Nearly five dozen shale oil and gas companies in the United States have cut their reserve estimates by more than 20% over the last year, the equivalent of 9.2 billion barrels, a move that could imperil their ability to raise funds to continue drilling new wells.
Rather than an accurate reflection of the raw material at the companies’ disposal, the estimates are more about a 2009 Securities and Exchange Commission (SEC) rule that allowed them to declare the reserves in the first place. Either way, though, the result could be devastating for the industry, and a breath of fresh air for communities that have been fighting the environmental and health impacts of fracking.
“Proven reserves—gas and oil resources that are among the best measures of a company’s ability to reward its shareholders and repay its debts—are disappearing across the shale patch,” Bloomberg explains. That matters, because “drillers face pressure to keep reserves growing. For many, the size of their credit line is tied to the measure. Investors want to see that a company can replace the oil and gas that’s been pumped from the ground and sold.”
The SEC routinely queries companies about their reserve estimates. But more recently, “they’re looking even more closely at how companies are booking reserves, how they’re evaluating the quality of those reserves, and what their intentions really are,” said ex-SEC regional director David Woodcock of Fort Worth, Texas. “They’re not accepting pat answers.”
The newfound concern about reserves traces back to an SEC decision in 2009 that may have helped drive the U.S. shale boom. That was the year the commission “tweaked a rule to make it easier for producers to claim wells that wouldn’t be drilled for years,” Bloomberg notes. The industry had “lobbied the SEC to count more undeveloped acreage as proved reserves, arguing that shale prospects are predictable across wide expanses,” and “the SEC agreed, with two key limits:” companies had to drill wells within five years of declaring them as reserves, and the wells had to be profitable according to an SEC formula that netted out to a price of US$95 per barrel. (At last count, benchmark West Texas Intermediate crude was trading at US$48.26.)
“The mere intent to develop, without more [activity], does not constitute ‘adoption’ of a development plan,” the SEC stressed in 2009.
But under the revised rule, declared reserves grew 67% between 2009 and 2014, and “almost half the gains came from wells that existed only on paper,” reports Bloomberg’s Asjylyn Loder.
The article traces the history of several companies whose estimated turned out to be less than realistic, some of which ultimately filed for bankruptcy.