White & Case LLP - News - SEC Proposes Modernization of the Oil and Gas Reporting Requirements

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SEC Proposes Modernization of the Oil and Gas Reporting Requirements
August 7, 2008

Securities partner Kevin Keogh spoke with SNL Energy on July 31 about the SEC's proposed revisions to oil and gas reporting requirements, why the SEC has proposed these changes, what the changes mean for shareholders of oil and gas companies, how the new rules compare to the rules in Canada and other countries, and how the industry should classify reserves that cannot make it to the market.

SNL Energy: How would the proposed changes to reporting requirements benefit oil and gas companies?

Kevin Keogh: The proposed changes in the way companies disclose reserves when they file SEC reports are basically being modernized to reflect current industry practices and technological changes in the oil and gas industry. By aligning these reporting requirements more closely with the petroleum resources management system that most companies use to establish their range of reserve categories, the SEC reporting rules will be more aligned with what the industry really does. And that's a great benefit to companies, particularly providing information that their investors really want to see. I would also like to mention that bringing these US rules in line with, particularly the rules that have been in effect in the last five years in Canada, will make it easier for multinational companies to report in the several jurisdictions that they have to report in.

SNL Energy: How do you think shareholder advocates will respond to the inclusion of estimated probable and possible reserves with proved reserves in the proposed reporting requirements?

Kevin Keogh: A number of institutional investors, in particular, like to see that kind of information, especially with probable reserves and possible reserves even though they have a much lower possibility of recovery, and because it gives investors a broader picture going forward of what the reserve and production picture might be.

SNL Energy: It's been 25 years since the reporting requirements have been updated. What sparked the proposed revisions? Has the recent shale boom played any role?

Kevin Keogh: The trigger for this set of proposed revisions was a series of concerns expressed at a roundtable that US reporting standards were so out of line with what other countries were requiring for companies whose shares were listed in those countries. The United States was really behind the times. Another concern was that companies were being asked to furnish this broader range of reserve information to private placement investors and to possible merger candidates when they could not disclose it publicly in the United States. That started to create some concerns about selective disclosure.

The third is a recognition that oil and gas production is coming from nonconventional sources now. Shale is one of those for sure. Oil tar sands may eventually be a source of production. But even now we've got coal resources being used to produce fuels other than coal. So, there was a need to get away from the SEC's traditional position. The 25-year-old rules basically say the only way you can be certain that you have a proved reserve is to report production from a well or to use a flow test from a well and that doesn't match any of the nonconventional sources of energy. So, shale and other areas are part of the trigger for this kind of reporting.

And I think the fourth is a general convergence of US reporting standards with international reporting standards for public companies. The SEC is acknowledging that non-US oil and gas reserves reporting rules are equally good, in fact better than existing US rules.

SNL Energy: If the proposed rules are approved, what will it mean for oil and gas companies?

Kevin Keogh: In part it will mean that they have more work to do because along with these new modernized rules comes requirements for much more detailed tabular reporting of reserves, including some new kinds of reports that companies haven't published in the past. So, it will be additional reporting. On the other hand, it is information that investors have said they wanted to see.

The second aspect is that along with these modernized rules the SEC is proposing to require companies to identify who it is that prepared the reserve report. And if it is an independent petroleum engineer, there will be a requirement that the engineer's report be filed as an exhibit to the oil and gas company's annual report. I think that's going to be quite controversial because independent petroleum engineers have never had to publish their reports before and filing it with the SEC will be perceived as potential for securities law liability.

SNL Energy: Are there any negatives or repercussions that come with the proposed reporting requirements?

Kevin Keogh: I think some smaller companies will also complain that the expanded tabular reporting of both reserves and exploration — you have to report the number of wells drilled, number of dry holes — that they haven't publicly reported before. That's going to burdensome. I don't think that burden is going to be very persuasive to the SEC.

SNL Energy: How will the reserves that can't make it to the market because of lack of existing pipeline infrastructure be assessed?

