SEC proposes updated reserves reporting rules

Paula Dittrick
Senior Staff Writer

HOUSTON, June 28 -- The US Securities and Exchange Commission has released a proposed set of revised oil and natural gas reserves reporting requirements, and proposed changes include disclosure of estimated probable and possible reserves.

Currently, oil and gas companies report only estimated proved reserves to the SEC. Existing reserves reporting requirements were adopted more than 25 years ago (OGJ, June 20, 2005, p. 21).

SEC released its proposed rule revisions on June 26, and the agency is seeking industry response on the proposed revisions during a 60-day public comment period.

Earlier this month, SEC staff recommended that reserves reporting requirements be updated in order to provide more estimated reserves information to investors (OGJ, June 23, 2008, Newsletter).

"The ability to accurately assess proved reserves is an important part of understanding any energy company's financial position," said SEC Chairman Christopher Cox. "But the current oil and gas disclosure rules often interfere with an investor's analysis because they are tied to outdated technologies."

The proposed revisions suggest some clarifications in terminology for reserves and resources classification.

Defining 'reasonable certainty'
SEC proposes to define the phrase "reasonable certainty," which is the standard now used in the definition of proved oil and gas reserves, yet "reasonable certainty" is not defined. Consequently, it has been the subject of disagreement within industry.

"We propose to define the term 'reasonable certainty' as much more likely to be achieved than not," said SEC's proposed rule revisions.

The SEC also wants to clarify definitions for deterministic and probabilistic methods of estimating reserves. Both methods would be allowed under the proposed rule revisions.

Companies now use deterministic methods for reserves estimates that are reported to the SEC. Some companies use probabilistic methods for estimates reserves although those figures are used internally by executives within the company.

Previously, industry-recognized definitions covered only proved reserves based on deterministic estimating methods, which was the SEC requirement. In 1987, the Society of Petroleum Engineers (SPE) issued definitions for probable and possible reserves classifications that found wide acceptance in industry. SPE and World Petroleum Congress issued new definitions in 1997 that allowed for the probabilistic estimation of reserves.

Yearend prices
Another proposed revision would require companies to report estimated oil and gas reserves using an average price based upon the previous 12-month period. Currently, companies report reserves based upon yearend prices.

Some producers had suggested that the SEC and the US Financial Accounting Standards Board consider using average prices rather than single-day, yearend oil and gas prices as the basis for calculating estimated reserves reported in 10-K filings.

Financial Accounting Standard (FAS) 69, which FASB adopted in 1982, mandates the use of prices as of Dec. 31 of each year. Some producers said this practice distorts reserves volumes and values.

SEC said this rule change would maximize comparability of reserve estimates among companies and mitigate distortion of the estimates that arises when using a single pricing date.

Oil sands
SEC's proposed rule changes also include:

-- Permitting use of new technologies to determine proved reserves if those technologies have been demonstrated empirically to lead to reliable conclusions about reserves volumes.

-- Allowing previously excluded resources, such as oil sands, to be classified as oil and gas reserves. Currently these resources are considered to be mining reserves.

-- Requiring companies to report the independence and qualifications of a preparer or auditor, based on current SPE criteria.

-- Requiring the filing of reports for companies that rely on a third party to prepare reserves estimates or conduct a reserves audit.

Contact Paula Dittrick at paulad@ogjonline.com.

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