SEC Official: Mulling New Oil Reserve Booking Guidelines

The Securities and Exchange Commission is considering changing the rules for how oil and gas companies book their reserves, a top SEC official said in a speech last week.

Reserves are oil companies' most important assets, and a modernization of the rules could mean billions of barrels of oil and trillions of cubic feet of natural gas may be able to make it onto balance sheets, potentially triggering a revaluation of the sector.

Oil and gas companies have been lobbying the SEC to change the way regulators allows firms to book reserves, the companies' key financial benchmark, based on new technologies and exploration and production techniques.

Despite several major reviews and updated industry guidelines approved by the international Society of Petroleum Engineers, the World Petroleum Council and the American Association of Petroleum Geologists, the SEC has steadfastly maintained the same reserve booking standards since the late 1970s.

But last Tuesday, John White, director of SEC corporate finance division, told an American Bar Association conference in San Francisco that his agency was considering updating the guidelines based on new technologies and suggestions from a new petroleum engineer the SEC was hiring.

In April, the SEC posted a notice on its Web site for applicants for a new, 12- to 18-month "Academic Petroleum Engineering Fellowship." Applying engineers must have "significant experience in petroleum reservoir engineering with expertise in petroleum reserve estimation" and "be familiar with modern analytical reservoir assessment methods," the notice read.

White told the ABA Tuesday the fellow would "assist us in evaluating our current disclosure requirements."

"We also will, with the assistance of the engineering fellow, evaluate new technologies companies may use to evaluate current, and identify new, reserves," White said. "Based upon that evaluation, we will determine what recommendation we will make to the commission, if any, about revisions to our current disclosure requirements," he added.

Under current rules, companies are prohibited from disclosing reserves other than "proved," according to strict SEC rules, because of the regulator's concerns that other categories of reserves are too speculative and too uncertain. Other than SEC filings, companies are allowed to include other categories as reserves in press releases or investor presentations.

White warned, though, that while companies and industry have encouraged the SEC to allow new technologies in evaluating reserves, "We have not concluded that these technologies have been demonstrated to be routinely reliable for the attribution of proved reserves."

"Allowing use of such technologies would likely produce increased levels of proved reserves, but might decrease the reliability of the estimate," White said.

The Society of Petroleum Engineers in late March published a new set of international standards called the "Petroleum Resources Management System." A two-year project, it updates 1997 standards, allowing for new technology, market evolution and unconventional resources such as oil sands.

Last year the Cambridge Energy Research Associates, or CERA, said it was time to modernize the SEC's definitions and recommended delegating responsibility for developing the new guidelines to the SPE. The report was funded by most of the oil majors, including ExxonMobil (XOM), ConocoPhillips (COP), BP (BP) and Royal Dutch Shell (RDSA), industry organizations such as the American Petroleum Institute, and accounting firms such as PriceWaterhouseCoopers and KPMG.

Part of the SEC's hesitancy to start changing the rules, say insiders, is that it might open the flood gates to a slew of changes sought by the industry that regulators fear might give the oil and gas companies too much flexibility to manipulate reserves figures.

The fears are partly grounded in recent history.

Following the Enron debacle, the SEC focused increased attention on oil and gas reserves, and found discrepancies in some companies' reported reserve volumes on the same fields. Companies such as El Paso (EP) and Royal Dutch Shell later disclosed they had over-booked. Shell repeatedly revised downward its reserves, sparking a dramatic fall in share prices and a loss of faith in senior management. Many top executives, including the chief executive, were forced to resign in the wake of the scandal.

SEC spokesman John Heine said it is impossible to say how long it would take the commission to approve new recommendations, if any. Given that the Fellowship is expected to last 12-18 months and that officials would need to write new proposals, offer them out for public comment and then require a commission vote, new guidelines could take more than two years.

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