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SEC rule change won't help oil sands till 2010

NORVAL SCOTT

Tuesday, December 30, 2008

CALGARY — The U.S. securities regulator is changing accounting rules to buffer energy companies from wild oil and gas price swings, but the move will come too late for Canadian energy producers facing significant writedowns on their reserves this year.

The U.S. Securities and Exchange Commission said this week that as of Jan. 1, 2010, oil and gas producers can use a 12-month average price to book the value of their reserves, instead of the price on a single day, Dec. 31, as they do now.

The changes won't apply to this year's reserves reports, causing a major headache for oil companies. But oil sands producers will be harder hit, because prices for bitumen, a heavier crude that is more expensive to refine, have fallen farther and faster than have prices for light, sweet crude.

Last Dec. 31, oil sands companies booked their bitumen reserves at a healthy $70 a barrel (U.S.), a price at which most projects appeared viable. But this year, even though bitumen prices spiked to more than $100 in June, the global economic downturn and subsequent commodity price collapse means a barrel of heavy crude from the oil sands will now only fetch around $25 Wednesday. At that price, many oil sands developments are too expensive to be viable, preventing companies from booking such reserves as proven.

The rule change, long lobbied for by U.S. and Canadian firms, should limit the impact of price volatility when it comes to reporting how much oil and gas assets are owned by companies.

Several oil sands producers, including Royal Dutch Shell Ltd., EnCana Corp. and Nexen Inc. refused to comment on their reserves Tuesday. But analysts said such companies will now have to reduce their year-end estimates of how much oil they own because of the current SEC regulations.

“Any oil sands companies filing U.S.-type disclosure for the 2008 year-end may have to write off a significant portion of their proved bitumen reserves, given that bitumen prices are extremely low right now,” said Phil Welch, president of McDaniel & Associates Consultants Ltd.

Petro-Canada spokeswoman Andrea Ranson said that while the calculation of year-end reserves is complicated, the lower price of bitumen this year “could impact our reserve booking.”

Any writedowns on reserves taken by companies this year likely won't significantly affect share prices, as producers should be able to rebook their oil at the end of 2009. However, decreased reserve values could make it even harder for producers to acquire debt, given that banks use reserves as a key indicator of a company's long-term viability, said Chris Feltin, a Calgary-based analyst at Tristone Capital.

Canadian firms have long campaigned against the old SEC regulations, arguing that using a price from a single day unreasonably exposes them to market volatility. They also say it's unfair to use a December price to evaluate their oil sands holdings; the value of bitumen falls in winter as demand for heavy crude drops.

However, the new rules will allow companies to disclose possible and probable reserves, as opposed to the current system that allows only proven reserves to be reported.

Oil sands mining companies can now also book their reserves as oil and gas resources, instead of mining reserves as was the case previously, improving clarity for investors.

In a separate move on Tuesday, the SEC officially rejected a banking industry push to suspend accounting rules that force banks to value assets on their balance sheets at current market prices even if they plan to hold them for years.

With files from AP

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