The "Reliable Technologies" Rule: What Did the SEC Intend

Abstract

Abstract This paper provides an analysis of the U.S. Securities and Exchange Commission's (SEC) newly defined term, " Reliable Technology,?? which plays a prominent role in the SEC's modernized regulations for reporting oil and gas reserves. This analysis includes examination of criteria that reliable technology must meet to ensure that it will provide the certainty level required to validate certain resources as reserves of any category (proved, probable, or possible). The new SEC rules for disclosing reserves no longer require that a limited number of rigidly specified technologies be used to establish the certainty level of reserves that a filer discloses. Reasonable certainty was required in the past, since only proved reserves could be disclosed, and, as an example, reasonable certainty of economic production required either flow tests or actual production to the surface except in the deep water Gulf of Mexico. The new rules allow any technology that has been proved empirically to lead to correct conclusions, including proprietary technology, to be used to determine the proper classification for a given petroleum accumulation. Unfortunately, the industry has been provided with only limited guidance on which technologies will be satisfactory and which technologies will not. This paper presents an analysis of SEC publications which could provide insight into its intent when it introduced this concept in its new rules. Proper disclosure of reserves will depend vitally on a proper interpretation of " reliable technology.?? Introduction The United States Securities and Exchange Commission (SEC) modernized its oil and gas reserves reporting rules in late 2008 (Modernization 2008b). The new rules are in effect for all reserves disclosures filed with the SEC after December 31, 2009. The previous rules, in effect since 1978, were widely regarded as " prescriptive??; i.e., there were many " bright line tests?? that resources had to satisfy to be classified as reserves. Examples include (1) the requirement of either flow tests to the surface or actual production to establish economic producibility (and thus classification as reserves) for a resource; and (2) limiting proved oil reserves to the interval between highest and lowest oil levels actually observed in a wellbore, rather than oil levels determined in other ways. The SEC intended the new rules to be more " principles based??; i.e., more flexible, with unnamed methodologies that have proved in practice to lead to correct conclusions allowed as the basis for determining whether given resources should be classified as reserves. A major feature in the new rules is a definition, that of " reliable technology,?? which captures the spirit of these principles-based rules. The definition provided in the revised regulations (Modernization 2008b) is Reliable technology (emphasis added) is a grouping of one or more technologies (including computational methods) that has been field tested and has been demonstrated to provide reasonably certain results with consistency and repeatability in the formation being evaluated or in an analogous formation.[Regulation S-X, §210.4-10(a)(25)]. Since its introduction, this definition has generated more interest - and more questions - among filers than most other sections of the SEC's modernized rules.