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SEC Updates Accounting to Reflect New Reserve Reporting Rule

The Securities and Exchange Commission (SEC) has released updated accounting guidance to implement the agency's new rulemaking on the reporting of oil and natural gas reserves.

A Staff Accounting Bulletin (SAB), which was issued by the SEC's Office of Chief Accountant on Oct. 30, "revises or rescinds" a series of staff accounting interpretations to conform with the SEC's new rules and regulations for oil and natural gas production activities.

The latest SAB "is an administrative, housekeeping piece to implement the rule. The SEC is updating [its] accounting guidance" to be consistent with the rulemaking, which was issued in December 2008, said a spokeswoman with the American Petroleum Institute (API). "It's another important piece to move it all along," she said.

In the December 2008 rulemaking, the SEC significantly updated its reserve reporting requirements for oil and gas companies, enabling them to report probable and possible reserves along with proved reserves (see NGI, Jan. 5). The agency's prior rules allowed producers to disclose only "proved" reserves in their filings.

The SAB also conforms to the new rulemaking by "replacing the use of a year-end price when determining reserve quantities with the use of the average [spot] price during the 12-month period prior to the ending date of the period covered by the balance sheet." The average annual spot price applies solely to proved reserves, which must be reported to the SEC, the API spokeswoman said.

The SAB further reflects the SEC rulemaking by permitting for the first time the disclosure of probable and possible reserves to the agency, but it "does not provide a basis to present estimated values attributed to those reserve quantities." according to the bulletin. While proved reserves are required to be reported to the SEC, producers have the option of reporting probable and possible reserves, the SEC said. The SAB retains the existing definitions for proved and nonproved oil and gas reserves.

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, according to the agency.

The SAB also made changes to reflect the fact that the SEC's definition of "oil and gas producing activities" now includes the extraction of natural gas from coalbed methane. "This was a major change in the rule," the API spokeswoman said.

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. Producers also will be required to report the independence and qualifications of a reserves preparer or auditor, and file reports when a third party is relied upon to prepare reserves estimates or conducts a reserves audit.

The new rulemaking and accounting guidance take effect Jan. 1, 2010, and will apply to reserves in the current year. Producers' Form 10-Ks will be due at the end of February, the API spokeswoman said.

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