HOUSTON, February 7, 2006 – The optimal way to modernize the 28-year-old United States Securities and Exchange Commission (SEC) rules under which oil and gas companies report reserves data is by adopting definitions and guidelines developed by the Society of Petroleum Engineers (SPE) and transferring responsibility for rule-making to the SPE, a year-long consultation led by Cambridge Energy Research Associates (CERA) has concluded.
The SEC rules are in urgent need of modernization for three primary reasons:
- Advances in technology over the last three decades which have enabled earlier and more accurate recognition of reserve volumes;
- Changes in the structure of oil and gas commodity markets which have become much more volatile than at the time the 1978 System was implemented;
- Changes in the character and geography of projects undertaken in which appraisal is more expensive, requiring companies to innovate and develop more information per well than was previously possible.
“Our review shows that modern SPE rules recognize all these important technical objectives while also providing conservative, reliable reserves assessments that have proven over long periods to be closer to the actual outcome after full reservoir development,” said co-author David Hobbs, CERA’s managing director of oil and gas research. “This would enhance the SEC’s ability to perform its regulatory role in the 21st Century with 21st Century methods. It would be in accord with the precedent the Agency has established in supervising other industries.”
In the project -- which involved the participation of 30 oil and gas, accounting and reservoir consulting firms, industry associations and professional and technical societies, as well as gathering input from other stakeholders including institutional investors – CERA developed a broad consensus that three steps are required to make the reserves reporting process relevant, accurate and reflective of real industry operations. These steps, outlined in the CERA report Modernizing Oil and Gas Reserves Disclosures, include:
- Separation of the SEC’s compliance role from responsibility for rule making;
- Delegation of the responsibility for defining oil and gas reserves and associated guidelines to the SPE through its Oil and Gas Reserves Committee; and
- Use of the forum of the SPE Oil and Gas Reserves Committee to facilitate public consultation in establishing best practices regarding emerging issues on reserves.
“Our February 2005 report created a widespread recognition that the 1978 System, based on three decade old technology, was in need of modernization,” said report co-author and CERA Chairman Daniel Yergin. “This report has forged a consensus among a wide range of key stakeholders as to the steps that would begin this process of modernization.”
The Stakes
“Companies are poised to invest up to $6 trillion in E&P through 2030 to meet future global demand for oil and gas,” Hobbs said. “The accuracy and reliability of reserves data lie at the heart of stakeholder confidence in the industry’s capability and its access to the funds needed to meet these huge needs.”
“CERA expects,” he added, “that the International Accounting Standards Board will likely, following completion of its own analysis, adopt the SPE definitions. The Russian government appears to have adopted the United Nations Framework Classification which is itself consistent with the SPE definitions. It will become increasingly difficult to justify the SEC’s stand-out position.”
Shortcomings
The report identified several areas of shortcomings in the SEC’s 1978 System:
- The interpretation and application of the current system is inconsistent with the way managements make investment decisions, which is the key information for investors. The report cites an example in which a registrant was constrained to report reserves under SEC regulations that were less than half those that would be considered proved under SPE definitions;
- The SEC’s 1978 System, despite its contrary intent, actually fails to achieve comparability between registrants’ disclosures. The report illustrates how two 50 percent owners of the same asset would have been required to report radically different 2004 reserves estimates by virtue of a three month difference in year ends;
- Production from mined oil sands, a significant component of North American production, is excluded from oil and gas disclosures.
”The ultimate objective is a modernized set of definitions and guidance that are complemented by a process for ensuring that they stay current and reflect best practices as they emerge, which would serve the needs of investors much better than the current system. The first part of this objective would be achieved by adopting the current published SPE definitions and technical guidance for establishing proved reserves,” the report notes. The second part would be achieved if the SEC were “to delegate the continuing modernization to the SPE’s Oil and Gas Reserves Committee, on which the SEC would have full-time representation.”
“With these changes, CERA can foresee a modernized, globally accepted system that would actually facilitate the creation of a workable, constructive framework for the oil and gas industry in the twenty-first century that responds to the needs of investors and all stakeholders,” Hobbs concluded.
Cambridge Energy Research Associates (CERA), an IHS company, is a leading advisor to international energy companies, consumers, financial institutions, governments, and technology providers. CERA (www.cera.com) delivers strategic knowledge and independent analysis on energy markets, geopolitics, industry trends, and strategy. CERA is based in Cambridge, Massachusetts, and has offices in Bangkok; Beijing; Calgary; Dubai; Johannesburg; Mexico City; Moscow; Mumbai; Oslo; Paris; Rio de Janeiro; San Francisco; Singapore; Tokyo; and Washington, DC.
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