SEC Oil, Gas Rule Changes Finally Come

Long-pursued revisions in reporting allow use of new technologies in accounting for reserves, and give shareholders more data.
Stephen TaubDecember 30, 2008

Unamimous approval of the long-expected revisions in Securities and Exchange Commission oil and gas company reporting requirements — the first changes in more than 25 years — should modernize the industry’s reporting in major ways.

The new disclosure requirements allow companies to use new technologies that they believe provide a truer picture of their proved reserves. Until now, the SEC required companies to rely only on technology that existed when the regulator’s energy rules were created — 30 years ago.

The new requirements also will allow companies to disclose their probable and possible reserves to investors. Currently, commission rules limit disclosure to only proved reserves.

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Among additional disclosure requirements: Companies must report the independence and qualifications of a preparer or auditor in the calculation of reserves; file reports when a third party is relied upon to prepare reserves estimates or conducts a reserves audit; and report oil and gas reserves using an average price based on the prior 12-month period rather than year-end prices.

The use of the average price maximizes the ability to compare reserve estimates among companies, and to mitigate the distortion of the estimates that arises when using a single pricing date, the SEC said in making its announcement.

“In the more than a quarter century since the SEC last reviewed its rules in this area, there have been significant changes in technology that have increasingly limited the usefulness of current disclosures to the market and investors,” according to SEC chairman Christopher Cox. “These updates to the SEC rules will help ensure more meaningful and comprehensive disclosure of information that, even though it does not appear on a company’s balance sheet, is of significance to investors in making informed investment decisions.”

The industry has lobbied for the changes for years, with its main objection being that the old rules required proved reserves be estimated using technology that prevailed in 1978.

In December 2007, the commission staff first recommended the issuance of a concept rRelease for public comment. Those public comments were used to formulate the rule amendments that the Commission proposed earlier this year.

The new rules will no doubt cheer up oil and gas producers, who face additional challenges.

We pointed out earlier this month that according to the BDO Seidman Natural Resources 2009 Outlook Survey, 57 percent of 100 U.S. oil and gas exploration and production company CFOs questioned had said that “credit capacity restraints, including access to capital” will be their companies’ greatest financial challenge in 2009. Access to capital was also the top barrier they saw to international growth.