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SEC Said to Be Probing Possible 'Overbooking' of Shale Reserves

The Securities and Exchange Commission (SEC) "recently began serving" subpoenas on producers active in natural gas shale development, according to Baird Equity Research, which cited an "attorney advertisement" issued by Houston law firm Fulbright & Jaworski as its source.

Rep. Maurice Hinchey (D-NY) in June called on the SEC and the Energy Information Administration (EIA) to look into the issue after a New York Times article alleged that shale gas producers may be "intentionally overbooking" their reserves (see Daily GPI, June 28).

"The use of subpoenas makes clear that the SEC is taking a formal, not a casual, look at the matter. A Wells Notice [which has not been issued yet] would indicate that SEC staff believes it can bring a civil action against an entity," wrote energy analysts Christine Tezak and Brian E.K. Kerkhoven with Robert W. Baird & Co. in a recent report on the SEC subpoenas.

"The SEC may have subpoenaed a large group of market participants to evaluate broadly how the industry is complying with the reserves disclosure rules. Additional investigations and/or potential Wells Notices may follow in the future," they said.

Following investigations into Royal Dutch Shell and El Paso Corp. for overbooking of reserves, the SEC in late 2008 updated its regulations for reporting reserves by oil and gas companies, enabling them to report probable and possible reserves along with proved reserves (see Daily GPI, Dec. 31, 2008).

The SEC's action revised then-existing rules, which were adopted more than 25 years ago, that allowed producers to disclose only "proved" reserves in their filings. To classify reserves as proved, a company was required to be reasonably certain, based upon geological and engineering data, that it could economically recover them.

This move toward more expansive reporting of reserves reflected the "significant changes" in the oil and gas industry, including improved technology and alternate resources, since the adoption of the original reporting requirements between 1978 and 1982, the SEC said.

After remaining basically flat throughout the 1990s, proved natural gas levels in the United States have surged since 2000, thanks to the combination of higher gas prices and increased unconventional production. From 1999 through 2009, U.S. natural gas reserves, which are defined by the EIA to be wet gas after lease separation (including natural gas liquids), grew at compound annualized growth rate (CAGR) of 4.9%. But much of that growth occurred more recently, with proved reserves rising 12.4% in 2007, and another 11.3% in 2009.

The growth in proved reserves has pushed the Reserve/Production (R/P) ratio higher as well (see chart).

The ratio bottomed at 7.2 years in 1998, but has since increased every year except 2008. The 10.9 ratio in 2009 was the highest on record since the 11.2 figure in 1983. Of course, the R/P ratio only accounts for proved reserves. It does not consider the massive growth in probable and possible reserves that has accompanied the unconventional gas boom in the United States. Several industry sources have estimated recently that the current R/P ratio using 3P data (proved, probable and possible reserves) would be 100 years or more.

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