Billions of Barrels of Oil Vanish in a Puff of Accounting Smoke
http://www.bloomberg.com/news/articles/2015-12-10/billions-of-barrels-of-oil-vanish-in-a-puff-of-accounting-smoke
In an instant, Chesapeake Energy Corp. will erase the equivalent of 1.1 billion barrels of oil from its books
And who do you think was one of the main players in getting the SEC reserves rules changed in the first place? Yep, Aubrey McLendon at Chesapeake.
Very true, 1ejl. Thanks for the clarification.
Actually, njg, the exact opposite is what Enron did. They not only increased, rather than decreased, the value of their assets through creative accounting, they actually built fictitious assets on their books, all to inflate the estimated value of the company's physical assets.
Although it makes for good fodder on Bloomberg and other media outlets, Chesapeake actually followed the intent of modern accounting laws quite well, with good transparency. As djl pointed out, the oil is still in the ground, but unprofitable to recover at current commodity prices. When those prices rise again in the future, which could be quite some time, Chesapeake will simply add those back into their recoverable reserves. The operative word there is "recoverable". This is a moving target, primarily affected by two things: commodity prices and advances in technology.
Sounds just like the Mark-to-Market (MTM) accounting method that records the value of an asset according to its "supposed" current market price. The same accounting method famously used by Enron which proved to be its downfall.
The oil is not actually gone, but exactly where it was all along: the ground.
The companies were allowed to report the reserves under the assumption that oil would be very expensive and that they could get it out of the ground for less than they could later sell it for.
It turned out that oil actually staid cheap (Thanks Saudi Arabia) and it would be unprofitable to get it out of the ground under current conditions.
Since it seems that the oil will stay in the ground for the foreseeable future they are no longer allowed to report it as reserves that they could pump out in the near future.