THE NEW YORK TIMES: S.E.C. Urged to Update Rules for Reporting Oil Reserves: “The report was financed by a consortium of about 30 oil companies, law firms, petroleum auditors, investment groups and accounting firms.”: “Confidence in the industry was shaken last year when Royal Dutch/Shell Group cut its proven reserves, prompting an investigation by the S.E.C., the dismissal of three top company officials and an overhaul of Shell's century-old structure. In the last year, Shell has lowered its proven reserves level by a third, or 5.8 billion barrels, from where they stood at the end of 2002. The most recent cut, earlier this month, came after Shell retrained 3,000 staff members to follow S.E.C. guidelines. The restatement will cut $700 million from Shell's earnings from 2000 to 2004.” (ShellNews.net) Posted 25 Feb 05

By JAD MOUAWAD

With oil companies facing increased scrutiny over how they account for their underground assets, one of the industry's most prominent research firms said that the rules governing how companies disclose their oil and gas reserves should be rewritten to reflect changes in the last three decades.

Daniel Yergin, chairman of Cambridge Energy Research Associates, said that the Security and Exchange Commission guidelines used by exploration companies to report their oil and gas reserves - among the most important indicators of the industry's health - fail to provide an accurate picture of an exploration company's assets.

"It's clear that there is a growing gap between the system for disclosure of reserves and the realities of the industry," said Mr. Yergin. "The current system doesn't do the job of conveying the information it claims to be conveying."

The oil industry will need as much as $6 trillion over the next 25 years to finance oil and gas projects and meet growing consumption, the report said. "Maintaining the confidence of financial markets will be a key to gaining access to these funds, according to the 121-page report, titled "In Search of Reasonable Certainty: Oil and Gas Reserves Disclosure."

The report was financed by a consortium of about 30 oil companies, law firms, petroleum auditors, investment groups and accounting firms.

The S.E.C. guidelines, which have been in effect since 1978, were drafted at a time when governments set the price of oil. They originally applied to companies with public filings in the United States but have progressively become the industry norm. They preceded the huge leaps in technology that allow current deep-water drilling.

Under the current guidelines, oil companies must disclose their proven reserves based on the standard of "reasonable certainty." But the guidelines have become too narrow because they fail to include advances in technology that were not foreseen three decades ago, like drilling below 10,000 feet of water, according to Cambridge Energy. It also said that nontraditional sources of oil like oil sands or gas-to-liquids and deep-water projects, which provide a growing source of oil, are not accounted for properly.

The report also said the S.E.C. should split its functions of drafting rules and monitoring their compliance. Confidence in the industry was shaken last year when Royal Dutch/Shell Group cut its proven reserves, prompting an investigation by the S.E.C., the dismissal of three top company officials and an overhaul of Shell's century-old structure. In the last year, Shell has lowered its proven reserves level by a third, or 5.8 billion barrels, from where they stood at the end of 2002.

The most recent cut, earlier this month, came after Shell retrained 3,000 staff members to follow S.E.C. guidelines. The restatement will cut $700 million from Shell's earnings from 2000 to 2004.

A company's reserves is a major indicator for investors providing them with a snapshot of performance. But according to Mr. Yergin, "It is a crucial misunderstanding to think of oil and gas reserves as being similar to inventory or a company's cash balances."

"Accounting for reserves is not like walking into a warehouse and counting the barrels," he added. Asked about the study, an S.E.C. spokesman, John Heine, said, "We will read the report with interest but have no immediate comment."

http://www.nytimes.com/2005/02/24/business/24reserves.html