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Providing coverage of Alaska and northern Canada's oil and gas industry
January 2009

Vol. 14, No. 2 Week of January 11, 2009

Winning the numbers game

Another year before new SEC rule allowing 12-month average price takes effect

Gary Park

For Petroleum News

Within a year Canadian energy producers — notably those in the oil sands — should emerge victorious from their prolonged battle with the Securities and Exchange Commission over U.S. reserves rules.

Effective Jan. 1, 2010, they can apply a 12-month average price to estimate their reserves, instead of being forced to use the price on Dec. 31.

But the oil sands sector will still have to endure another year of writedowns that will likely wipe hundreds of millions of barrels deemed to be uneconomic off their books.

A year ago bitumen producers were reveling in the crude price tidal wave that allowed them to book reserves at US$70 per barrel, a figure that climbed toUS$100 by midyear before starting the precipitous second-half descent that dragged heavy crude prices to about US$25 on Dec. 31 — a level that makes most oil sands projects too costly to be viable and prevents companies from booking their reserves as proven.

The SEC regulation infuriated leading producers, including ExxonMobil, Suncor Energy and Shell Canada, as well as Cambridge Energy Research Associates, who called for changes to rules dating back to 1978.

Criticisms of old system

The critics said the system was increasingly at odds with the realities of the oil and gas industry of the 21st Century, arguing it was ironic that companies were spending billions of dollars to develop oil they could not list as reserves, even though the end product was finding its way into the tanks of American vehicles.

They also argued it was unfair to use a Dec. 31 price in determining reserves, given that bitumen reaches its lowest point in winter as demand for the product drops.

The new rules will also allow companies to claim possible and probable reserves, in addition to the current system that limits them to proved developed reserves.

As well, oil sands producers will be able to book their bitumen reserves as oil and gas resources, not just mining reserves.

The SEC itself acknowledged the flaws in the old regulations, saying the “use of the average price will maximize the comparability of reserves estimates among companies and mitigate the distortion of the estimates that arises when using a single pricing date.”

Final rules not published

Although the SEC has yet to publish the final rules, despite adopting the new rules on Dec. 29, Canadian producers are hopeful the change will reduce the impact of price volatility when they estimate the value of assets they own.

But they have still to escape the consequences of last year’s price nosedive.

“Any oil sands companies filing U.S.-type disclosure for the 2008 year-end may have to write off a significant portion of their proved bitumen reserves, given that bitumen prices are extremely low right now,” said Phil Welch, president of the consulting firm of McDaniel & Associates.

Writedowns won’t necessarily affect share values, assuming producers are able to re-book that oil at the end of 2009, but a drop in reserve values could make it even tougher for producers to negotiate debt given that banks use reserves as a key indicator of corporate long-term viability, Chris Feltin, an analyst with Tristone Capital, told the Globe and Mail.





SEC approves new rules for oil reserves

The Securities and Exchange Commission on Dec. 29 approved updated rules for energy companies that will require them to provide more detailed information to investors when reporting oil and gas reserves.

Reserves are an oil company’s most valuable asset and a critical indicator of its long-term financial prospects. Any reduction in their estimated size is a concern for investors.

The SEC’s reporting rules for oil and natural gas reserves were adopted more than 25 years ago, and the changes are intended to reflect technological changes in how oil companies determine their proven reserves.

“These updates to the SEC rules will help ensure more meaningful and comprehensive disclosure of information that, even though it does not appear on a company’s balance sheet, is of significance to investors in making informed investment decisions,” SEC Chairman Christopher Cox said in a statement.

Changes approved unanimously

The changes were proposed in June and opened to a 60-day public comment period. The SEC approved the changes unanimously.

The newly adopted revisions:

*Allow companies to use new technologies to determine proven oil and gas reserves provided the technologies have been shown to lead to reliable assessments.

*Allow companies to disclose their probable and possible reserves to investors. Until now, SEC rules limited disclosure only to proved reserves.

*Require companies to report oil and gas reserves using an average price based on the prior 12-month period rather than year-end prices.

*Require companies to certify the independence of petroleum auditors that audit their assessments of reserves.

The American Petroleum Institute, the industry’s trade association, said it was reviewing the new rules and had no immediate comment.

In August 2004, the SEC fined Royal Dutch/Shell Group $120 million — one of the largest penalties against a company in an accounting case — in connection with the overstatement of oil and gas reserves. The Anglo-Dutch oil giant’s disclosure that year of reserve inflation stunned shareholders and the oil industry, and led to the dismissal of several top executives.

The company neither admitted nor denied wrongdoing in agreeing to pay the civil fine.

—The Associated Press


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