13 comments on New SEC Concept Floated to Change Way E&P Companies Book Reserves
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I'm not sure I would call what was posted today a "rule". The SEC calls it a "Concept Release", and it reads like a document intended to start discussion, rather than proposed rule.
The discussion in the concept release indicates that the SEC is considering liberalizing what can be counted as reserves. If SEC does make a change, there will be a period of discontinuity, at the time the reserve definition is changed.
Apart from the transition issue, I don't see a problem with the idea of changing the reserve definition. The current method is strange, and does not correspond well to what other countries are doing. If there are big changes in the valuations of oil companies, it is because investors don't understand what the current reserves are measuring.
If a method can be developed that is an accurate reflection of the real 2P reserves, it would seem like it would be a step forward.
Its not a 'rule' but it seems like they are requesting feedback of sorts. I doubt firms will complain. So I see no reason why it won't come to pass - something like this was probably overdue - I just find it curious that its happening when banks lending practices are puckering.
Being the skeptic I am I suspect that under the old rules a lot of oil companies may have been facing big reserve write downs. By liberalizing the rules this right down of high quality but over estimated reserves is hidden in a large expansion of lower quality reserves. Generally these types of changes are initiated by the people affected by the changes in the first place not because of sudden enlightenment of the government. Whats probably important is that pressure to change the rules has not been significant till now.
I was expecting that we would see large write downs in the very near future but this move would hide this. So I find it very interesting.
So why was this not done in 1990 2000 etc etc if it was that bad ?