Risk & Compliance

SEC Eyes Revision for Outdated Energy Rules

The 30-year-old rules can force oil and gas companies into making inaccurate disclosures of their reserves.
Sarah JohnsonDecember 11, 2007

The Securities and Exchange Commission is responding to demands to update its disclosure rules for oil and gas companies. In a first step toward enabling such companies to disclose their reserves more accurately, the SEC will issue a concept release to formally gauge interest and collect advice on revisions to the nearly 30-year-old rules.

Under the 1978 rules, oil and gas companies registered with the SEC can report only their so-called “proved reserves.” The regulator defines these as the amounts of oil and gas the companies can estimate “with reasonable certainty” that they can recover.

Reserves whose recovery is considered probable or possible cannot be included. The SEC has considered those to be too speculative — and possibly misleading — to be shared with investors.

However, because of advancing technology and other changes in the energy industry, the companies and many industry participants have come to believe that the disclosure rules don’t allow them to “give a complete picture of reserves they believe they can accurately detect or produce,” said John White, director of the SEC’s corporation finance division.

The technology improvements, including computer simulations, have enhanced energy companies’ confidence in the volume of available resources that lie underground, according to W. John Lee, an academic fellow who has been advising the SEC on these issues.

However, to be classified as “proved,” reserves must be estimated using the technology available when the SEC rules were written; counter-intuitively, using more recent, advanced technology would cause resources to be classified as “probable.”

Before the SEC’s unanimous vote (commissioner Paul Atkins did not participate), commissioner Annette Nazareth said she hoped the new questionnaire would lead to more principles-based disclosure rules. By coming up with less prescriptive guidance for oil and gas companies, she said, the SEC wouldn’t have to again revisit the issue 30 years from now.

To be sure, the SEC based its rules partly on the definitions created by the Society of Petroleum Engineers, which has since made several revisions to its understanding of terms.

The concept release will ask:

• Should the SEC should revise its definition of proved reserves?
• How will new technologies affect that definition, and how could a new definition accommodate further technology advancement?
• Should the SEC allow other categories of resources to be disclosed?