As part of a plan to ensure more accurate reserves reporting, oil and natural gas companies have been asked by the Securities and Exchange Commission (SEC) to report information for periods ending on or after Dec. 15, 2004 about how they account for exploratory drilling and other operations.

According to a three-page letter sent to energy CFOs earlier this month, SEC’s chief accountant in the division of corporate finance asked energy companies to disclose how they account for exploratory drilling and how they swap energy stockpiles between companies. SEC’s Carol Stacey said in the letter that the disclosures could offer important information to investors on balance sheets and income statements to assess a company’s health.

Currently, a Financial Accounting Standards Board taskforce is working on guidance for companies that have to account for exploratory wells. Until the guidance is completed, the SEC wants to offer investors more information through new disclosures that would include total capitalized drilling costs, the number of wells and the costs associated with wells that require a major investment before oil and gas production ramps up.

According to the SEC, companies would initially be allowed to capitalize the costs associated with drilling. However, one year after a well is completed, companies would be permitted to keep the asset on their balance sheets only as long as they could prove that the wells were “actively and continuously” taking steps to classify the reserves as proven.

Stacey’s letter indicates that searching for development or production partners does not offer reasonable support to defer exploratory drilling costs beyond one year after drilling is completed. Otherwise, the SEC wants the producers to write off their investment or take a charge to earnings.

The commission also is reviewing how companies account for the purchase and sale of oil and gas supplies between each other. In many cases, the SEC said that producers swap inventory to move get energy stockpiles to the right place. Currently, this method is considered a legitimate method to bypass costs associated with hauling oil or gas between distant locations.

However, Stacey wrote that some producers may be reporting proceeds from the commodities sales on a “gross” basis without account for the amount of money spent to purchase other stockpiles. She said, “We have questions regarding the appropriateness of reporting the proceeds and costs of buy/sell arrangements on a gross basis in the statement of operations. Although consideration of these issues is not yet complete, it is apparent that proceeds and costs associated with such transactions are fundamentally different in character than those of a company’s primary operations.”

For more information about the request, contact Stephanie Hunsaker, SEC’s assistant chief accountant or Todd E. Hardiman, associate chief accountant, at (202) 942-2960.

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