The U.S. Securities and Exchange Commission is looking at putting Alberta's oil sands reserves on the same footing as conventional crude oil, a move that could boost the value of the enormous resource.
The SEC will be reviewing rules – put in place nearly three decades ago when the oil sands were considered uneconomic – that prohibit companies from booking their bitumen resources as “proven crude reserves.”
Investors and industry analysts rely heavily on SEC documents for unvarnished reporting on corporate assets and potential. The changes being considered by the SEC would allow for “an apples-to-apples comparison” of North American oil companies and remove the uncertainty from oil sands reserves, said Justin Bouchard, a Calgary-based analyst at Raymond James Financial Inc.
“In Calgary, there is a group of concerned producers that has been trying to get the rules changed for quite a while,” Mr. Bouchard said. “It's pretty tough to get the word out [on your reserve base] if you can't recognize it on the books.”
While the U.S. Department of Energy recognized the oil sands proven reserves nearly five years ago, the U.S. securities regulator has taken a considerably more cautious approach. It requires oil companies, including such Canadian giants as EnCana Corp., Suncor Energy Inc. and Petro-Canada, to list their oil sands reserves as bitumen, and to book that resource based on a Dec. 31 price, when demand is typically at its lowest and the price is at its cheapest.
The SEC has faced widespread criticism for its reporting rules, which critics said not only distort the view of oil sands companies, but provide a misleading picture of North American oil resources.
Kevin Cramer, a New York-based lawyer with Osler Hoskin & Harcourt LLP who works with Canadian oil companies, said Monday that the SEC “has acknowledged that its current practices may not provide investors with the most useful picture of oil and gas reserves public companies hold.”
Mr. Cramer said the regulator, which issued notice of its review last month, has made no decisions on how it will proceed, but that it clearly wants to ensure the productive potential of oil sands resources is reflected in companies' filings.
Pierre Alvarez, president of the Canadian Association of Petroleum Producers, has urged the SEC to reconsider the method by which companies can book bitumen resources, and particularly the restrictive pricing formula.
“We don't think that picking a price point in the middle of winter accurately reflects the value of the resources,” Mr. Alvarez said. He added that several companies were forced to take writedowns on their reserves in 2005 when bitumen prices hit a low point precisely on Dec. 31.
Reserves can only be booked if they can be produced at the prevailing price.
“We think what this change would do would be to more accurately reflect the reserve potential of this huge, huge resource out here,” Mr. Alvarez said.
EnCana spokesman Alan Boras said the company welcomes the review. EnCana was one company that was required in 2005 to remove 363 million barrels from its reserves calculations for the year, as a result of the one-day dip in bitumen prices.
Three years ago, the influential Cambridge Energy Research Associates issued a report saying the rules were “in urgent need of modernization.”
“It is increasingly at odds with the realities of the oil and gas industry in the 21st century and, as a result, it does not properly inform investors about values and prospects for companies,” the CERA study said.
CERA's director of research, David Hobbs, said yesterday that investors should find it easier to value companies with major oil sands reserves and compare their performance against industry competitors.
Mr. Hobbs said sophisticated investors can now figure out an oil company's reserve base – including proven bitumen reserves – from published information, but the SEC changes would add clarity for all market participants.
In a report from an SEC meeting last month, John White, the commission's director of corporate finance, acknowledged that the rules governing oil sands reserves need to be updated.
The SEC is also examining whether to allow companies to expand their reporting beyond proven reserves – those that can be developed at current prices with current technology – to include a broader range of resource assets.
It may also force companies to hire outside evaluators to confirm their reserve claims.