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Alaska producers reject new SEC rule
Ray Tyson For Petroleum News
Some of the world’s largest oil companies, including Alaska Big Three producers ExxonMobil, ConocoPhillips and BP, are unlikely to participate in a new U.S. Securities and Exchange Commission rule that will give publicly traded companies the option to report probable and possible reserves. For more than two decades, the SEC accepted proved reserves only.
The outcome of years of industry pressure to bring more clarity to reserve reporting, the new rule was expected to generate broad industry support, in part because including additional reserves in SEC reports would tend to enhance the value of companies, especially at a time when many companies are facing reserve write downs due to the collapse in world oil prices.
It’s the first time in more than 25 years that the SEC has made changes to its reporting rules for oil and gas reserves. The new rules will take effect on Jan. 1, 2010.
From the SEC’s point of view, the disclosure of probable and possible reserves, one of many changes adopted by the SEC in late December, also will help investors make more informed stock-purchasing decisions.
“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 press release announcing the rule change.
The SEC also recognized the role new technologies play in finding and proving up oil and gas reserves.
“In the more than a quarter century since the SEC last reviewed its rules in this area, there have been significant changes in technology that have increasingly limited the usefulness of current disclosures to the market and investors,” Cox added.
However, none of the 29 oil and gas companies that submitted comments to the SEC prior to the rule changes fully supported all the proposed changes associated with reserve reporting, with most saying that the additional disclosures of probable and possible reserves would be overly burdensome, provide little value to investors, compromise competitive positions and, in some cases, would be outright illegal in host countries.
In the list of opposing comments is a 16-page letter submitted last year by the American Petroleum Institute and signed by 11 oil and gas companies, including Alaska producers Exxon, Conoco, BP, Anadarko Petroleum, Marathon Oil and Chevron. Others that signed the letter are Shell, Devon Energy, Hess, Murphy Oil and Occidental Petroleum. All the companies were identified as participating members of the API Ad Hoc Working Group for the “SEC Concept Release on Oil and Gas Reserves Disclosures.”
In the letter, API and the ad hoc group clearly favor the reporting of proved reserves only, arguing that “proved reserves are more aligned with the measures of revenue, income, profitability and cash flow that investors are most focused on.”
“As a result, we do not believe that full adoption … for public reporting purposes, including the reporting of additional categories of reserves resources beyond proved, would be of sufficient value to investors to justify the costs, and potentially would create confusion in the investing community and for other users of financial statements,” the letter said.
Formula complex Mike Wysatta, business development manager for Houston-based Ryder Scott Petroleum Consultants, agrees that investors could be easily tripped up by probable and possible reserves, given the rather complex formula companies would have to follow in calculating the probability of these reserves.
“Investors are going to have to understand the inherent risks in those reserve categories,” Wysatta said in an interview with Petroleum News. “And I think they are going to have to go back to the (SEC) definitions.”
Under the new guidelines, when a company reports a probable reserve, there is a 50 percent chance or probability that the reserve will meet or exceed 50 percent; and when a company reports a possible reserve, there is only a 10 percent chance the reserve will meet or exceed 10 percent.
“If I’m an investor, I’m going to say, hey, that’s not a very good bet,” Wysatta said. “In fact, if I’m looking at probable and possible, and I’m saying there’s only a 10 percent or 50 percent chance that they’ll hit this, I might stake something on that, but I wouldn’t bet the whole kit and caboodle.”
He said that proved reserves, which will continue to be a reporting requirement under the new rules, should always be the safer play, considering they must be at the 90 percent probability threshold.
“The proved number is still going to be … a highly important measure of value in a conservative sense,” Wysatta said. “And let’s face it, with the economic woes we have and the financial crisis, there may be a move toward conservatism. So I don’t think the proved number will lose its luster.”
Litigation a concern API and the ad hoc group also believe that “reporting of reserve resource categories below the proved threshold could also expose companies to additional, unwarranted litigation due to the increased risk and uncertainty associated with these categories.”
API encouraged the SEC “to consider the potential for competitive damage to companies through overly detailed disclosure requirements,” in particular requirements for disclosures on specific fields.
“Such disclosures can undermine the negotiating positions of companies in future property sale transactions or other asset transfers,” the letter said. “In addition, information about individual fields is sensitive data that is often subject to restrictions by the national governments that have awarded the concession rights.”
Devon, a large exploration and production independent based in Oklahoma, said in separate comments to the SEC that disclosing unproved reserves “can cause misunderstanding by investors of potential recovery from projects in a company’s portfolio of properties.”
Houston-based Apache, another big E&P independent, said in its comments to the SEC that voluntary disclosure of unproved reserves would contribute to confusion as “investors may not understand the reasoning as to why one registrant discloses this information and others do not.”
The API ad hoc group noted that “many industry companies make significant supplemental data” available to investors through press releases, information in the nonfiled portions of annual reports to shareholders, annual operating summaries and periodic management presentations to financial analysts.
Little detail in reports However, 2007 annual reports and other documents prepared by Alaska’s three largest producers reveal little detail in the way of probable and possible reserves. Exxon reported that 32 percent or 22.7 billion barrels of its 72 billion barrels of oil-equivalent reserves worldwide were proved, suggesting that the remaining 49.3 billion barrels were probable and possible. For the most part, the other two big North Slope producers stuck with reporting proved reserves — about 10.6 billion oil-equivalent barrels for Conoco worldwide and roughly 17.8 oil-equivalent barrels for BP worldwide.
Generally, companies that submitted comments to the SEC were concerned with the extra paperwork and support services to comply with the proposed rules. The SEC estimated that to comply, the 241 oil and gas companies that file annual reports and 67 companies that file registration statements would spend about 35 hours per company, of in-house time.
“Most of the information called for by the new proposed disclosure requirements, including the optional disclosure items, is readily available to oil and gas companies and includes information that is regularly used in their internal management systems,” the SEC said.
Preparation time a concern However, integrated oil companies and large independents with operating units worldwide contend in their comments to the SEC that it could take up to 20,000 hours per registrant for internal staff to prepare additional data, much of it in tabular format, for year-end 2009 filings.
BP, which submitted separate comments to the SEC, said it considers the estimate of 15,000 to 20,000 hours to comply with added disclosures to be “a realistic approximation” and requested that the SEC postpone the implementation date.
Exxon, which repeated many of API’s concerns in separate comments to the SEC, led the charge to nix reporting of 2P (probable) and 3P (possible) reserves from the new rule. “We strongly prefer that reserves reporting be limited to proved reserves only as prescribed by the current disclosure requirements,” the company said.
However, while viewing the optional reporting of probable and possible reserves as an acceptable alternative to mandatory reporting of these reserves, Exxon nevertheless warned industry “to be willing to accept a higher risk of additional, unwarranted litigation due to the inherent uncertainty associated with these reserves.”
While the major oil companies and big E&P independents were, for the most part, opposed to reporting probable and possible reserves, the smaller E&P independents likely will welcome the new rule, according to Scott Ryder’s Wysatta.
“In our little reserves world this is the biggest news in decades,” he said. “And for these companies whose reserve value is 95 percent of the entire value of their company, this is big news for them, too.”
However, other aspects of the new SEC rules should be more universally appealing to industry. Most significantly, the new rules will allow companies to value their reserves using a yearly average market price, rather than a one-day market price.
“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,” the SEC said.
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