We believe that the harmonization of foreign private issuer disclosure will help make disclosures of foreign private issuers more comparable with domestic companies.
The oil and gas industry has changed significantly since the rules were adopted. Today, many companies have interests that span the globe. In addition, many of these projects are joint ventures between foreign private issuers and domestic companies. Having differing levels of disclosure for companies that may be participating in the same projects harms comparability between investment choices. The harmonization of foreign private issuer disclosure is intended to promote comparability among all oil companies.
D. Costs
We expect that the new rules and amendments will result in initial and ongoing costs to oil and gas companies. These burdens will vary significantly among companies. Based on disclosures in company filings, the largest oil and gas companies can have as much as 10,000 times the reserves of the median reporting oil and gas company. As would be expected, companies that have more reserves and larger operations will have a correspondingly larger amount of information that they must disclose and, therefore, the burden of complying with our disclosure requirements would be greater for larger companies.
Although we are adding a new subpart to Regulation S-K to set forth the disclosure requirements that are unique to oil and gas companies, the subpart, for the most part, codifies the substantive disclosure called for by Industry Guide 2. The
disclosure requirements have been updated and clarified, and require the disclosure to be presented in a tabular format, where appropriate. Although many companies already present this information in tabular form, for companies that do not, this requirement could impose a burden on companies as they transition from a narrative to tabular disclosure format. We expect, however, that any increased preparation costs would be
highest in the first year after adoption, but would decline in subsequent years as companies adjust to the new format. We think this burden is justified because tabular disclosure will increase comparability and facilitate understanding and analysis by investors.
1. Probable and possible reserves
Allowing disclosure of probable and possible reserves could create an increased risk of litigation because these categories of reserves estimates are less certain than proved reserves. Companies may choose not to disclose such reserves, in part, because of the risk of incurring litigation costs to defend their disclosures due to the increased uncertainty of these categories. Disclosure of probable and possible reserves may also result in revealing competitive information because it might reveal a company’s business strategy, such as the geographic location and nature of its exploration and discoveries. For example, if geographical detail can be inferred from estimates of unproved reserves, this might reveal information about the value of a company’s assets to competitors and could put the producer at a competitive disadvantage. We have reduced the level of geographical detail to reduce the burden on companies, while still providing sufficient information to investors regarding concentrations of risk, including political risk.
We expect companies will incur costs in preparing the additional disclosures such as calculating and aggregating the reserve projections in a prescribed format. However, if probable and possible categories of reserves have different extraction cost structures and they are not disclosed separately from proved reserves, this could result in increased uncertainty in an investor’s assessment of a company’s prospects.
Companies also expressed concern that mandatory disclosure of probable and possible reserves could expose them to increased litigation risk. We believe that making these disclosures voluntary mitigates these concerns. Companies unwilling to bear the added risk can simply opt not to provide this disclosure.
2. Reserves estimate preparers and reserves auditors
If a company chooses to use a third party to prepare or audit reserve estimates, it will incur costs to hire these outside consultants. The new rules and amendments do not require companies to hire such a person. If enough companies that currently do not use such consultants begin to hire them, we believe that industry wages could potentially increase due to increased demand for reserves calculating specialists unless that demand is compensated by an increase in the supply of such persons. If wages increased, then all companies, not just those employing third party consultants, would incur added costs.
Large companies may be less likely to hire third parties because they tend to have staff to make reserves estimates. However, if such large companies chose to hire third- party consultants, third parties would expend significantly more effort on such projects than for smaller companies because larger companies have more properties to evaluate. Thus, we expect third-party fees, and the time required to conduct such projects, would scale upwards with the quantity of company reserves.
Disclosure of unproved reserves without third-party certification may present a risk with respect to smaller oil and gas producers because smaller companies are likely to have less in-house expertise and ability to accurately estimate such reserves than larger companies. However, we understand that the vast majority of smaller oil and gas companies already hire third parties to estimate their reserves or certify their estimates.