A 2009 rule implemented by the federal Securities and Exchange Commission that made it possible for oil and gas companies to claim the financial benefits of reserves that would not be drilled for years could now force companies to wipe those numbers from their 2015 earnings figures.
For example, Chesapeake Energy Corp. will lose the equivalent of 1.1 billion barrels of oil from its books, Bloomberg News reports.
When the boom began several years ago, companies lobbied the SEC to let them claim the vast potential earnings sitting in shale patches underground across the country. Inventories nearly doubled as investors poured money into the shale boom, entranced by near-bottomless prospects.
But the rule requires that undrilled wells be profitable at a price determined by an SEC formula, and they must be drilled within five years.
Now companies are having to disclose what many investors already knew: Many prospective wells would lose money as the price of oil stays around $40 a barrel.
“There was too much optimism built into their forecasts,” says David Hughes, a fellow at the Post Carbon Institute and formerly a scientist with the Geological Survey of Canada. “It was a great game while it lasted.”
The rule change will cut Chesapeake’s inventory by 45%, regulatory filings show. But Chesapeake’s new discoveries and expansions will help offset some of its revisions, the company has said in a third-quarter regulatory filing. Gordon Pennoyer, a spokesman for Oklahoma City-based Chesapeake, declined to comment further.
Other examples of companies hit hard by the rule include Denver-based Bill Barrett Corp., which will lose as much as 40%, and Oasis Petroleum Inc., based in Houston, which will erase 33%, according to filings.
