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SEC ordered to use emergency powers to immediately curb excessive market speculation

The Wall Street Journal Home Page

SEC Proposes Change In Oil, Gas Reporting

By KARA SCANNELL and SIOBHAN HUGHES in Washington, RUSSELL GOLD in Austin, Texas, and BEN CASSELMAN in Dallas

June 27, 2008; Page A14

The Securities and Exchange Commission proposed allowing oil and gas companies to include in regulatory filings additional information about their reserve inventories, a measure analysts and investors use to gauge a company’s prospects.

If adopted, the change proposed Thursday would increase reserves results at a time when they have been on the decline. The SEC plan would allow oil and gas companies to include previously excluded sources of oil, such as tar sands, and disclose “probable and possible” reserves, not just those proven to exist. It will also permit companies to use newer technology to calculate their proven reserves.

The SEC’s move came as the House voted by a wide margin to order the nation’s energy-market regulator to use its emergency powers to immediately curb excessive market speculation. As crude-oil prices hit a record above $140 a barrel and OPEC’s president said they could climb above $150, the House voted 402-19 for a bill that calls on the Commodity Futures Trading Commission to more-aggressively police the energy markets it oversees.

The lopsided vote reflects lawmakers’ anxiety about oil prices and signaled that members of both parties want the CFTC to step up its review of whether speculation is contributing to rising prices. The bill faces opposition in the Senate and possibly a presidential veto.

Meanwhile, the SEC proposal would let oil companies speak more openly to investors about oil they believe they control but have not yet proven. The companies have long argued that such changes would show their reserves have been growing.

Many smaller oil companies have found new ways of accessing vast resources, particularly of natural gas, that had been too difficult or too expensive to reach. But because the fields and the technologies are so new, much of that gas does not show up in their regulatory filings.

The SEC said it proposed the changes “to help provide investors with a more accurate and useful picture of the oil and gas reserves that a company holds,” and reflects “significant changes” in the industry, according to a statement.

The recommendations, which would become final after a 60-day comment period and second SEC vote, have long been sought by the industry. Big Oil for years has complained that the rules are outdated and do not reflect technological and other changes that more accurately reflect supply pipelines.

Smaller companies have argued that rules that worked for conventional oil and natural-gas resources make little sense in the new shale plays that have emerged in North America. That’s because the new fields are much less risky; companies rarely drill “dry holes.”

It is not clear how the new rule would affect oil companies’ share prices. Many companies already routinely tell analysts and investors about their unproved resources, although they must include a disclaimer saying they are not considered reserves by SEC standards.

Some companies have found other ways to report the information. Exxon Mobil Corp, for instance, already reports what it calls its “resource base,” which, effectively, are probable and possible reserves in addition to its proved reserves. This year, it reported 72 billion barrels of oil equivalent resource base and only 22.7 billion barrels of oil equivalent proved reserves.

Ralph Eads, chairman of Jefferies Randall & Dewey, the energy unit of investment bank Jefferies & Co, said investors already value companies based on unproved reserves but are doing so based on incomplete information that varies from company to company. “I think it could have an impact on share price, because it’s going to bring standardization to the process,” he said.

In addition, the SEC, responding to industry concerns over swings in financial statements year over year, is considering requiring companies to determine whether their reserves are “economically recoverable” based on average oil and gas prices over the prior 12-month period rather than year-end prices. And it proposed requiring companies to report the independence and qualifications of auditors or other preparers based on criteria published by the Society of Petroleum Engineers, as well as requiring companies to file reports when they use third-parties to either conduct an audit of reserves or prepare reserves estimates.

Write to Kara Scannell at [email protected], Siobhan Hughes at[email protected], Russell Gold at [email protected] and Ben Casselman at[email protected] and its also non-profit sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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