FINANCIAL TIMES: SEC asked to reconsider its reserves readings : “Long-running industry discontent with SEC oversight has been magnified by the huge write-downs in reserves made last year at Royal Dutch/Shell and El Paso, the US gas group, which damaged investor confidence in what is viewed as a crucial valuation measure.” (ShellNews.net) 24 Feb 05
By Doug Cameron in Houston
Published: February 24 2005
US regulators were yesterday asked to consider the wholesale reform of their "outmoded" system of measuring energy companies' oil and gas reserves, to avoid misleading investors and distorting investment decisions.
The Securities and Exchange Commission is being asked to abandon its requirement that proved reserves should be calculated using only year-end energy prices, and to separate its compliance and rule-making functions.
Long-running industry discontent with SEC oversight has been magnified by the huge writedowns in reserves made last year at Royal Dutch/Shell and El Paso, the US gas group, which damaged investor confidence in what is viewed as a crucial valuation measure.
The proposed reforms are contained in a study by Cambridge Energy Research Associates (Cera), an industry consultant, backed and sponsored by energy groups and accounting firms.
Daniel Yergin, chairman of Cera and one of the report's authors, said: "The system of reserve reporting in force in the US is in urgent need of modernisation. It is increasingly at odds with the realities of the oil and gas industry in the 21st century and, as a result, does not properly inform investors about values and prospects of companies."
Mr Yergin said the rules, which date from 1978 but are based on methodologies developed in the 1960s, failed to provide comparability between companies and had been "left behind by technology and the changing anatomy of projects". He said that the SEC had become "overly conservative" in its reserves policy, and had moved from requiring "reasonable certainty" to "absolute certainty" in companies' measurements.
Super-majors such as ExxonMobil and BP have highlighted the disparity between reserves calculated using SEC rules and their own planning models.
David Hobbs, another co-author, said this "under -booking" distorted investment patterns as it became more of an issue of timing rather than the existence of the oil and gas.
He said: "It penalises present investors to the benefit of future investors."
Cera said it was looking to start a debate to improve transparency and industry practice. The SEC's requirement to use end-of-year prices has been criticised because of the volatility it creates in reserves numbers, and Cera favours the use of an average price.
The SEC said there were no formal proposals to review its guidelines, and was still examining whether reserve reports should be subject to the disclosure requirements of the Sarbanes-Oxley Act. A spokesman added: "We will look at the [Cera] report with interest, but have no immediate comment."