Update: The Forthcoming Dramatic Fall of Reported Oil Reserves

Michael Giberson

A week ago I wrote, “The forthcoming dramatic fall of reported oil reserves is due to falling prices and reporting requirements, not ‘peak oil’ or the manipulations of greedy industry executives.” However, as this Associated Press story reports, yesterday the Securities and Exchange Commission adopted proposed changes to reporting requirements that will have the effect of reducing the effects of price volatility on reserves reported.

An SEC press release is available, but as of Tuesday morning the full text of the new regulations were not available on the SEC website.

According to the AP article the new rules will:

• Allow companies to use new technologies to determine proven oil and gas reserves provided the technologies have been shown to lead to reliable assessments.
• Allow companies to disclose their probable and possible reserves to investors. Until now, SEC rules limited disclosure only to proved reserves.
• Require companies to report oil and natural gas reserves using an average price based on the prior 12-month period rather than year-end prices.
• Require companies to certify the independence of petroleum auditors that audit their assessments of reserves.

The third item is the key to reducing the effects of price volatility on officially reported reserves.

The effect of price volatility on reserves can be reduced, but not eliminated, because the price of oil is one factor that determines how much of the oil in the ground will likely be economically producible (cost of production being the other main factor).  A prior twelve-month average of prices is not necessarily the best estimate for a company to use in its own internal evaluation of expected reserves – the company may have reasons to believe it can do better in pulling oil from the ground (or will do worse) than the amount indicated by using the twelve-month average price. But for financial reporting purposes it is important to have a standard and not too volatile measure.