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25266SEC inquiry on oil reserves is heads-up to industry

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  • Brett J. Mitchell
    Nov 16, 2002

      HoustonChronicle.com -- http://www.HoustonChronicle.com | Section: Business

      Nov. 12, 2002, 11:20PM

      SEC inquiry on oil reserves is heads-up to industry

      Reuters News Service

      A letter from U.S. securities regulators quizzing Gulf of Mexico oil and
      gas producers about their accounting for proven reserves is prompting
      industry fears that the SEC's corporate accountability push is reaching the
      Oil Patch.

      The Securities and Exchange Commission's corporation finance division sent
      the Oct. 1 letter to nearly every oil and gas producer operating in the
      Gulf of Mexico.

      It asks the producers to furnish information about how they assessed their
      proven reserves before booking them in their financial statements. The
      query links calculations that are ordinarily the province of petroleum
      engineers to the arena of financial disclosure, because reserves are the
      asset most producers have.

      In the current post-Enron era of stringent scrutiny of financial
      statements, it made waves in the exploration and production industry.

      "The overall reaction has been to take it very seriously," said Thomas
      Gardner, a petroleum engineer with Houston-based Ryder Scott, an oil
      consultancy specializing in the evaluation of reserves. "I know of one
      supermajor where the letter went all the way to the CEO."

      Proven reserves are a measurement of the oil and gas a producer has shown,
      via testing, to have in the ground. As such, it is a critical part of an
      exploration and production company's financial statements.

      "Apache is conservative about booking reserves," said Bill Mintz, a
      spokesman for the Houston company. "All of our operations are in mature
      not frontier."

      One executive at a Houston-based producer, who asked not to be identified,
      said most companies employ conservative estimates and have little to
      worry about. Nonetheless, they don't want to run afoul of the SEC in the
      current climate.

      "It's kind of a scattershot thing to check people's reserves in the Gulf of
      Mexico to see if they were booked without a flow test," the executive said.

      Under an SEC rule developed in 1978, the only way to prove reserves for
      financial reporting purposes is by a flow test. The expensive procedure
      requires a producer to tap a well and let some of its contents flow to the
      surface to prove what is inside. Gardner said the cost, especially for
      deep-water wells of 1,000 feet or more, can be in the tens of millions of

      Newer technology allows petroleum engineers to instead assess reserves
      using a combination of procedures that are generally undertaken in the
      stages of looking at a well's potential.

      "A combination of data can give you the same information as a flow test,"
      Gardner said.

      He added that only about 15 percent of deep-water wells were flow-tested in
      the past five years.

      Therein lies the disconnect between the SEC's rule and industry practice,
      Gardner said.

      The letter appears not to be part of an enforcement action, but rather part
      of the SEC's continuing campaign of ensuring greater clarity in financial

      "Please understand that the purpose of our review process is to assist you
      in your compliance with the applicable disclosure requirements and to
      enhance the overall disclosure in your filing," the letter said.

      The SEC's request caused a number of producers to turn to outside
      consultants like Ryder Scott to independently evaluate their reserves --
      which is
      not a financial reporting requirement but is encouraged by some on Wall
      Street. Banks issuing credit to producers sometimes require independent

      Chronicle reporter Michael Davis contributed to this report.

      We have gas logs.

      Dr. Michael A. Olivas.
      Learning. Leading.

      Put down the hammer and

      pick up the phone.

      HoustonChronicle.com -- http://www.HoustonChronicle.com | Section: Business
      This article is: http://www.chron.com/cs/CDA/story.hts/business/1659418