Kevin Keogh: Those certainly will not qualify as proved reserves under the new rules. Proved reserves will now require the availability of all the necessary infrastructure as well as the reserve measurement in order to call them proved reserves. The words that the SEC uses are, "There has to be an installed method of delivering the oil, gas or related substances to markets." They clearly are not going to be able to count that as proved reserves. It may be that those reserves would get into the category of what we would call possible reserves. That is, they're additional reserves as to which there is at least a 10% probability that those total quantities will be produced and delivered because they depend on the construction of a delivery system. But those possible reserves are getting down to the lowest category that the SEC will prevent reporting for.

SNL Energy: How will the proposed reporting requirements be more in line with reporting regimes of other countries?

Kevin Keogh: This SEC proposal borrows very heavily from the Canadian rules. There are some differences. There are differences in some evaluation measurements and definitions. It is interesting that they took the Canadian rules that have been in effect for five years in Canada and said, "Here's a country and security administrators that deal with oil and gas companies all the time and these rules look pretty good to us."

SNL Energy: If approved, what will the new rules mean for practices like White & Case?

Kevin Keogh: We are such a global law firm that we are constantly dealing with multinational securities offerings. And with non-US companies who have to report to the SEC because their shares trade here, this will really make it somewhat easier to do cross-border financing. It will also make it easier for non-US companies to comply with their US reporting obligations because they will be able to use one fairly consistent set of disclosure rules worldwide.

To give you an example, when we do financing in the United States for a Canadian company, so let's say it's a public company in Canada and in the United States, we use their Canadian reporting documents as part of the prospectus. And right now we have to put a great big warning on them that says, "The reserves that are reported by this company are required to be reported in Canada and prohibited from being reported in the United States. Therefore you may not rely on those. Nonetheless, we're required to deliver them to you so here they are." So, now we get rid of all that and can have one uniform set of reporting standards and that's going to ease capital formation for oil and gas companies.

For more information please follow the links below:

Click here for information about the White & Case Capital Markets / Securities team
Click here for Mr. Keogh's detailed professional biography

"Talking" features White & Case lawyers answering questions about emerging legal and business issues. For more information or to schedule an interview with Kevin Keogh, contact Reilly Starr at rstarr@whitecase.com.

Any information contained in this interview is for educational purposes only. It should not be construed as legal advice.

