WASHINGTON (Dow Jones Newswires), Dec. 30, 2008
The U.S. Securities and Exchange Commission on Monday changed the way that companies may disclose oil and natural gas reserves, a step that could mean massive new amounts of oil and gas make it onto financial reports.
Companies will be able to disclose possible and probable reserves, a break with decades-old rules that limited disclosure only to reserves that were proven. Companies also will be able to treat resources in non-traditional areas, such as oil sands and the rock formations known as shale, as oil and gas reserves instead of mining reserves.
Reserves are oil companies' most important assets, but companies are having an increasingly hard time replacing reserves as large oil fields that have been producing for decades are depleted and new finds are more expensive and involve technological challenges. The pressures unleashed a wave of lobbying at the SEC, with companies arguing that the agency's rules were outdated and didn't take into account technological advances that allow access to more reserves.
The SEC acknowledged those concerns on Monday, announcing that the commission had unanimously agreed to change the way reserves are counted. Under the new rules, companies will also be able to use new technologies to determine proved reserves if those technologies have been shown to lead to reliable conclusions about reserve volumes, the SEC said.
"These updated rules consider the significant changes that have taken place in the oil and gas industry since the adoption of the original reporting requirements more than 25 years ago," John White, the director of the SEC's corporation finance division, said in a statement.
Oil and gas companies will be subject to the new rules beginning on Jan. 1, 2010. The SEC will make details of the new regulation available at a later date. The SEC took up the issue late last year, and proposed the changes in June. It described the new rule in a press release issued Monday.
Under the new rules, companies also will be required to report the value of oil and gas reserves using an average price based upon the prior 12-month period rather than on year-end prices. The SEC has previously said that it will work to sort out discrepancies with accounting standards, which still use the year-end price.
The SEC and oil companies have a history of tussling over reserve accounting. In 2004, Royal Dutch Shell (RDSA) agreed to pay $120 million to settle SEC charges that it had overstated its reserves, among the biggest civil penalties in SEC history. The SEC 's enforcement staff also put former Shell executive Philip Watts on notice that they would recommend charges against him in connection with the reserves-overbooking controversy, but in 2006 reversed course and said they wouldn't take any action.
Some environmentalists are wary of the new regulations, which they see as fostering the interests of oil companies. Of particular concern are the greenhouse-gas emissions associated with oil-shale development, which environmentalists consider among the planet's dirtiest fuels.
"The rules did need updating," said Steve Kretzmann, the executive director at Oil Change International, an environmental group. "But they also need to disclose the higher carbon content of these reserves. It's clear that the Bush administration is doing one last favor for their friends in the oil and gas industry here. If the Obama administration is serious about getting a handle on global warming, then they're going to have to address this."
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