessment. In common with other reporting standards, the SEC now permits companies to report probable and possible reserves, as well as proved reserves, which should give investors a richer insight into a company's long-term potential.

The SEC will also permit sensitivity cases: in addition to standardised information about reserves, based on the 12-month average price, companies can supply separate figures based on their own assessments of the outlook for energy prices. Producers are also allowed to include hydrocarbons – mined bitumen and synthetic oil, for example – that weren't permissible before because they weren't produced through a wellbore. That makes sense, given that these resources are substitutes for conventionally produced crude oil.

However, it's the more open attitude to the use of modern technology in defining reserves that will make the biggest difference. Ryder Scott, a US consultancy that specialises in reserves certifications, describes the more flexible rules as a "vast improvement" on the old system.

Yet there are areas of uncertainty. Seismic data, numerical modelling techniques and data from downhole tools are now all eligible if the company can show that they generate "repeatable and consistent" results. But the SEC might consider providing a more detailed definition of "repeatable and consistent". At one time, the regulator said it would require empirical data indicating a 90% success rate with a particular technology, but it removed this requirement from the final guidelines. Companies will want to know what that hurdle rate is.

The SEC has also become much more accommodating in its attitude to proved undeveloped reserves. Previously, operators needed to demonstrate "certainty" in order to report proved undeveloped reserves – an unrealistically high hurdle. That requirement has been downgraded to "reasonable certainty" (a term the SEC has done a better job of defining).

Another potential flaw

Yet herein lies another potential flaw: companies reporting proved undeveloped reserves, based on evidence of "reasonable certainty", must have a development plan that has reached a final investment decision and that will move the reserves to the proved developed category within five years. The rule's understandable logic is to prevent companies from piling reserves onto their books that they won't necessarily develop. Yet technically complex projects – deep-water ventures, for example – may take longer than this to bring on stream.

Despite the uncertainties, the changes should go down well with the oil industry, because they permit companies to enlarge reported reserves figures using perfectly legitimate technology and more flexible guidelines. But the industry and the SEC are probably in for a few months of trial and error.

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