SEC Rule Changes and Shale Gas Stock Evaluations

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One of the last moves of the SEC, under the Bush administration, was to change the rules used by natural gas companies to measure their shale gas reserves. There could be only one reason why the industry pressured the SEC to change the rules. The rule change increased their reserve estimates, and lowered their cost of exploration and recovery. This had the desired effect of increasing industry stock prices. Some analysts view this as another Enron moment. This is another example of the problems that were created when executive compensation was tightly coupled to stock market valuations. Managing the stock price became the name of the game. Unfortunately, this has led to a lot of creative accounting and pressure on the SEC to relax accounting standards. By the way, the SEC rule change is another example of describing an industry favorable law or regulation as "modernization". In this case, the modernization was achieved by allowing the use of mathematical models to estimate gas reserves. We hope that these models more accurately describe reality than the models that were used to estimate the default of sub prime mortgage securities.