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FERC, Petroleum Institute Suggest Changes to Proposed Oil and Gas Reporting Requirements

The Federal Energy Regulatory Commission ("FERC") generally supports the SEC's proposed revisions to the oil and gas reporting requirements, but urged the Commission not to take the view that gas reserves are not proved if there is no infrastructure to move the gas to market currently in place. The American Petroleum Institute ("API"), which represents more than 400 companies in the oil and gas industry, was more critical of the proposals, calling the new disclosures "onerous in their scope" and saying they will require significant new training by API member companies.

The Commission issued the rule proposals in June based on comments it had received on a concept release on the issue. The proposed revisions are intended to modernize and update the oil and gas disclosure requirements under Regulations S-K and S-X to align them with current practices and changes in technology. The proposals include a new definition of "proved reserves" and changes to the criteria used to assess and measure those reserves.

FERC endorses the proposed revisions, and believes they provide a more accurate reflection of the reserves of natural gas that are contained in, and are being extracted from, non-traditional or unconventional sources, including shale deposits. However, the agency is concerned that the rule 4-10(a)(2) definition of proved oil and gas reserves may not reflect regulatory and industry practices that enable the timely construction of facilities necessary to gather, process and transport natural gas.

The proposed definition requires a company to be reasonably certain that gas reserves will be recoverable in the future in order to include them in their proved reserves calculations. The SEC believes that a company cannot be reasonably certain unless there is a means in place to transport gas from the wellhead to the market. FERC disagrees with this position.

FERC advised that the development of transportation infrastructure and the means to transport resources to the market can be developed relatively quickly. Between 2000 and 2008, the agency approved over 13,000 miles of natural gas pipeline, and nearly 11,000 miles of new pipeline went into service. In the shale area between Oklahoma and Alabama, FERC took only nine and one-half months to authorize the 506-mile Midcontinent Express project.

Based on this record of responsiveness to dynamic supply and market realities, the agency believes that inclusion of all proved reserves, whether connected or unconnected to a transporting pipeline, meets the stated threshold as provided in rule 4-10. FERC requested that the SEC no longer assume that a ready market for gas does not exist until a physical means to move the gas to market is in place. FERC proposed instead that the SEC presume that infrastructure can be authorized, constructed and placed into service within a period of time, and at a cost, that will allow for the transportation of gas reserves to market and the sale of those reserves at a competitive price.

API told the SEC that the proposed disclosure requirements require a degree of granularity not currently present in the industry's reporting and consolidation processes. Disclosures that go beyond what companies use to manage the business on a day-to-day basis are inherently excessive, the organization said.

API noted that the cost-benefit analysis section of the proposal estimates that the new rules will require an incremental effort of 35 hours per registrant. API believes the number is significantly understated and that for some member companies the incremental effort could be as high as 15,000 to 20,000 hours per company.

The trade organization said that some of the proposed disclosures are of little value to financial statement users, do not justify the high cost of implementation and can cause competitive damage to the disclosing company in some instances. The disclosures would likely make the U.S. financial markets and U.S. oil and gas companies less competitive internationally and would seem to be inconsistent with recent Commission efforts to reduce the complexity of the U.S. reporting system, API said.

The costliest feature of the proposals, according to API, is the requirement that reserves be calculated on two different bases, one using 12-month average prices for disclosure purposes and one using single-day, year-end prices for accounting purposes. This would double the required amount of recordkeeping, API noted, and would stretch the people, systems and governance processes of its member companies, which are already straining to meet the 60-day deadline for the annual report on Form 10-K. API strongly recommended that the SEC align accounting and disclosure requirements on the 12-month average price basis.