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CERA Report Urges SEC Revise Reserves Reporting System

The 27-year-old U.S. system to measure and report oil and natural gas reserves has failed to keep pace with a changing, increasingly global energy industry and, as a result, it has fallen short of accurately valuing companies' performance and strategies, according to a study by Cambridge Energy Research Associates (CERA).

CERA's report is similar to another earlier this month released by consulting firm Deloitte & Touche LLP, which urged U.S. regulators to update global reporting requirements to restore confidence in reserves reporting (see NGI, Feb. 11).

CERA's six-month study found that the Securities and Exchange Commission's (SEC) reserves reporting system "is in urgent need of modernization," said CERA Chairman Daniel Yergin, one of the authors of In Search of Reasonable Certainty: Oil and Gas Reserves Disclosures. "It is increasingly at odds with the realities of the oil and gas industry in the 21st century and, as a result, it does not properly inform investors about values and prospects of companies."

As an example, CERA pointed to ExxonMobil Corp., which announced its reserves numbers earlier this month (see NGI, Feb. 21). According to its internal calculations, ExxonMobil replace 112% of its production in 2004. However, the SEC's year-end price policy would put ExxonMobil's reserve replacement at only 83%.

CERA explained that ExxonMobil took a temporary hit when the bottom momentarily fell out of the extra-heavy oil and asphalt markets at the end of the year. When measured against the Dec. 31, 2004 oil price, Exxon Mobil could not call its Cold Lake Canadian oil sands project economical and had to leave it out of the SEC-compliant reserve estimate.

According to the CERA study, the SEC's reporting system, put into place in 1978, should be modernized through a joint governmental, industry, accounting, legal and investor consultative process that establishes a principles-based regulatory framework, avoids undue optimism or conservatism, achieves cost benefits, and protects registrants' confidentiality and competitive positions.

"The 1978 System was really made for an oil industry whose map was centered in what might be called 'Texlahoma' -- a conceptual composite of Texas, Louisiana, and Oklahoma that describes the heart of the conventional U.S. oil patch," said David Hobbs, the study project leader and CERA's director of E&P Strategy. "Since the 1978 system was established, among oil and gas companies that are registered with the SEC, the proportion that North American reserves comprise of their global totals has declined from more than 65% to just 17%."

With growing demand for oil and gas in the next 25 years, $4-6 trillion in new exploration and production investment will be needed. "Reserves are at the heart of the confidence and credibility necessary to ensure the industry has access to those funds and the capability to meet those huge needs," according to the report. It identified the following six areas that the SEC could evaluate with industry input.

In the course of conducting the research and analysis for the report, CERA organized a consortium that included 30 oil and gas, accounting, reservoir consultants and law firms to support the research, consulted with more than 150 people in multiple workshops in Washington, DC, Houston, New York, London and Moscow. For more information on the report, visit

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