The Securities and Exchange Commission (SEC) may change the rules on how oil and natural gas producers book their reserves — something the industry has requested for several years.

Under the SEC’s current rules, producers may only disclose “proved” reserves in their filings. The SEC’s intention was to ensure that investors understood that other categories of reserves were speculative and uncertain. However, the proved reserves are only an SEC requirement. In press releases and investor presentations, producers also may discuss their probable and possible reserves.

However, for years producers have lobbied the SEC to reevaluate the way reserves must be booked because of new technologies and techniques used for exploration and production. The Society of Petroleum Engineers (SPE), the World Petroleum Council and the American Association of Petroleum Geologists, among others, have recommended the reserves rules be revised. In March the SPE published “Petroleum Resources Management System,” a two-year project that explains booking requirements based on new technology, market evolution and unconventional oil and gas resources.

The SEC has not budged since it last revised the reserves rules in the late 1970s, but earlier this month the SEC’s John White, director of corporate finance, hinted to attendees at the American Bar Association conference in San Francisco that the agency may be ready to move. In his interim report on agency activity, White was stressing the “importance of transparency” in financial filings, and he described several items that the SEC has on its agenda.

As requested by industry, White said the SEC now is considering updating its reserves bookings rules based on new technologies. It also will rely on a newly hired petroleum engineering fellow.

“Reserves are often the most important asset of an oil and gas company and may be categorized as proved, probable or possible,” White said. “Under our current rules, an oil and gas company is prohibited from disclosing any reserves other than proved reserves in a filing made with us because of concerns that other categories of reserves are too speculative and too uncertain of realization and, therefore, may be confusing to investors. Companies may, and generally do, include information regarding other categories of reserves in press releases and other reports and communications.”

To classify reserves as proved, a company has to be reasonably certain, based upon geological and engineering data, that it can economically recover them, he noted. “Inherent in our application of the concept of reasonable certainty is the implication that, as more data becomes available, a company is more likely to revise its proved reserves upward than downward.”

White noted that under current SEC rules, “a company determines its proved reserves based upon the results of production or flow testing from actual wells and appraisal drilling. Several groups have encouraged us to allow companies to rely on new technologies in evaluating their reserves and identifying proved reserves.

“We have not concluded that these technologies have been demonstrated to be routinely reliable for the attribution of proved reserves, although we did allow use of such technologies in calculating proved reserves in the Gulf of Mexico following a special project we undertook. Allowing use of such technologies would likely produce increased levels of proved reserves, but might decrease the reliability of the estimate.”

Earlier this year the SEC placed ads for an academic petroleum engineering fellowship that would last 12-18 months. The applicants had to have “significant experience in petroleum reservoir engineering with expertise in petroleum reserve estimation” and they had to be familiar with “modern analytical reservoir assessment methods.”

White said the new engineering fellow would assist the SEC in evaluating its current disclosure requirements.

With the assistance of the engineering fellow, the SEC will “evaluate new technologies companies may use to evaluate current, and identify new, reserves,” White said. “Based upon that evaluation, we will determine what recommendation we will make to the commission, if any, about revisions to our current disclosure requirements.”

If the rules are revised, Citigroup analyst Gil Yang said in a note to clients that several U.S.-based independents will have a lot to gain, including Anadarko Petroleum Corp., Apache Corp., Chesapeake Energy Corp. and Pioneer Natural Resources Co. because all of them hold vast quantities of not only proved reserves, but large amounts of probable and possible resources.

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