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SEC Expands Reserves Reporting to Include Probable, Possible

The Securities and Exchange Commission (SEC) last Monday approved a significant update of its reserves reporting requirements for oil and gas companies, enabling them to report probable and possible reserves along with proved reserves, as well as value reserves based on an average price over the prior 12-month period.

The SEC's action revises 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 must be reasonably certain, based upon geological and engineering data, that it can economically recover them.

This move toward more expansive reporting of reserves reflects 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, according to the agency.

"In more than a quarter century since the SEC last reviewed its rules in this area, there have been significant changes in technology that have increasingly limited the usefulness of current disclosures to the market and investors," said SEC Chairman Christopher Cox. "These updates to the SEC rules will help ensure more meaningful and comprehensive disclosure of information that, even though it does not appear on a company's balance sheet, is of significance to investors in making informed investment decisions."

In addition to allowing the reporting of probable and possible reserves, the new SEC requirements will permit the use of new technologies to determine proved reserves if the technologies have been demonstrated empirically to lead to reliable conclusions about reserve volumes, the agency said.

Moreover, companies will be required 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 upshot of the new requirements is that they will give producers, particularly independents, a "more accurate reading of the [amount and value] of their reserves base," said Lee Fuller, vice president of government relations for the Independent Petroleum Association of America. Last year (2008) -- during which oil and gas prices rose to meteoric heights in the spring and summer only to plunge in the remaining months -- is a "good example" of why reserves need to be valued based on the average price over the prior 12-month period rather than year-end prices, he said.

The changes, which were proposed by the SEC in June, were preceded by a concept release in which the agency solicited comments on whether changes in the reporting requirements were needed (see NGI, June 30, 2008). The comments generally supported updating the reporting requirements to reflect the changes that have taken place in the industry.

The Society of Petroleum Engineers, the World Petroleum Council, the Association of Petroleum Geologists, Cambridge Energy Research Associates and accounting firms advocated changes to the reserve reporting system, especially following the ballyhooed reserves restatements by El Paso Corp. and Royal Dutch Shell in 2004 (see NGI, April 26, 2004; Feb. 23, 2004).

The new reserves reporting requirements will take effect on Jan. 1, 2010. The SEC said the full text of the changes to the reporting requirements will be posted to its website as soon as possible.

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