Producers using United States regulations are expected to report lower proved gas reserves this year because of a change in the way the price for proven reserves is calculated, say independent reserves evaluators. Companies using Canadian regulations and forecast pricing will be in better shape to hold onto or book increased gas reserves.

Ironically, many producers had argued the U.S. requirement of calculating reserves using prices on the last day of the year resulted in too many dramatic changes to reserves but in 2009, they would have been better off using prices on the last day of the year.

With the requirement to use an average monthly price last year, producers using American securities regulations may have to write off substantial gas reserves in their year-end reports which will be coming out over the next two months.

"Under Canadian rules, you are not going to see as much of that," said Harry Jung, president and chief executive officer of GLJ Petroleum Consultants Ltd.

"If they are Canadian filers, using forecast pricing, they should be able to book either oil or gas reserves related to those unconventional plays as well as conventional (plays)," added Keith MacLeod, president of Sproule Associates Limited.

New U.S. Securities and Exchange Commission (SEC) rules applicable for year-end 2009 require that year-end proved reserve volumes be calculated using an average of the New York Mercantile Exchange (NYMEX) spot prices for sales of oil and gas on the first calendar day of each month in 2009. Last year, the average Henry Hub gas price was $3.87 (U.S.) per mmBtu, a price Jung described as "pretty ugly," while oil averaged $61.14 per bbl.

Under the previous SEC reporting rules, the price was based on NYMEX spot prices on the last day of the year.

"I would think it would be very challenging for U.S. filers to book very much new gas reserves at the prices we had for the average in 2009," said MacLeod. "We'll definitely see some of the companies that report in the U.S. have some reserve revisions due to price."

However, "that doesn't mean the reserves are gone; it just means they can't be reported for this year," he emphasized. "If the average gas price goes up in 2010, they'll be back on the books."

While companies likely would be able to book reserves for existing production because the capital has already been invested, it's unlikely that any new undeveloped reserves would be economic at that price, MacLeod suggested.

"That creates a bit of a challenge for this year."

Any gas reserve revisions would be most likely in marginal plays with high capital/and or operating costs, said Jung.

It's a different story for oil reserves for both Canadian and U.S. filers. "For most of the Bakken plays or some of the Cardium or other unconventional (plays), prices were generally high enough that you probably would be able to book not just the developed reserves but some of the undeveloped reserves," resulting in positive reserve additions, according to MacLeod.

Canadian filers are likely to see reserve additions if they are involved in new plays that are working, he said. "I expect to see some of the players in successful unconventional plays report some significant extensions or discoveries bookings."

While new gas plays are coming on in some areas, reserve bookings will be specific to each company's situation, said Dana Laustsen, executive vice-president and chief operating officer of GLJ. "Certainly the technology in some of the plays could have a major impact on specific players."

Some operators involved in shale and tight gas plays now have new information and a better understanding of what it will take to develop them which will enable them to book reserves, said Jung. "Costs have come down in some of those plays," he said. "Even though gas prices have come down, so have completion costs and those might offset each other."

In addition to U.S. pricing, there may be other reasons for lower company reserves. For example, companies that didn't drill very much last year could see lower reserves due to production declines, said MacLeod.

Other companies may take reserves off the books or move proved reserves with the intention of developing them when prices improve. Canadian securities rules include investment timing guidance for proved or probable so generally if a company is not going to be developing reserves within a reasonable time frame it may choose to reduce the reserve category or debook them. This can also be the result of a company acquiring new assets or making discoveries and those projects then becoming a higher priority for capital allocation.

At least two U.S.-based companies, Pioneer Natural Resources Company and Forest Oil Corporation have already reported negative pricing revisions attributable to their gas assets. Pioneer's net pricing revisions of 65 million bbls of oil equivalent were principally due to proved undeveloped (PUD) reserves that became uneconomic in the company's Raton field in southeastern Colorado at a low realized price of $3.06 per mmBtu (the average 12-month average minus the basis differential). At a $5 per mmBtu NYMEX price, the company said it would expect to recover approximately 98% of Raton's year-over-year proved reserve loss after adjusting for 2009 production.

For its part, Forest estimated the lower commodity prices used in its reserves evaluation decreased its estimated proved reserves by 377 bcfe.

The new SEC rules allow PUDs to be booked beyond one offset location where reliable technology exists that establishes the reasonable certainty of economic producibility at greater distances. In accordance with the new rules, Pioneer recorded an incremental two million bbls of oil equivalent of PUD reserves in Alaska while Forest added an estimated 75 bcfe of proved undeveloped reserves, primarily related to horizontal wells that reflect the recent success and focus of the company's horizontal drilling capital program.

The new rules also suggest that five years is a reasonable timeframe in which to develop PUDS, unless specific circumstances justify a longer time. This change reduced Forest's estimated proved reserves by 31 bcfe while all of Pioneer's PUD reserves of 375 million BOE are scheduled to be drilled before the end of 2014.