WASHINGTON -- U.S. regulators will consider updating rules on accounting for oil and gas reserves as early as this summer, Securities and Exchange Commission Chairman Christopher Cox said Thursday.
The SEC's corporation finance division, which oversees financial reporting, and the SEC's chief accountant announced that they have recommended changes that would allow companies to give investors more information on oil and gas reserves.
"In the decades since adoption of the current requirements, there have been tremendous changes in the way reserves are measured and oil and gas companies do business, which are not yet reflected in our rules," SEC corporation finance division director John White said in a statement Thursday.
SEC staffers declined to elaborate on the recommendations, which weren't publicly released.
Reserves are among the most important assets for oil and gas companies, and the current SEC rules limit these firms to reporting only proved reserves from conventional sources, an approach that excludes oil shale, tar sands and other potentially rich sources of oil and gas.
SEC rules on reporting oil and gas reserves were adopted more than 25 years ago, and critics complain that they haven't kept pace with changes in technology, such as three-dimensional seismic interpretation tools, that can make it easier to locate and estimate new energy sources.
Updating U.S. rules to reflect such changes could add billions of barrels of oil and cubic feet of natural gas to the balance sheets of oil and gas companies, and placate those who say the current rules result in underreporting of such assets.
Any proposal to update the rules would be subject to a public comment period and changes could not be finalized without a second vote by the commission.
The SEC issued a so-called concept release in December seeking public input on whether to revisit the rules, which was generally welcomed by accountants, oil companies, industry groups and Wall Street firms.
Current rules on accounting for reserves don't reflect "technological, geologic, geographic and pricing shifts," Deutsche Bank Equity Research Managing Director Paul Sanke wrote the SEC. Center for Audit Quality Executive Director Cynthia Fornelli also endorsed updated rules, saying the policy of excluding unconventional reserves "may not be providing investors with a complete picture" of an energy company's assets.
The American Petroleum Institute recommended the SEC adopt the Society of Petroleum Engineers' Petroleum Resource Management System for reporting proved reserves, and called for it to include reserves from unconventional sources.
Pricing is another area that should be updated, according to many commenters. The current method specified by the SEC uses prices based on a single day at year-end, which is too volatile and "outmoded" according to Houston-based Apache Corp. (APA). It favors substituting the average price over a 12-month period, or a forward-looking average based on futures prices.
Shell Oil also recommended abandoning year-end pricing, saying business decisions "are not based on a one-day price."
The U.S. Energy Information Administration suggested investors would benefit from such changes because they would get more information presented in a more consistent fashion. It added that energy companies might be less inclined to make investment decisions based on whether a project results in increasing proved reserves if the company is permitted to report progress in other categories.
Reaction to having reserves verified by an independent third party didn't prove to be popular, with several commenters saying that would drive up costs and take too long to be useful.
The SEC's drive to update oil and gas reserve accounting follows a Cambridge Energy Research Associates report that recommended that the task of developing new reserve-reporting guidelines be left to the Society of Petroleum Engineers. The report was funded by most of the major oil companies, including Exxon Mobil Corp. (XOM), ConocoPhillips (COP), BP PLC (BP) and Royal Dutch Shell PLC (RDSA, RDSB); industry organizations; and accounting firms such as PricewaterhouseCoopers and KPMG.
-By Judith Burns, Dow Jones Newswires; 202-862-6692; [email protected]
(Ian Talley contributed to this report.)DOW JONES NEWSWIRES
