Risk & Compliance

Outdated Oil & Gas Reporting Rules Take Heat

The SEC says the 30-year-old rules governing how oil and gas companies report their reserves should be updated.
Kate PlourdJune 13, 2008

The Securities and Exchange Commission has moved a step closer to revising what many see as outdated rules for how oil and gas companies report their reserves.

The SEC staff announced Thursday that it would recommend that the commission propose reporting rule changes. The staff didn’t specify what it believes the changes should be, but they likely have to do with the definition of “proved reserves” and what techologies can be used to quantify the amount of reserves.

The staff issued a concept release last December asking whether the SEC should revise its definition of proved reserves, how new technologies would affect that definition, how a new definition could accommodate more technology advancement, and whether the SEC should allow other categories of resources to be disclosed. The commission said in a press release that it received about 80 comment letters that “generally supported” modernizing the rules, which are 30 years old.

Under those rules, publicly held oil and gas companies can disclose material information only about their proved reserves, defined as the amounts of crude oil, natural gas, and natural gas liquids they can estimate with a “reasonable certainty to be recoverable in future years from known reservoirs.” Probable or possible reserves cannot be reported.

Significantly, the rules also require that proved reserves be estimated using technology that was available when the rules took effect in 1978.

While there is no way to determine exactly how much oil or gas is in a reservoir, the SEC staff noted that many who submitted comments to the concept release felt the technology allowed under the rules is badly outdated. If allowed to use newer technology, energy companies could present investors with a more accurate picture of potential profitable assets, the commenters opined.

Companies already use advanced tools such as 3-D and 4-D seismic interpretation to decide where to drill new wells.

Oil and gas companies and industry experts have pushed for change for years. Cambridge Energy Research Associates, an oil and gas industry think tank, issued a 2005 report concluding that key corporate performance metrics were affected by the reporting requirements.

“Our thesis was that the rules were created a quarter of a century ago and things have changed,” David Hobbs, head of research at CERA told CFO.com. “It’s really a service to investors if they can see the same information that the management is relying on.”

The SEC staff noted that international regulators are aiming in a similar direction. Canada has already modernized its reporting requirements, and the International Accounting Standards Board, the United Nations Economic Commission for Europe, and the United Nations Economic and Social Council are working toward doing the same.