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Trying to get SEC to bend on bitumen rule Canadian bitumen producers take second stab at persuading U.S. regulator to apply 12-month price average in calculating value Gary Park Petroleum News Canadian Contributing Writer
Canada’s oil sands producers have made their second pitch to the United States Securities and Exchange Commission to broaden its “strike zone” for reporting bitumen reserves.
The Canadian Association of Petroleum Producers pleaded with the commission earlier this month to use a 12-month price average to assign a value to bitumen reserves.
The SEC disclosure rules restrict oil and gas companies listed on U.S. stock exchanges to use of the Dec. 31 commodity prices to calculate their reserves.
Because of a blip in the market, Cold Lake bitumen averaged about 50 percent of the price of West Texas Intermediate light crude, but slumped to 20 percent of WTI in the final days of 2004.
As a result, close to 2 billion barrels were effectively erased from the books of most large producers, such as EnCana, Husky Energy, ConocoPhillips, Nexen, Suncor Energy, Petro-Canada and Shell Canada, causing widespread anxiety among investors, although the multi-billion dollar projects were unaffected. Alberta using 12-month average Having succeeded in persuading the Alberta Securities Commission to apply the 12-month price average, the association was unable to get the SEC to follow suit.
But rather than walk away from the campaign, CAPP formed a reserves reporting task force, which argued in a new submission to the SEC that it is in the “best interest of all stakeholders that a year-end bitumen pricing methodology be established that reasonably reflects the general market conditions and is not unduly influenced by seasonal demand (or) weather driven or cataclysmic price movements.”
The consulting firm of Cambridge Energy Research Associates, which is making its own case to the SEC on reserves reporting, is pondering applying an average price for the 12 months ending Sept. 30 for a full range of hydrocarbons, not just bitumen.
Dwight Barton, EnCana’s team leader for reserves, told a Conference Board of Canada meeting earlier in October that separate rules for bitumen are justified because the market is relying on a variety of pricing formulas to attain an effective price position, reflecting the fact that the bitumen market is immature and illiquid.
In addition, the bitumen market is seasonal with prices slumping late in the year because the demand for asphalt is at its lowest point. Cold Lake averaging 51% of WTI The consulting firm of Purvin & Gertz has calculated that bitumen from Imperial Oil’s well-established Cold Lake heavy oil project has fetched an average of 51 percent of WTI prices over seven years.
In the meantime, the Alberta Securities Commission is concerned that there are no formal guidelines in the province for evaluating bitumen reserves.
David Elliott, senior petroleum evaluation geologist with the commission, told a Calgary conference in October that the regulator needs help from the industry to develop guidelines.
For now, the commission is “flying by the seat of our pants,” he conceded.
Elliott said separate committees are grappling with three unconventional areas — in-situ bitumen, mined bitumen and coalbed methane — but recommendations on guidelines are a long way off.
Until then the commission endeavors to make sure disclosure documents, such as a prospectus, answer the needs of investors and contain explanatory information, he said. Canadian standards force caution On another front, various industry experts say Canadian standards for disclosure of oil and gas activities adopted two years ago have forced independent engineers to become too cautious in evaluating reserves.
John Wright, president of Petrobank Energy and Resources, told the conference board meeting that there is a “huge disconnect” between published evaluations and the value investors attach to those assets.
He said there is a danger of costly reserve reports missing the mark in establishing a true value of shareholder investments, just to satisfy regulators.
Chris Slubicki, senior managing director with Scotia Waterhouse, estimated that engineering audit evaluations have fallen in the range of 65-95 percent of actual market value, partly because engineering consultants have to meet tight deadlines and because market evaluations are a fast-moving target.
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