SEC to Review Reserves Reporting

What’s in a Word?

In reserve estimation, one thing is more proven than probable: The numbers can be open to interpretation.

That point, which was made frequently at the Multidisciplinary Reserves Conference, held in late June in Washington, D.C., co-sponsored by AAPG and SPE, has certainly gotten the attention of the U.S. Securities and Exchange Commission.

John W. White, director of the SEC corporate finance division and a speaker at the June conference, has signaled the commission might update its methodology in response to calls from the industry.

White told an American Bar Association group in late August that the SEC has advertised for a “Professional Engineering Fellow” to assist in evaluating current disclosure requirements and new technologies that companies may use to evaluate current -- and identify new -- reserves.

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In reserve estimation, one thing is more proven than probable: The numbers can be open to interpretation.

That point, which was made frequently at the [PFItemLinkShortcode|id:12677|type:standard|anchorText:Multidisciplinary Reserves Conference|cssClass:asshref|title:see a related article|PFItemLinkShortcode], held in late June in Washington, D.C., co-sponsored by AAPG and SPE, has certainly gotten the attention of the U.S. Securities and Exchange Commission.

John W. White, director of the SEC corporate finance division and a speaker at the June conference, has signaled the commission might update its methodology in response to calls from the industry.

White told an American Bar Association group in late August that the SEC has advertised for a “Professional Engineering Fellow” to assist in evaluating current disclosure requirements and new technologies that companies may use to evaluate current -- and identify new -- reserves.

“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 said.

White explained that an oil and gas company with exploration activities must provide disclosure about its reserves in its filings with the SEC. It presents this information as unaudited information in the notes to its financial statements.

The company then capitalizes certain costs relating to the acquisition, exploration and development of oil and gas properties and presents them as assets in its balance sheet. The company also provides other information regarding drilling and production operations elsewhere in its SEC filings.

“Reserves are often the most important asset of an oil and gas company and may be categorized as proved, probable or possible,” White explained. “Under our current rules, an oil and gas company is prohibited from disclosing any reserves other than proved reserves in a filing made with us, because of concerns that other categories of reserves are too speculative and too uncertain.”

However, companies may – and generally do – include information regarding other categories of reserves in press releases and other reports and communications.

“Under our current rules, a company determines its proved reserves based upon the results of production or flow testing from actual wells and appraisal drilling,” White said. “Several groups have encouraged us to allow companies to rely on new technologies in evaluating their reserves and identifying proved reserves.

“We have not concluded that these technologies have been demonstrated to be routinely reliable for the attribution of proved reserves, although we did allow use of such technologies in calculating proved reserves in the Gulf of Mexico following a special project we undertook,” he said.

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

In noting the importance of qualifying words in the definitions of oil and gas reserves and resources, David C. Elliott, chief petroleum adviser for the Alberta, Canada, Securities Commission, conducted a survey among the 130 participants at the June meeting in Washington and found a wide variance in responses to meanings of estimation categories.

“This variance raises troubling questions about the manner in which reserves definitions are interpreted,” Elliott wrote. “How would a user know the view taken by an evaluator – and vice versa?”

The report on the survey can be found in the GEO-DC area of the Web site, where a complete report on the meeting's sessionsrtxyyuabevcd also is available, including PowerPoint presentations and texts of speeches.

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