Oil industry urges overhaul of SEC reserve rules

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The Independent Online

Sweeping changes in the rules laid down by the US Securities and Exchange Commission for determining the levels of reserves that oil companies can book as proven were called for yesterday in a report funded by the industry.

Sweeping changes in the rules laid down by the US Securities and Exchange Commission for determining the levels of reserves that oil companies can book as proven were called for yesterday in a report funded by the industry.

The report, paid for by the world's oil majors and produced by Cambridge Energy Research Associates (Cera), an independent and well-respected US consultancy, said the SEC's system was outdated, unnecessarily conservative and unrealistic as a measure of future production.

The SEC's rules, which date back nearly 30 years, have been at the centre of attention since Shell was forced to unbook a third of its proven reserves last year. It subsequently fired its chairman Sir Philip Watts and agreed to pay £83m in fines to the SEC and the UK's Financial Services Authority for misleading investors.

Daniel Yergin, the chairman of Cera and one of the two authors of the report, said: "The system of reserve reporting in the United States is in urgent need of modernisation. It is increasingly at odds with the realities of the oil and gas industry." Mr Yergin added that Cera called it the "1978 system because that's basically when it was fashioned and it doesn't fit the oil and gas industry of the 2000s".

One of the report's main recommendations is that the SEC overhauls its year-end pricing rule which affects how many barrels of proved reserves western oil companies can book through production sharing agreements with national governments and oil corporations.

Changes in the price of oil can produce sharp spikes in volume of proved reserves that companies are allowed to book under these agreements, even though the amount of oil in the ground remains unchanged.

On the SEC's more rigorous benchmark, BP replaced only 89 per cent of the oil it pumped last year, while Shell's replacement ratio plummeted to below 40 per cent. One suggestion is that year-end pricing is replaced by a rolling 10-year price average to smooth out fluctuations in reported reserves.

Oil companies generally only classify reserves as proven once they have sanctioned the investment necessary to exploit those resources. But the SEC does not accept this approach as sufficient to class reserves as proven.

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