40 comments on New SEC Oil Accounting Rules
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40 comments on New SEC Oil Accounting Rules
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Thanks for posting that Gail,
I'm pretty pessimistic about the outcomes of this change. It really opens the door wide open for a ponzi scheme to develop in this industry. Essentially Madoff was reporting to his clients that they had nice sized deposits when in fact they weren't there. The Oil companies would now be allowed further latitude for valuing their reserve assets without having to prove that they truely exist. This leads to overvalued companies and the financial decisions that are made because of that.
While there may be some benefit if the companies stay in the spirit of the law with this new rule change, I can't say that I have much faith that they will. It's pretty well known that all the OPEC countries have overstated their reserves because it means more money to them. There's plenty of financial motivation for Oil companies to do the same.
I'm not a fan of this change at all.
TS
I told my husband at dinner about the new rule change (he teaches computer science, so is not really involved with this), and his reaction was much the same as yours. If a company does't have to actually prove that it can get the oil out, there is a lot more room for games-playing, especially when the oil is in very deep locations or other technologically challenging locations.
With more flexible rules, it is a lot easier to assume that if oil or gas can be seen with imaging techniques, it must be economically possible to get the oil out. The surprises come later, when one discovers the oil is mixed with a toxic substance that is difficult to remove, or reservoir pressure is very low, or some other unforeseen problem arises.
I've heard some very unfavorable opinions of the SEC's work, for instance in this FSN interview with Bud Burrell; also from Bud (pdf): Has Naked Shorting Gone So Far Out of Control, It Could Meltdown the Financial System? That was written in 2004, btw.
If a company does't have to actually prove that it can get the oil out, there is a lot more room for games-playing
Exactly. And with the American public becoming aware that the US only has ~3-4% of the world's oil supply, raising reserve levels (and announcing probable and possible reserves additionally) seems intended to give the US citizen a false sense of security that maybe the oil reserves in the US aren't declining like some of those kooks say.
If oil shale is somehow included in this rule change (as possible or probable, for example), then that would skew perceived reserves by such a margin as to completely bamboozle the average American.
I think your are right that the changes could act to bamboozle the average American. I hadn't thought about oil shale. It is hard to imagine how one could consider it to be economically recoverable.
you are correct, gail.
oil shale deposits would only be considered reserves if and when they are demonstrated to be economical to produce.
What is the basis for that statement? What price point would be used to determine if it were 'economical to produce'? Where in the rule change is this stated, especially in light of probable and possible reserves?
"Where in the rule change is this stated, especially in light of probable and possible reserves? "
this is not stated in the rule change, but is in the basic definition of proven reserves. wrt possible oil shale reserves i suppose someone could call them possible reserves, based upon estonia, but imo, that is even a stretch. i dont think anyone gives any credibility to possible reserves anyhow.