The oil and gas industry will have modernized US Security and Exchange Commission’s rules for reporting oil and gas reserves. Ryder Scott Petroleum Consultants, in its most recent quarterly newsletter, summarized the industry’s concerns with the rules as proposed in July 2008.
As of this writing, SEC had not made available the new rules on the internet but the rules will come into effect on Jan. 1, 2010.
SEC published the proposed revisions to its oil and gas reporting requirements in July 9, 2008 (17 CFR Parts 210, 229, and 249). The rules will apply to companies that file with SEC.
The existing rules are set out in Regulation S–K and Regulation S–X under the Securities Act of 1933 and the Securities Exchange Act of 1934, Industry Guide 2, and disclosure requirements adopted in 1978 and 1982.
The comment period for the proposed rule changes ended on Sept. 8, 2008.
Ryder Scott notes that 308 oil and gas companies file with SEC and 29 oil and gas companies submitted comments regarding the proposed rules. Of the companies commenting, 19 were independents, 9 were integrated oil companies, and 1 was a national oil company.
The full comments are available on SEC’s web site at www.sec.gov/comments/s7-15-08/s71508.shtml.
Burdensome disclosures
To conform better to current industry practices, the industry has sought changes to the rules for many years, but the comments sent to SEC indicate that various companies do not agree with many of the proposed changes. One contentious point, as Rider Scott notes, is that an integrated oil company and large independent with operating units worldwide may require up to 20,000 hr for its internal staff to prepare the additional data required in the proposed rules. This time compares with SEC’s estimate of a company needing only 35 hr.
As Ryder Scott said, “Under proposed rules, companies would have to track field maturity and conversion of proved undeveloped reserves, report material reserves by field or basin and reservoirs as conventional or continuous, account for drilling activities by new well categories—extensions and suspended—and by location, disclose new technology, and submit qualifications of evaluation staff.”
Ryder Scott also noted, “None of the 29 [oil and gas] companies fully supported all eight items of Subpart 1200 of Regulation S-K, with most saying that the additional disclosures were overly burdensome, provided little value to investors, compromised competitive positions and, in some cases, were outright illegal in host countries.”
Other comments
Some other comments highlighted by the Ryder Scott newsletter included:
- Five companies favored disclosing evaluator qualifications. ExxonMobil Corp. questioned “how standards could be established considering differences in education systems, licensing and certification requirement and professional bodies from country to country.”
- Only one company, PetroCanada, favored mandated reporting of probable or 2P reserves. Security regulations in Canada require 2P reporting, but ExxonMobil said that reporting these reserves would expose companies to additional litigation due to the uncertainty of these reserves. ExxonMobil favored optional reporting such as currently is done in press releases and discussions.
- Only one company, Petrobras, favored mandated third-party evaluations.
- No company favored mandatory disclosure of proved undeveloped data. SEC had proposed that companies would have to submit a table showing how PUD reserves would be converted to proved developed during a 5-year period.
- No company was against the proposed rules covering indirect measurement technologies such as wireline, formation tests, and seismic to define the lower limits and aerial extent of the proved reservoir volume.
- Most companies wanted to change from a single yearend price to a 12-month historical average for estimating proved reserves. Some suggested averaged daily prices instead of month-end prices and prices on the first day of the month rather than the last. Other comments called for the 12-month reporting period to conclude 1-3 months before the calendar yearend date to allow more preparation time for March filings. A few companies wanted prices from the futures market. For instance, McMoRan Exploration Co. said, “Historical prices have little meaning in considering future investments.” The company added that future prices would make disclosures much more relevant to investors.