Risk & Compliance

Oil Companies, SEC Differ on Metrics

The regulator allows companies to report only ''proved'' reserves, but to make a better impression on investors, the industry would like to report ...
Stephen TaubFebruary 7, 2006

When an energy company measures its “inventory,” it’s more than a simple exercise in counting.

Indeed, the Securities and Exchange Commission requires these businesses to abide by disclosure rules that some consider outdated and arbitrary — and, more significantly, that understate their reserves — according to The Wall Street Journal.

The paper reported that oil companies want to create their own industrywide metric. This is a critical issue, since in large part energy investors base their decisions on a company’s reserves.

The difference between the two approaches is illustrated by ExxonMobil Corp., noted the Journal. In 2004, the world’s largest oil company pumped 1.6 billion “barrels of oil equivalent,” the industry-standard metric that comprises both oil and natural gas. ExxonMobil calculates that it added 1.8 billion oil-equivalent barrels to replace them, but going by the SEC rules, the company replaced only 1.3 billion. According to the company, reserves are increasing; according to the commission, they’re decreasing.

The Journal explained that the SEC allows companies to report only “proved” reserves, which it defined as energy that can be estimated and produced using standard technology and market prices. Oil companies also want to report what they call “probable” reserves, which the paper described as a less-conservative measure using longer-term price assumptions and more-advanced technology to estimate underground oil.

Even the matter of measuring proved reserves can be problematic, of course. In 2004 investors in Royal Dutch/Shell were rocked by the company’s disclosure that it had overstated reserves for 2002 and prior years by some 23 percent. And last year Calpine reported that the SEC was seeking information related to its downward revision of proved oil and gas reserves.

“The SEC doesn’t allow companies to use all data at their disposal,” asserted David Hobbs, a managing director of Cambridge Energy Research Associates. According to the newspaper, Hobbs is also the co-author of an industry-financed report that recommended when it comes to measuring reserves, the energy industry should make the call.

On the other hand, Matthew Simmons, a Houston-based energy investment banker, told the paper he believes the SEC’s current rules should be even stricter.

The Journal also noted that according to SEC spokesman John Heine, the issue isn’t on the regulator’s current agenda.