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SEC Rules Force Inaccurate Estimates of Energy Reserves

February 8, 2006

Tags Interventionism

A new Cambridge Energy Research Associates (CERA) report proposes to let companies judge for themselves how many oil and gas reserves they have, as opposed to the current system whereby the Securities and Exchange Commission mandates the use of a strict formula. According to the oil and gas industry, the SEC's method "is archaic and arbitrary, and undercounts the amount of energy on tap for the future."

SEC rules are flawed in many respects. For instance, they prevent companies from claiming hundreds of millions of barrels of crude oil located in Canada's oil sands. In the past, this oil was considered too costly to extract, but recent high crude oil prices have made extraction profitable.

SEC rules have failed to take into account new technology that makes producing the oil profitable. Another senseless SEC rule requires energy companies to value project feasibility according to the market price of oil or natural gas as of December 31. On that arbitrary date, oil and gas prices may vary substantially from the annual average, causing profitability estimates to be inaccurate. CERA maintains that the annual average price is a better gauge of profitability.

According to the WSJ, the SEC has no intention of changing its rules for reserves accounting.

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