SEC Seeks Comment on Potential Revisions to Oil and Gas Reserve Disclosure Requirements

Securities Law Update

December 19, 2007

The Securities and Exchange Commission is seeking public comment on possible revisions to its disclosure requirements for oil and gas reserves.  In its concept release, the SEC notes that significant technological advances have been made in the detection and extraction of oil and gas resources since the current disclosure rules were adopted nearly 30 years ago.  The concept release points to concerns that disclosures under the current rules may not provide investors the most useful information on oil and gas reserves. 

The request for comment provides an important opportunity for industry participants to influence the SEC's disclosure rules in this area.  Any new rules adopted by the SEC following this comment process could significantly alter the manner in which oil and gas producers are required or permitted to make disclosures regarding their oil and gas reserves.  Interested parties will have 60 days following publication of the concept release in the Federal Register to submit comments.

Background

The SEC's current rules, adopted between 1978 and 1982, establish financial and reporting standards for businesses engaged in oil and gas producing activities.  Among other matters, the rules define what constitutes proved reserves, require that oil and gas producers disclose their proved reserves and prohibit them from disclosing other categories of reserves.

Since these rules were adopted, the oil and gas industry has experienced significant technological advancements in the exploration for and identification of reserves (including 3-D and 4-D seismic interpretation), major changes in the oil and gas markets and important developments in the types of projects in which companies invest.  Many in the oil and gas industry, including some businesses, professional organizations and analysts, are concerned that current reserves disclosure requirements have not kept pace with these changes.  For example, the current rules set high standards of certainty of recoverability and marketability for reserves to be classified as proved reserves and bar a proved reserve classification of other reserves that may be identified or recovered using new technology.

Similarly, the definitions used by the SEC to classify reserves have not changed since 1978, although the Society of Petroleum Engineers classification framework on which those definitions were based has been updated several times, including as recently as February 2007.

Critics have suggested that the current rules prevent investors from obtaining full, accurate information on oil and gas companies and do not allow company management to clearly present their rationale for oil and gas projects. 

Comments Requested

In view of these industry changes and criticisms, the SEC is reconsidering its disclosure standards for oil and gas reserves and is seeking input from the public regarding whether and how these standards should be revised.  Specifically, the concept release requests comments on the following questions:

• Should the SEC replace its current, rules-based disclosure requirements with a principles-based system and, if so, what principles should the SEC consider?
• Should the SEC consider allowing companies to disclose reserves other than proved reserves in SEC filings?  If so, what types of reserves should the SEC consider?
• Should the SEC adopt all or part of the Society of Petroleum Engineers’ Petroleum Resource Management System?  Are there other classification systems the SEC should consider?
• Should the SEC revise the current definitions of proved reserves, proved developed reserves and proved undeveloped reserves?
• Should the SEC specify the tests required to estimate reserves or the data required to support reserve conclusions?
• Should the SEC reconsider the concepts of "reasonable certainty", "certainty" with respect to proved undeveloped reserves, "economic producibility" and "existing operating conditions"?
• Should the SEC require the use of a sale price in estimating reserves and, if so, what should be the basis of that price framework?
• Should the SEC eliminate current exclusions from the definitions of proved reserves and oil and gas activities or eliminate the restrictions on including reserves from sources that require further processing (e.g., tar sands)?
• What aspects of technology should the SEC consider in evaluating a disclosure framework?  Is it possible to establish a disclosure framework that accommodates technological advances?
• Should the SEC require an independent third party evaluation of reserves estimates made in SEC filings?

The SEC is also seeking comment on any other issues relating to oil and gas reserves disclosure requirements that interested parties may wish to address.