On Thursday the Securities and Exchange Commission proposed a new set of rules that would change the way oil and gas companies report their reserves on financial statements. Following 60 days of public comment, the commission will take a final vote on adopting the changes.
The new rules would require oil and gas companies to report more information about their reserves and allow companies to report probable and possible reserves, rather than only “proved reserves.” The SEC defines proved reserves as the amounts of crude oil, natural gas, and natural-gas liquids they can estimate with a “reasonable certainty to be recoverable in future years from known reservoirs.” Under the new rules, resources such as oil sands that are considered mining reserves could be reported as oil and gas reserves as well.
The oil and gas industry and the SEC say the changes would provide investors with a clearer picture of an energy company’s assets and long-term financial health.
The industry has lobbied for the changes for years. The main objection is to the current rule that proved reserves be estimated using technology that was available when the rules took effect in 1978.
One of the six proposed rules would allow companies to use new technologies as long as they are deemed to produce empirically reliable conclusions about reserve volumes. Many companies already use such advanced tools as 3-D and 4-D seismic interpretation to decide where to drill new wells.
“The ability to accurately assess proved reserves is an important part of understanding an energy company’s financial position,” said SEC chairman Christopher Cox in a statement. “But the current oil and gas disclosure rules often interfere with an investor’s analysis because they are tied to outdated technologies.”
Another change would give companies the option to provide an audit of their reserve reporting, based on criteria from the Society of Petroleum Engineers. Companies would also have to report reserves using an average price based on the previous year’s prices.