Tuesday, September 25, 2012

Oilsands and bookable reserves: The SEC's Perspective (The Bullion Vault)

Why Alberta's tar sands look set to be squeezed out...

FOR DECADES, the US Securities and Exchange Commission (SEC) wouldn't allow Canadian oil-sands promoters to call their assets "oil reserves." Instead, the SEC required them to be classified as "mining reserves." It was a distinction that cost them billions of Dollars, writes Porter Stansberry for the Daily Wealth

The SEC's policy erased the equity on these promoters' balance sheets, taking away most of the value of their resources. This regulatory roadblock made it hard for companies trying to extract petroleum from Canada's oil sands to access capital and secure loans.

 The SEC had its reasons, of course. Extracting the extremely heavy oil trapped in the sand of places like Canada's Athabasca region of Alberta is expensive. You have to dig the tarry sand out of the ground and super-heat it to separate the oil. Even then, it's lower-quality than the light, sweet crude that flows from wells in Texas and the Middle East.

 Total extraction costs for oil sands can exceed $50 a barrel. Extracting regular oil can cost half that (or less)... So it seemed unlikely that the "oil mud" in Alberta would ever become a profitable source of oil. SEC rules say to count as "reserves," the oil has to be economical to produce. If the promoters of Canadian oil sands couldn't profitably produce the oil, why allow them to count it as a proven oil reserve?

The logic held for a while. But by 2008, with oil trading for much more than $100 a barrel, these assumptions seemed obsolete. The Peak Oil theory had convinced everyone – even the SEC – that even the most marginal source of crude oil was now a crucial resource and could no longer be ignored from a financial and accounting standpoint.

After intense lobbying on behalf of the Canadian oil mud industry, the SEC began to bend. And on June 26, 2008, the promoters got their fondest wish – official recognition from the SEC.
The Securities and Exchange Commission today announced that it has proposed revised oil and gas company reporting requirements to help provide investors with a more accurate and useful picture of the oil and gas reserves that a company holds.
In anticipation of this change, shares of Suncor – the biggest and best-known publicly traded oil-sands company – hit $72 that May. The stock had appreciated 2,900% over the previous 15 years. Its vast reserves of mud... bought for pennies... were now worth billions of Dollars... if you believed the SEC.


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