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The sharp drop in oil prices at the end of 2008 may lead oil and gas companies to report lower proven reserves and could contract the borrowing ability of some firms, according to a report.

The Securities and Exchange Commission requires oil and gas companies to disclose net quantities of proven oil and gas reserves based on year-end oil prices. Over the past several years the SEC reporting rules didn't cause a significant problem because year-end prices were fairly similar to average annual prices. But as the price of oil fell by $100 a barrel from its record high in July to less than $45 a barrel in December, reserve booking is likely to come under pressure, analysts at Fitch Ratings said in a report released Monday.

"The outsized volatility seen recently in commodity markets led prices to diverge sharply, and for 2008 is expected to result in sizable negative price-based reserve revisions in pending year-end reports," Fitch analyst Mark Sadeghian wrote.

The expected negative reserve revisions shouldn't have a significant effect on the liquidity and capital-expenditure plans of large integrated oil companies and large independent oil and gas firms, according to the report.

However, independent oil companies with more aggressive growth profiles may be affected, in particular exploration-and-production firms with reserve-base lending. In this type of lending, the size of the borrowing base is redetermined on a semiannual or other basis, which due to lower oil prices may cause a contraction in a company's borrowing ability and hence its ability to fund expansion plans, according to the report.

Some of the companies with reserve-base lending listed in the report are: Berry Petroleum Co. (BRY), Chesapeake Energy Corp. (CHK), Clayton William Energy Inc. (CWEI), Comstock Resources Inc. (CRK), Forest Oil Corp. (FST), Linn Energy LLC (LINE) and Newfield Exploration Co. (NFX). Petrohawk Energy Corp. (HK), Plains Exploration & Production Co. (PXP) and Sandridge Energy Inc. (SD) are also part of the list.

Larger oil companies, such us Exxon Mobil Corp. (XOM), Chevron Corp. (CVX), ConocoPhilips (COP) and Marathon Oil (MRO), which have significant reserves booked under production-sharing contracts, may see a partial offset to the negative effects of lower oil prices in reserve booking, according to the report. This is because these contracts, which are generally agreements between private oil companies and oil-producing nations or a national oil company, are designed to give more oil to companies and increase reserve booking when oil prices go down. They have the reverse effect when oil prices go up.

"With 2008 year-end crude below $45/barrel, at least some of those barrels are expected to come back onto the books and could offset the effect of low prices on the rest of a company's reserve holdings," Sadeghian wrote.

The negative effects of last year's oil-price volatility on reserve booking are expected to vanish in 2010. The SEC recently approved major changes of the existing reporting rules that require oil and gas companies to report net quantities of proven oil and gas reserves based on 12-month average pricing versus year-end prices.

-By Isabel Ordonez, Dow Jones Newswires; 713-547-9207; isabel.ordonez@dowjones.com

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