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Accounting Rule Makes Billions of Barrels of Oil Disappear

By:
Chris Gaetano
Published Date:
Dec 10, 2015
'Pumpe Hemmingstedt' by Dirk Ingo Franke - photo taken by Dirk Ingo Franke. Licensed under CC BY-SA 2.0 de via Wikimedia CommonsWhat can make billions of barrels of oil disappear in an instant? While some people might answer something like "a blazing wildfire" or "a UFO coming down to scoop up our fossil fuels for itself," the real answer is "an accounting rule from 2009 that will now require fossil fuel companies everywhere to write off significant amounts of inventory," according to Bloomberg. In short, the rule made it easier for oil companies to claim untapped reserves, which the SEC said is "intended to provide investors with a more meaningful and comprehensive understanding of oil and gas reserves." 

The amount of undeveloped reserves reported since then have more than tripled since 2008, accounting for 45 percent of proven reserves, according to Bloomberg. However, the new rule said those reserves needed to actually be tapped, profitably, within five years or else companies would have to write them off. 

Well those five years have now come to pass and, according to Bloomberg, many of those reserves that the companies said would be profitably developed still remain in the ground. As the 2015 filings come in, oil companies are expected to cut their reported inventories by substantial amounts: Bill Barrett Corp, for example, is expected to lose as much as 40 percent while Oasis Petroleum Inc., will probably erase 33 percent. Chesapeake Energy, meanwhile, will cut its inventory by 45 percent, said Bloomberg. This comes at a time when oil prices are at major low, and will likely put even more stress on an already distressed industry, according to Bloomberg.