It is critical that the U.S. Securities and Exchange Commission begin clarifying new reserves-reporting rules for companies filing year-end disclosures. One hope is that this happens much sooner than later; if it doesn’t, we are all going to be in a little bit of a bind in the latter part of the year.

While the rules themselves are understandable, the finer points are not. The SEC’s 160-page “Modernization of Oil and Gas Reporting” allows average oil and gas prices to be used to calculate economic limits on reserves and estimated future production.

The SEC will also permit the reporting of unproved reserves and non-traditional reserves, such as mined bitumen, if the end product is petroleum.

The SEC will allow the use of modern technology to justify levels of certainty for categorizing reserves if these technologies produce consistent, repeatable results. The changes are fairly straightforward, maybe, as you’re looking at it from 10,000 feet. It’s not a question of if we can do it. The real question is whether we can do it in the manner that the SEC intended to be compliant. Until we get feedback from the SEC, we won’t know its intent.

Ryder Scott has formulated interpretive positions on some of the more complex issues and submitted questions to the SEC for clarification but, at this time, the agency has not responded.

The SEC is under a tremendous strain right now with all of the industry throwing questions at it. We understand that it wants to formulate a good set of answers and it will supposedly post those answers on its website and give us instructions.

One issue involves the use of technology to justify reserves bookings. The SEC wants reliable technology to have a repeatable, consistent track record and widespread use in a given area. The SEC did not adopt a bright-line 90% test for that technology as proposed in the concept document.

So what does that mean to the SEC? Does that now mean that three out of five is okay? Seven out of 10? We don’t know what threshold they will set for this until there are some rulings in regard to that.

Ultimately, the SEC will have to deal with each one of the issues on a case-by-case basis.

--Don Roesle

About the author: Don Roesle is chief executive officer of reservoir-analysis firm Ryder Scott, and has been with the firm since 1975. A registered professional engineer, he received his master’s in petroleum engineering from the University of Texas in 1973. He is a co-author of “Evolution to principles-based reserves reporting: New SEC rules require strategic direction,” published by PricewaterhouseCoopers. Roesle can be contacted at 713-651-9191 and Click here for a full report on Ryder Scott’s May 2009 annual reserves conference: The Ryder Scott Newsletter, June-Aug, 2009 ryderscottnewsletterjune-aug09.