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Vol. 10, No. 10 Week of March 06, 2005
Providing coverage of Alaska and northern Canada's oil and gas industry

SEC comes under fire

ExxonMobil, CERA challenge U.S. regulator for sticking with outdated oil and gas reserves standard; say investors are left confused, uncertain

Gary Park

Petroleum News Calgary Correspondent

A heavyweight brawl between ExxonMobil and the U.S. Securities and Exchange Commission and a report by a prominent U.S. energy think tank have put pressure on the regulator to rethink its standard for calculating reserves.

The SEC’s accounting of reserves grabbed the spotlight last year when Royal Dutch/Shell and other companies started admitting they might have overstated their reserves for several major projects.

Then ExxonMobil took up the cudgels as the last company to deliver its 2004 reserves replacement figures.

It did everything possible to bend the SEC rule requiring the use of commodity prices on Dec. 31 to put a number on its reserves.

Rather than meekly complying with the SEC, the oil giant submitted two sets of numbers, sidestepping around the impact of the single-day, year-end prices.

That allowed ExxonMobil to claim a replacement rate for the year of 125 percent, although it conceded that, under the SEC standard, that ratio would drop to 83 percent.

By way of rubbing the message in, ExxonMobil Chairman Lee Raymond said his company had posted its 11th straight year of “greater than 100 percent reserve replacement.”

Cambridge Energy criticizes SEC's 1978 system

Fueling the debate, Cambridge Energy Research Associates, in a Feb. 23 study, said the SEC urgently needs to move beyond its 27-year-old rules.

Cambridge Energy Chairman Daniel Yergin said the 1978 system is “increasingly at odds with the realities of the oil and gas industry of the 21st Century.

“It is stranded in time, left behind by an industry that has advanced and changed so much more than could have been anticipated in 1978.”

The fallout has been sharply felt in Western Canada’s rapidly emerging oil sands sector, where producers have been forced to drop hundreds of millions of barrels of reserves from the “proven” category to “possible,” because of the Dec. 31 price date and because the SEC won’t allow companies to claim as “proven” volumes of oil that must be dug rather than pumped out of the reservoirs.

Yergin, noting that the oil sands are going to be a “very important component of U.S. oil supply in coming years,” said the SEC regulations create “confusion and uncertainty among investors.”

Given projections of a 60 percent increase in worldwide oil production to meet demand over the next 25 years and an expected doubling in natural gas demand, up to US$6 trillion in new investment is required, he said.

But, without changes to the SEC rules, investors may be scared off participating in mega-projects such as oil sands developments, Yergin suggested.

Cambridge Energy director David Hobbs said it is ironic that producers are spending billions of dollars to develop oil they can’t count as reserves even though the end product will “go into the gas tanks of American vehicles and is an important part of the resource base of American companies.”

DOE included oil sands in reserves in 2003

Once viewed as fringe mining operations, the oil sands entered the world league in 2003 when the U.S. Department of Energy included the deposits in its recognized reserves, lifting Canada from 5 billion barrels to 180 billion barrels — second only to Saudi Arabia. The sector is now on track to exceed 3 million barrels per day of production by 2015.

“It will become increasingly hard not to recognize this activity within the oil and gas disclosures without the risk of materially confusing (investors),” the Cambridge Energy report said.

Yergin said the SEC standard is “bizarre” given the volatility of oil prices, especially heavier crudes, which traded at C$12.27 a barrel on Dec. 31, less than half the average price for all of 2004.

Prices for Canadian heavy crude rebounded within days of entering 2005 and typically climb to a peak in spring and summer because of the demand for asphalt, a product of the oil sands bitumen.

Yergin also said varying royalty regimes from country to country result in discrepancies between “bookable” reserves and proven reserves.

He recommended that the SEC consider basing reserves on average prices spanning nine months to three years.

Suncor Energy, a leading oil sands producer, endorsed changes that would more accurately reflect the changed realities of the industry, especially a move to drop the Dec. 31 price benchmark.

In the meantime, the oil sands producers have rolled out a long, dismal list of reserve writedowns, including ExxonMobil, which removed 500 million barrels from its Cold Lake heavy oil-bitumen project in northeastern Alberta. Imperial Oil, 69.6 percent owned by ExxonMobil, said its overall proved reserves for Canada were slashed by 6.8 percent to 1.72 billion barrels.

Other reductions have seen Suncor write off 420 million barrels, EnCana 363 million barrels, Shell Canada 182 million barrels, Husky Energy 114 million barrels and Canadian Natural Resources 30 million barrels.



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