The Securities and Exchange Commission (SEC) has begun to serve producers active in natural gas shale development with subpoenas, according to Baird Equity Research, which cited an “attorney advertisement” issued by the Houston law firm of Fulbright & Jaworski as its source.

On Friday Tudor, Pickering, Holt & Co. Inc. (TPH) said in a note that EXCO Resources Inc. had been served with a subpoena by the SEC that is requesting information regarding proved developed producing (PDP) shale gas wells and reserve estimates from Jan. 1. 2008. Analysts said the action “feels like a witch hunt” because EXCO’s PDP wells “have steadily increased” in both estimated ultimate recovery and performance. EXCO “indicated a number of other shale gas producers have received similar subpoenas” but a poll of some independents by TPH had resulted in a “not yet answer.”

Rep. Maurice Hinchey (D-NY) in June called on the SEC and the Energy Information Administration to look into the issue after a New York Times article alleged that shale gas producers may be “intentionally overbooking” their reserves (see NGI, July 4).

“The use of subpoenas makes clear that the SEC is taking a formal, not a casual, look at the matter. A Wells Notice [which has not been issued yet] would indicate that SEC staff believes it can bring a civil action against an entity,” wrote energy analysts Christine Tezak and Brian E.K. Kerkhoven with Robert W. Baird & Co. in a recent report on the SEC subpoenas.

“The SEC may have subpoenaed a large group of market participants to evaluate broadly how the industry is complying with the reserves disclosure rules. Additional investigations and/or potential Wells Notices may follow in the future,” they said.

Following investigations into Royal Dutch Shell and El Paso Corp. for overbooking of reserves, the SEC in late 2008 updated its regulations for reporting reserves by oil and gas companies, enabling them to report probable and possible reserves along with proved reserves see (see NGI, June 30, 2008).

The SEC’s action revised then-existing rules, which were adopted more than 25 years ago, that allowed producers to disclose only “proved” reserves in their filings. To classify reserves as proved, a company were required to be reasonably certain, based upon geological and engineering data, that they could economically recover them.

This move toward more expansive reporting of reserves reflected the “significant changes” in the oil and gas industry, including improved technology and alternate resources, since the adoption of the original reporting requirements between 1978 and 1982.

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