With overwhelming support from the energy industry, FERC and the Department of Energy's Energy Information Administration (EIA), the Securities and Exchange Commission (SEC) may be close to announcing a major overhaul of oil and natural gas reserves accounting rules.

The SEC in December issued a concept release concerning possible revisions to the disclosure requirements relating to oil and natural gas reserves (see NGI, Dec. 17, 2007). The current disclosure rules were adopted between 1978 and 1982, but SEC commissioners noted that since that time, significant changes have occurred in the industry.

Nearly all of the 69 of those submitting comments overwhelmingly concurred with updating the rules, according to the responses posted by the SEC. Producers favoring changes included Apache Corp., BHP Billiton Petroleum, EnCana Corp., Total S.A., Talisman Energy Inc., Southwestern Energy Co., Nexen Inc. and Ultra Petroleum Corp.

Officials representing the Federal Energy Regulatory Commission (FERC) and the EIA also provided a positive take on the proposed revisions, as did credit ratings agencies, oil and gas groups and independent auditors.

FERC's Berne L. Moseley, director of the division of pipeline certificates, addressed the SEC's Rule 4-10(a)(2) within the disclosure rules, which requires producers to be able to recover resources under "existing...operating conditions" before classifying them as proved reserves.

"Historically, SEC has interpreted this to include a 'ready market and a means to transport resources to market,'" Moseley wrote. "According to SEC, for natural gas, there must be a pipeline to transport the gas to a sales point; otherwise, known gas reserves are considered to be stranded.

FERC, however, believes that the lack of existing pipeline infrastructure connecting the resource to the market should not be used to exclude 'shut-in' or stranded gas supplies when determining proved resources," Moseley wrote. "The time necessary to authorize, construct and place a connecting pipeline into service could be a matter of a few months if performed under FERC's blanket certificate process, depending on the distance that shut-in supplies are from existing pipeline infrastructure. Even infrastructure projects involving hundreds of miles of new pipeline, which would be ineligible for the blanket certificate program, may still be constructed and placed into operation in a relatively short period of time."

Citing the Rockies Express Pipeline (REX) project, Moseley said that under current SEC policy, the "gas reserves now transported by REX-West should be excluded from proved reserves. Clearly, lack of connecting infrastructure is not an appropriate exclusionary factor."

The rule "also excludes natural gas from proved reserves that can be produced from shale formations and coalbeds," Moseley noted. "Given that vast amounts of natural gas are expected to be recovered from these types of formations, the level of proved reserves will be vastly understated when gas from such sources is excluded. Indeed, currently 15% of total U.S. gas production comes from these formations."

Moseley urged the SEC to include all "proved reserves, whether connected or unconnected to a transporting pipeline...Further, due to their increasing importance to U.S. gas production, gas from nontraditional sources, such as shale formations and coalbeds, should be included in any definition of 'proved reserves' as well."

EIA Administrator Guy Caruso said that "given the accelerating pace of relevant technological change, the rate at which existing conventional oil and gas proved reserves are being produced, and the large price swings in contemporary oil and gas markets, many elements of the existing rule-based system used by the commission merit reconsideration. Movement to a well conceived and executed principles-based system informed by the best available reserves estimation practices could help to keep investors better informed."

In comments that mirrored many of the producers' comments to the SEC, Caruso wrote that "some of the present rules governing reserves disclosures can distort the reporting of proved reserves. Notably, using a product price at the last day of the year as the basis for determinations regarding the economic producibility of reserves can produce unrealistic and misleading results regarding the amounts of proved reserves that are actually available and cause a spurious fluctuation in reserve estimates."

Caruso said the problem was "particularly acute with respect to the prices of individual production streams, which can be dramatically impacted by temporary disruptions in downstream transportation or refining/processing infrastructures to which they may be tightly linked."

To read the comments, visit www.sec.gov. The comments are posted under "Concept Release on Possible Revisions to the Disclosure Requirements Relating to Oil and Gas Reserves," File No. S7-29-07.

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