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SEC probes shale-gas reserves reporting

Companies subpoenaed for production data on disclosed reserves

The US Securities Exchange Commission (SEC) is casting a wary eye over the reporting practises of shale-gas producers in the wake of damaging media reports questioning the viability of reserves disclosure.

Fort Worth-based Quicksilver Resources is the latest shale-gas producer to be subpoenaed for production data related to the company’s disclosed reserves, which it claims are 2.9 trillion cubic feet (cf). On 2 August, Dallas-based Exco Resources received a similar request. More could be forthcoming.

“The SEC said this is a fact-finding inquiry,” Quicksilver said in its quarterly filing. However, the company suggested unspecified press reports critical of shale-gas drilling prompted the review.

The company was no doubt referring to a New York Times (NYT) article, published 26 June, that described shale gas a huge Ponzi scheme and drew swift industry condemnation. The report suggested producers such as Quicksilver have been over-estimating reserves in Texas’ Barnett Shale by as much as 350%. In the face of mounting criticism, the NYT defended the article on its web site on 17 July, but conceded its story “lacked an in-depth dissenting view”.

Tougher line

But the actions of the US regulators suggest the SEC is taking the complaints seriously and is considering a tougher line on reserves reporting. Reserves evaluations, often performed by independent engineers, are used to determine asset values and have considerable influence on a company’s market capitalisation. Investors consider the reports to be sacrosanct and expect them to be beyond question.

Even before the shale-gas controversy erupted, there was speculation that the SEC might move to tighten reporting requirements to bring them in line with US trading partners. In Canada, the massive Bre-X gold fraud in the 1990s led to the implementation of National Instrument 15-101, which also covers oil and gas companies.

Engineers are required to use the Canadian Oil and Gas Evaluation Handbook, which ranks reserves on a sliding scale of probability – 90%, 50% and 10% – of being recovered after factoring in capital investment and future cash flows.

No exact science

Nonetheless, estimating the amount of gas in the ground isn’t an exact science. Coming up with an accurate number is a partly subjective process dependent on an interpretation of the law of averages, co-related with experience. And shale gas has very little well-performance history to go by. Even in mature shale gas areas such as the Barnett – the field has been producing for 25 years – technological changes have been so rapid as to render historical production data obsolete.

It’s only reasonable to assume some individual wells will perform better or worse than average, even after factoring in all reasonable risk assessments. So it’s that margin of error – plus or minus – that can mean the difference between profit and loss for producers struggling in the face of low natural gas prices. And price will be the final arbiter of success or failure in North America’s shale basins.

While it might seem tempting to brag about the enormous amounts of shale gas in North America – estimates by the Energy Information Agency suggest 862 trillion cf, or a century of new supply – those claims must be put to the test if natural gas is ever to supplant oil as a primary energy source in the US.

But wary of creating another bubble economy, such as dot.coms or real estate, the SEC looks as if it’s moving to take firm, pre-emptive steps to prevent it from happening with shale gas. That can only be seen as a positive step, if only to dispel any lingering doubt.

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