	In the Media
Expertise Canada Capital Markets	SEC Proposes Modernization of the Oil and Gas Reporting Requirements August 7, 2008 Securities partner Kevin Keogh spoke with SNL Energy on July 31 about the SEC's proposed revisions to oil and gas reporting requirements, why the SEC has proposed these changes, what the changes mean for shareholders of oil and gas companies, how the new rules compare to the rules in Canada and other countries, and how the industry should classify reserves that cannot make it to the market. SNL Energy: How would the proposed changes to reporting requirements benefit oil and gas companies? Kevin Keogh: The proposed changes in the way companies disclose reserves when they file SEC reports are basically being modernized to reflect current industry practices and technological changes in the oil and gas industry. By aligning these reporting requirements more closely with the petroleum resources management system that most companies use to establish their range of reserve categories, the SEC reporting rules will be more aligned with what the industry really does. And that's a great benefit to companies, particularly providing information that their investors really want to see. I would also like to mention that bringing these US rules in line with, particularly the rules that have been in effect in the last five years in Canada, will make it easier for multinational companies to report in the several jurisdictions that they have to report in. SNL Energy: How do you think shareholder advocates will respond to the inclusion of estimated probable and possible reserves with proved reserves in the proposed reporting requirements? Kevin Keogh: A number of institutional investors, in particular, like to see that kind of information, especially with probable reserves and possible reserves even though they have a much lower possibility of recovery, and because it gives investors a broader picture going forward of what the reserve and production picture might be. SNL Energy: It's been 25 years since the reporting requirements have been updated. What sparked the proposed revisions? Has the recent shale boom played any role? Kevin Keogh: The trigger for this set of proposed revisions was a series of concerns expressed at a roundtable that US reporting standards were so out of line with what other countries were requiring for companies whose shares were listed in those countries. The United States was really behind the times. Another concern was that companies were being asked to furnish this broader range of reserve information to private placement investors and to possible merger candidates when they could not disclose it publicly in the United States. That started to create some concerns about selective disclosure. The third is a recognition that oil and gas production is coming from nonconventional sources now. Shale is one of those for sure. Oil tar sands may eventually be a source of production. But even now we've got coal resources being used to produce fuels other than coal. So, there was a need to get away from the SEC's traditional position. The 25-year-old rules basically say the only way you can be certain that you have a proved reserve is to report production from a well or to use a flow test from a well and that doesn't match any of the nonconventional sources of energy. So, shale and other areas are part of the trigger for this kind of reporting. And I think the fourth is a general convergence of US reporting standards with international reporting standards for public companies. The SEC is acknowledging that non-US oil and gas reserves reporting rules are equally good, in fact better than existing US rules. SNL Energy: If the proposed rules are approved, what will it mean for oil and gas companies? Kevin Keogh: In part it will mean that they have more work to do because along with these new modernized rules comes requirements for much more detailed tabular reporting of reserves, including some new kinds of reports that companies haven't published in the past. So, it will be additional reporting. On the other hand, it is information that investors have said they wanted to see. The second aspect is that along with these modernized rules the SEC is proposing to require companies to identify who it is that prepared the reserve report. And if it is an independent petroleum engineer, there will be a requirement that the engineer's report be filed as an exhibit to the oil and gas company's annual report. I think that's going to be quite controversial because independent petroleum engineers have never had to publish their reports before and filing it with the SEC will be perceived as potential for securities law liability. SNL Energy: Are there any negatives or repercussions that come with the proposed reporting requirements? Kevin Keogh: I think some smaller companies will also complain that the expanded tabular reporting of both reserves and exploration — you have to report the number of wells drilled, number of dry holes — that they haven't publicly reported before. That's going to burdensome. I don't think that burden is going to be very persuasive to the SEC. SNL Energy: How will the reserves that can't make it to the market because of lack of existing pipeline infrastructure be assessed? Kevin Keogh: Those certainly will not qualify as proved reserves under the new rules. Proved reserves will now require the availability of all the necessary infrastructure as well as the reserve measurement in order to call them proved reserves. The words that the SEC uses are, "There has to be an installed method of delivering the oil, gas or related substances to markets." They clearly are not going to be able to count that as proved reserves. It may be that those reserves would get into the category of what we would call possible reserves. That is, they're additional reserves as to which there is at least a 10% probability that those total quantities will be produced and delivered because they depend on the construction of a delivery system. But those possible reserves are getting down to the lowest category that the SEC will prevent reporting for. SNL Energy: How will the proposed reporting requirements be more in line with reporting regimes of other countries? Kevin Keogh: This SEC proposal borrows very heavily from the Canadian rules. There are some differences. There are differences in some evaluation measurements and definitions. It is interesting that they took the Canadian rules that have been in effect for five years in Canada and said, "Here's a country and security administrators that deal with oil and gas companies all the time and these rules look pretty good to us." SNL Energy: If approved, what will the new rules mean for practices like White & Case? Kevin Keogh: We are such a global law firm that we are constantly dealing with multinational securities offerings. And with non-US companies who have to report to the SEC because their shares trade here, this will really make it somewhat easier to do cross-border financing. It will also make it easier for non-US companies to comply with their US reporting obligations because they will be able to use one fairly consistent set of disclosure rules worldwide. To give you an example, when we do financing in the United States for a Canadian company, so let's say it's a public company in Canada and in the United States, we use their Canadian reporting documents as part of the prospectus. And right now we have to put a great big warning on them that says, "The reserves that are reported by this company are required to be reported in Canada and prohibited from being reported in the United States. Therefore you may not rely on those. Nonetheless, we're required to deliver them to you so here they are." So, now we get rid of all that and can have one uniform set of reporting standards and that's going to ease capital formation for oil and gas companies. For more information please follow the links below: Click here for information about the White & Case Capital Markets / Securities team Click here for Mr. Keogh's detailed professional biography "Talking" features White & Case lawyers answering questions about emerging legal and business issues. For more information or to schedule an interview with Kevin Keogh, contact Reilly Starr at rstarr@whitecase.com. Any information contained in this interview is for educational purposes only. It should not be construed as legal advice.