Publicly-traded producers were elated when the US Securities and Exchange Commission adopted new oil and gas reserves disclosure regulations on Dec. 29. They also wish it had happened sooner.
"It's unfortunate that the rules weren't modified before now. It's good news they're changing, but not soon enough to help producers in 2008. Generally speaking, we think they're still a huge improvement over the very archaic rules which previously were in place," explained Frederick Lawrence, the Independent Petroleum Association of America's vice president of economics and international affairs.
The new rules take effect on Jan. 1, 2010. That means producers still have to limit their 2008 estimates to proved reserves. They also must use a Dec. 31 price to determine the reserves' estimated value.
"We have a lot of concerns remaining, and I expect to hear during our investors' conferences about how these rules affect companies from 2008 to 2009. Access to capital wasn't a big issue for our members in the 1990s. It is now," Lawrence told me on Jan. 5.
Three big improvements
The new regulations contain three major improvements, he said. The first is the 12-month average price. Lawrence said that the old system could be a blessing or a curse depending on markets during the year. Prices fell during 2008's second half so most producers will show a decline in year-end estimates from 2007, he noted.
"There also is the ability to use 3-D seismic, hydraulic fracturing and other modern technologies to show reserves. It will be important to be able to show more clearly what resources are in the ground without having to drill for them," Lawrence continued.
"Finally, considering the possible and probable reserves also will be a factor. Just being able to include non-conventional formations in reserves will help our members, who are focusing more on shales and coalbed methane," he said.
Impacts of estimates
Reserve estimates matter because they affect a producer's balance sheet and market capitalization. Investors pay close attention to both of these indicators.
"The whole issue of financial leverage and credit is high on everyone's list this year. The balance sheet certainly will be affected by these changes from one year to the next. There could be a one-time jump in reserve estimates in 2009 for a lot of these companies. 2008 will still be a tough year as they go into the new year with their balance sheets hammered down by the year-end pricing rule," Lawrence said.
Having to use numbers prepared under the old rules could affect ceiling tests, amortizations and how producers' debt is rated at a time when credit markets have grown tighter, he added.
The SEC's adoption of the new rules was still significant and welcome, Lawrence emphasized. "It has been understaffed in several key areas and it was a challenge for several of their employees to learn the intricacies of oil and gas production. They worked hard to process the information and move quickly," he said.
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