Nick Snow
Washington Editor
Government investigations into tight shale gas production have taken a new direction with the US Securities and Exchange Commission's apparent launch of an inquiry into producers' developed and producing wells and reserves estimates.
The federal agency would not comment on the matter. But two producers, Exco Resources Inc. and Quicksilver Resources Inc., said in their latest Form 10Q filings with the SEC that they had received subpoenas for shale gas information.
"The SEC has informed us that their investigation arises out of recent press reports questioning the projected decline curves and economics of shale gas wells," Quicksilver said in its Aug. 9 filing. "We understand from the SEC that a number of other shale gas producers received similar subpoenas."
US Rep. Maurice D. Hinchey (D-NY) asked for such an investigation on June 27 in a letter to SEC Chairwoman Mary L. Schapiro. Hinchey said articles in the New York Times cited e-mails and internal documents suggesting that some shale gas producers may be intentionally overbooking reserves by not factoring in new production data showing wells were not producing as much as originally predicted.
"Estimating a future gas well's productivity is undoubtedly a difficult challenge," Hinchey said. "However, once production begins, companies should adjust their financial models accordingly to reflect any new data. According to The New York Times, this may not be happening."
Hinchey noted that in addition, SEC's oil and gas reporting requirements, which were changed in 2008, may need to be updated again to require third-party audits and disclosure of technologies used to estimate shale gas reserves.
Appropriate response
Christine Tezak, an investment analyst with Robert W. Baird & Co. in Houston, said in a July 28 bulletin that SEC's move was an appropriate response to compliance with the reserves reporting regulations being publicly questioned.
Tezak noted that while SEC's use of subpoenas makes clear that the agency is formally looking into the matter, they are not a Wells Notice, which she described as a formal indication that SEC's staff believes it can bring a civil action against an entity.
SEC may have subpoenaed several producers to broadly evaluate how the industry is following reserves disclosure rules, she suggested. "A regulatory investigation may provide a clearer investment horizon than a ‘trial' in the press," Tezak added.
Hinchey, who opposes hydraulic fracturing, said on Aug. 18 that New York State Atty. Gen. Eric T. Schneiderman has launched his own investigation, and applauded his action.
Like SEC, the attorney general's office would not comment. But a source close to the investigation confirmed on Aug. 22 that it is in fact under way.
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