Because oil and natural gas reserves are the "core" measure of exploration and production (E&P) performance, the Security and Exchange Commission's (SEC) decision to review and evaluate reserves disclosures offers a "welcome opportunity" to strengthen and improve the rules, Standard & Poor's (S&P) said in a report Friday.
The report by S&P credit analysts Sherman A. Myers and David Lundberg follows a recent decision by the SEC to appoint an expert to review the reserves disclosure system now in place. In October the SEC appointed W. John Lee as an academic engineering fellow to serve a one-year term through August to review and evaluate current reserve disclosure requirements. Lee worked for ExxonMobil Corp. predecessor Exxon Corp. from 1962 to 1976 on simulator reserve studies. He holds the Peterson Chair in Petroleum Engineering at Texas A&M University, where he has worked since 1977.
Other groups also have urged changes to the current SEC reporting system, including Cambridge Energy Research Associates (CERA), which issued a report in February 2005 calling for "reasonable" reserve disclosures (see NGI, Feb. 28, 2005). Besides CERA, the Society of Petroleum Engineers and accounting firms have called for changes to the system, especially following the ballyhooed reserves restatements by El Paso Corp. and Royal Dutch Shell in 2004 (see NGI, July 26, 2004; May 31, 2004A ; May 31, 2004B.
As it considers revisions to its rules, Myers and Lundberg said the SEC needs to ensure that there are several "crucial" characteristics in its reserves rules: consistency, conservative estimation, completeness and standardized pricing. E&Ps use a variety of measures to determine their reserves numbers, which usually include internal reviews and/or outside consultants. Because of the various ways to report the numbers, they are calling on the SEC to require E&Ps to:
"Finally, E&P companies vary as to whether they estimate oil and gas reserves internally, use independent petroleum engineers for outside estimates,or seek outside review of internal estimates," wrote the analysts. S&P "currently expects independent petroleum engineers to prepare and review the reserve reports of smaller companies but also believes that an independent audit or review would enhance the reliability of all companies' reserve reporting."
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