Speech by SEC Staff:
Opening Statement of the Division of Corporation Finance: Oil and Gas Concept Release
Mellissa Campbell Duru
Attorney-Adviser, Division of Corporation Finance
U.S. Securities and Exchange Commission
December 11, 2007
Thank you, John. Good morning Chairman Cox and Commissioners.
Today we are recommending that the Commission publish a concept release soliciting comment on the nature and extent of the public’s interest in the possible revision of current oil and gas reserves disclosure requirements.
Oil and gas companies are required to provide disclosure about their reserves in their filings with the Securities and Exchange Commission. The oil and gas reserves disclosure requirements exist in their current form in Rule 4-10 of Regulation S-X and Item 102 of Regulation S-K under the Securities Act of 1933 and the Securities Exchange Act of 1934. Under these rules, companies must include disclosure of their proved oil and gas reserves in their filings with us.
Proved reserves are the estimated quantities a company is reasonably certain it can recover from known reservoirs, based on geological and engineering data, assuming existing economic and operating conditions. Inherent in our application of the concept of reasonable certainty is the implication that, as more information about a reservoir becomes available, it is more likely than not that the additional data will confirm or enhance the company’s original estimate of the quantity it can ultimately recover. Our rules prescribe the types of tests a company must conduct in order to evaluate whether it can classify resources as proved reserves.
Although a company may categorize its reserves as proved, probable or possible, our rules prohibit companies from including any categories of reserves other than proved in their filings. This long-standing prohibition is based upon concerns that other categories of reserves are too speculative and too uncertain of realization and, therefore, may be confusing or misleading to investors.
Our rules, and the tests specified in them, have changed very little in the 30 years since the Commission adopted them. Technological advancements have made it easier for companies to identify buried reservoirs and estimate more accurately the amount of oil or gas in them. Computer simulation models assist companies in focusing their drilling activities. Technological innovation in drilling and extraction techniques has expanded the range of resources from which companies can recover petroleum economically. For example, using specialized extraction techniques, companies can now profitably extract oil from non-traditional resources such as tar sands and oil shales – resources our current rules prohibit companies from classifying as proved reserves.
We understand that many oil and gas companies would like the Commission to revise its definition of proved reserves. We understand that many industry participants are interested in a disclosure framework that would allow companies to disclose a broader range of reserves. We recommend that the Commission seek comment on this and invite input on how possible revisions to our current disclosure requirements can be flexible enough to accommodate future industry changes and innovation. Also, given industry concerns about the use of a single price on a specified date to estimate reserves, we recommend that the Commission seek input on whether we should reexamine the price companies must use in their reserves estimation procedures.
We recommend that the Commission invite input on how disclosure quality and reliability could be affected by possible changes to our reserves disclosure requirements. Finally, we recommend that the Commission seek comment on whether it should expand our rules to require independent third party verification of the reserves disclosure companies include in their filings with the SEC. We are interested in commenters’ views on whether this is feasible or necessary. We look forward to considering public views on this and the other important issues set forth in the concept release.