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SEC May Require New Rules On Audit of Oil Firms’ Reserves

The Wall Street Journal: SEC May Require New Rules On Audit of Oil Firms’ Reserves

“independent reserves assessments are increasingly popular in the wake of the Shell debacle”

By JOHN M. BIERS

DOW JONES NEWSWIRES

July 22, 2004; Page A4

HOUSTON — The Securities and Exchange Commission may require independent auditors to review the reserves of energy companies, SEC staff said in a memorandum provided to Congress, but the agency’s tack is receiving a cool reception from oil companies and lawmakers alike.

Downgrades this year of oil reserves at Royal Dutch/Shell Group and other companies has increased scrutiny over the way companies tally their energy holdings. Oil and natural-gas reserves are a widely followed benchmark for valuing energy companies, but outside auditors aren’t required to certify them.

In the June 24 memo, the SEC said it will consult with the Public Company Accounting Oversight Board — set up by Congress two years ago in the wake of major accounting scandals — on whether new regulations are necessary.

“In view of the recent revisions of many companies in this industry, the internal controls over preparation of reserve estimates may have been inadequate,” according to the memo, signed by Allan Beller, director of the SEC’s Division of Corporation Finance, and SEC Chief Accountant Donald Nicolaisen. The SEC will review the matter with the accounting board “and evaluate, with them, whether auditors should be required to perform additional work.”

An SEC spokesman said the agency had no additional comment. The 11-page memo is the most concrete sign yet that the SEC may impose new rules in the wake of recent scandals, an outcome most energy companies are hoping to avoid.

Though independent reserves assessments are increasingly popular in the wake of the Shell debacle, major oil companies prefer to handle their reserves accounting in-house, arguing that no outsider could know their complex fields and production projects better than company experts. The biggest industry players — major integrated firms such as Exxon Mobil Corp. — are likely to resist any effort by the SEC to make outside auditing mandatory.

“We don’t understand what value would be added for an organization with the scope of Exxon Mobil to have people who are not necessarily experts in reserves assessments replicate the work that a dedicated team of highly experienced geologists already do,” an Exxon Mobil spokesman said.

After a hearing yesterday on the energy-reserves issue by the House Committee on Financial Services, Michael Oxley, committee chairman and an Ohio Republican, said problems at Shell and other companies result from poor internal controls rather than poor regulations. He said there is no short-term need to impose new requirements on outside auditors to certify oil reserves. “Our witnesses, who are the experts, said the regulations have really stood the test of time,” he said.

Meanwhile, Rep. John Dingell of Michigan, the ranking Democrat on the committee, dismissed the SEC response as inadequate. Saying he is “underwhelmed, if not outright troubled” by the federal response to a series of large oil- and gas-reserves downgrades, called on regulators to immediately impose new rules.

–Susan Warren in Dallas contributed to this article.

Write to John M. Biers at [email protected]

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