FINANCIAL TIMES: US stands alone on oil reserves rule: “Daniel Yergin, Cera's chairman, says there is "a compelling case for modernising the [SEC] system" to improve transparency and win back investor confidence in a system dented by the huge downgrades at Royal Dutch/Shell and El Paso.” (ShellNews.net) 24 Feb 05

By Doug Cameron

Published: February 24 2005

Canada's oil sands have attracted billions of dollars in investment from companies eager to develop energy resources which are estimated to exceed those of Saudi Arabia. But not a drop appears in the annual reserve reports prepared for US regulators.

Millions of barrels of oil from related bitumen deposits also "disappeared" from companies' 2004 reports after a slide in prices last December deemed them uneconomic under the guidelines imposed by the Securities and Exchange Commission.

The subsequent rebound in bitumen prices, and the appearance of oil sand-derived gasoline on US roads, highlight what many in the industry believe to be outdated SEC rules.

The industry-sponsored critique from Cambridge Energy Research Associates, published yesterday, highlights how the oil and gas sector has changed since the rules adopted in 1978 were formulated.

New technologies - such as deep water drilling and 3-D seismic mapping of underground reserves - have opened up regions of the world for exploration and development at far lower cost than before. The industry also argues that the same techniques have made the art, not the science, of estimating economic oil and gas reserves more accurate.

Investment decisions on the ever-expanding number of projects costing from $1bn to as much as $9bn are made on the basis that while companies can't see or touch the resources, yet, they are pretty sure they are there.

The two Canadian examples highlight the disparity between US practice and that in other jurisdictions such as the UK, or standards promoted by other bodies, such as the Society of Petroleum Engineers.

The SEC is alone in barring oil sands from inclusion in reserves, and in using year-end pricing to calculate the reserves estimate.

Cera, and others, argue that using a snapshot price distorts the true picture of a company's resources. Investment decisions are made using internal planning prices and assumptions. Moreover, the SEC's stricter criteria for booking reserves from more difficult terrain impact different companies in different ways and make them more difficult to compare. But the industry debate on reserves accounting which Cera has called for also promises to raise more deep-rooted concerns about reserves measurement and accounting. The outcome could prove crucial in determining whether the industry can access the estimated $4,000bn-$6,000bn in investment needed to match production with expected demand growth over the next 25 years.

The SEC rules basically require companies to shuffle reserves between the proved basket economically viable at a given price and the possible, calculated using their own best estimates.

One Wall Street analyst said the definitions of proved and possible measures between different companies "are all over the place" because of the different methodologies they employ.

Ron Harrell, chairman of Ryder Scott, an engineering consultant, says he was "exasperated" at the differences uncovered when examining reserve reports from the 50-plus producers which his company audits.

Mr Harrell believes the companies are partly to blame by cutting training budgets when oil prices were low for the engineers and geophysicists who estimate what lies underground. Moreover, he says there has been an over-reliance on new technology in calculating reserves.

Daniel Yergin, Cera's chairman, says there is "a compelling case for modernising the [SEC] system" to improve transparency and win back investor confidence in a system dented by the huge downgrades at Royal Dutch/Shell and El Paso.

He supports the use of reserve measures which best fit the project, encompassing direct measurement where possible and probabilistic techniques based on new technology. "Companies are going ahead and investing billions of dollars based on indirect methods [of assessing reserves]," he says.