Recent Changes in SEC Regulations 

In December 2008, the U.S. Securities and Exchange Commission (SEC) approved a new set of regulations to govern company reporting of oil and natural gas reserves and production. The new regulations are expected to become effective as of January 1, 2010. They are intended to bring company reporting to the SEC in line with current industry realities by expanding: the range of technologies recognized for proving reserves, to include seismic and other “reliable” modern technologies; the types of production reported, to include unconventional liquids, such as bitumen and shale oil; and the levels of certainty about reserve estimates, to include “probable” and “possible” as well as “proven.” 

In addition, the new regulations require companies to use average of start-of-month prices for each month of the year in calculating year-end reserves, rather than the previous practice of using price only as of December 31—which did not account for volatility in oil and natural gas prices or potential differences between the yearly average price and the price on a single day (December 31). The new pricing methodology is important for reserve reporting, because reserves, by definition, must be economical to produce. The previous practice of using one day’s price to estimate company reserves had the undesirable effect of transforming the volatility of oil and natural gas prices into volatility of reserve estimates.