Oil and Gas Disclosures: SEC Modernizes Resource Reserve Reporting

SEC Revises Energy-Reserves Rules

The Securities and Exchange Commission issued a press release on December 29, 2008 changing the way companies may disclose oil and natural-gas reserves in corporate financial reports, giving oil companies flexibility they had long sought.

Companies will be able to disclose possible and probable reserves, a break with decades-old rules that limited disclosure only to proven reserves. Rule changes include:

• Permitting use of new technologies to determine proved reserves if those technologies have been demonstrated empirically to lead to reliable conclusions about reserves volumes.
• Enabling companies to additionally disclose their probable and possible reserves to investors. Current rules limit disclosure to only proved reserves.
• Allowing previously excluded resources, such as oil sands, to be classified as oil and gas reserves. Currently these resources are considered to be mining reserves.
• Requiring companies to report the independence and qualifications of a preparer or auditor, based on current Society of Petroleum Engineers criteria.
• Requiring the filing of reports for companies that rely on a third party to prepare reserves estimates or conduct a reserves audit.
• Requiring companies to report oil and gas reserves using an average price based upon the prior 12-month period-rather than year-end prices, to maximize the comparability of reserve estimates among companies and mitigate the distortion of the estimates that arises when using a single pricing date.
  
  

Oil and gas companies have for years said the SEC's rules were outdated and didn't take into account technological advances that allow access to more reserves.

The new disclosure requirements also require companies to report the independence and qualifications of a reserves preparer or auditor; 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 upon the prior 12-month period rather than year-end prices. The use of the average price will maximize the comparability of reserves estimates among companies and mitigate the distortion of the estimates that arises when using a single pricing date.

Related technical documents:
The full 171-page text of the proposing release to update disclosure requirements for oil and gas companies
The 16--page concept release

Including material by Siobhan Hughes at dowjones.com