Companies would be allowed to disclose probable and possible reserves and add in coalbed methane and shale gas to their reserves count under wide-ranging new rules for reserves evaluation proposed by the Securities and Exchange Commission (SEC) Thursday.

The proposed update to the reserves count rules would allow previously excluded resources, such as coalbed methane, shale and oil sands, to be classified as oil and gas reserves; the disclosure of probable and possible reserves to investors, in addition to the currently allowed proved reserves; require companies to report reserves using an average price based upon the prior 12-month period (as opposed to year-end prices) to eliminate distortions of estimates that arise when using a single pricing date; and would permit the use of new technologies to determine proved reserves if they have been demonstrated empirically to lead to reliable conclusions about reserves volumes.

The SEC said its proposed revisions reflect the significant changes that have occurred in the oil and natural gas industry since the adoption of the original reporting requirements more than 25 years ago. The proposed rule changes incorporate improved technologies and alternative extraction methods, and allow oil and gas producers to provide investors with additional information about their reserves.

The more that precise, first-hand information from oil and gas companies is available to investors and the marketplace, the less that the marketplace is forced to rely solely upon information from speculators, according to the SEC.

“The ability to accurately assess proved reserves is an important part of understanding any energy company’s financial position. But the current oil and gas disclosure rules often interfere with an investor’s analysis because they are tied to outdated technologies,” said SEC Chairman Christopher Cox.

The SEC’s proposed revisions also would require companies to report the independence and qualifications of a preparer or auditor of reserves, based on current Society of Petroleum Engineers’ criteria; and require the filing of reports for companies that rely on a third party to prepare reserves estimates or conduct a reserves audit.

One key issue was not included in the proposed rule — whether “stranded” gas should be included in a company’s reserves. In testimony filed with the SEC earlier this year, Berne L. Mosley, director of FERC’s Division of Pipeline Certificates, took issue with the SEC’s existing restriction on shut-in and stranded gas, pointing out that the fast-paced nature of pipeline construction helps to quickly connect such reserves to markets (see Daily GPI, June 16).

Mosley cited the western leg of the Rockies Express Pipeline (REX) as an example. The first segment of REX-West, which involved 503 miles of new pipeline through four states, was placed into service nine months after being authorized by FERC. It “allows formerly shut-in Rocky Mountain gas supplies to reach the market. However, according to 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,” he said.

In other submitted comments, major producers, independent producers, energy associations, energy regulators and credit rating agencies were split on the issue of whether to liberalize the rules and allow the reporting of unproven oil and gas reserves. However, there was a general consensus that the SEC should nix the requirement for producers to use year-end prices to determine reserves quantities, and to eliminate the restrictions on the reporting of oil and gas reserves derived from shale, oil sands and other unconventional sources.

The various entities expressed their views in letters to the SEC after the agency issued a concept release in which it requested comments on whether changes to its reporting requirements for reserves were needed (see Daily GPI, Dec. 14, 2007).

Public comment on the proposed rule changes are due at the SEC within 60 days of being published in the Federal Register.

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