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SEC Staff Proposes Update of Rules for Reporting Reserves

The Securities and Exchange Commission's (SEC) Division of Corporation Finance and Office of Chief Accountant Thursday said they have prepared for SEC consideration recommendations to update and modernize the requirements for oil and natural gas companies to report reserves -- a move that has been widely supported by the industry.

The recommendations seek to change the existing rules, which were adopted more than 25 years ago, that allow producers to disclose only "proved" reserves in their filings, but not speculative and uncertain oil and gas reserves because these may be too confusing to investors. To classify reserves as proved, a company has to be reasonably certain, based upon geological and engineering data, that it can economically recover them..

The SEC staff proposals reflect 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 staff. Among other things, the recommended proposals would allow companies to provide investors with "additional information" about their oil and gas reserves, the SEC said. The SEC staff did not say what that additional information would include.

The recommendations follow a concept release issued by the SEC last December in which the agency solicited comments on whether changes in the reporting requirements were needed (see Daily GPI, Dec. 14, 2007). The commission said it received approximately 80 comment letters, which generally supported updating the reporting requirements to reflect the changes that have taken place in the industry. The letters also provided a "great deal" of input about the specific types of updates that are needed, the SEC staff said.

The Society of Petroleum Engineers, the World Petroleum Council and the Association of Petroleum Geologists have called for changes to the reserve reporting system. Also advocating change were Cambridge Energy Research Associates and accounting firms, especially following the ballyhooed reserves restatements by El Paso Corp. and Royal Dutch Shell in 2004 (see Daily GPI, June 1, 2004; April 20, 2004).

"In the decades since adoption of the current requirements, there have been tremendous changes in the way reserves are measured and oil and gas companies do business, which are not yet reflected in our rules," said John White, director of the SEC's Division of Corporation Finance.

"This is obviously an important initiative...We are very interested in obtaining feedback from investors as to their views on whether the proposed rules will provide them with the information they need," said SEC Chief Accountant Conrad Hewitt.

Issuance of a proposed rule by the SEC based on staff recommendations will require agency approval, and will be followed by a public comment period.

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