Securities and Exchange Commission Historical Society

The Richard C. Adkerson Gallery on the SEC Role in Accounting Standards Setting

Strains on the Partnership

Oil and Gas: The Dry Hole Imbroglio

“We are especially disturbed by the Commission’s haste in moving toward the implementation of what we regard to be a radical, untested and impractical idea. For this reason, we urge a reconsideration of the basic RRA idea in the form of a penetrating evaluation of its purpose, practicality and usefulness.”

- April 30, 1979 Letter from the Audit Committee, Standard Oil of California to SEC Chairman Harold M. Williams on reserve recognition accounting

To enable the development of a reliable energy database by the Department of Energy from reports submitted by oil and gas (O&G) producers, in 1975, Congress directed the SEC to assure the establishment of accounting practices by O&G companies.(27) Congress specified that the SEC could rely on the FASB to develop the relevant standards.

Two principal methods were then in use for costs that could not be directly related to the discovery of specific O&G reserves, sometimes referred to as “dry hole” costs: the successful efforts costing and full costing methods. Under successful efforts, those costs are charged to expense, but full costing carries those costs forward to future periods as costs of O&G reserves generally. Under successful efforts, the only costs capitalized are those directly related to productive properties; full cost capitalizes all costs incurred in finding and developing O&G reserves within broad centers.

Surveys indicated that roughly half of O&G companies used full costing and half used successful efforts. Full costing was used by small producers who believed that successful efforts would not only reduce their earnings but also make them more volatile, hampering financing efforts and discouraging exploration.

In December 1977, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 19, concluding that only successful efforts costing was appropriate. Small producers led a firestorm of criticism, enlisting the aid of Congress, the Department of Energy and the Federal Trade Commission. In August 1978, the SEC overruled the FASB in Accounting Series Release (ASR) No. 253, allowing either method and announcing that it favored the development of yet another method, a version of current value accounting.

The SEC tried to walk a tightrope in explaining its continued support for the FASB while reversing it, asserting that “The provisions of [The Energy Policy and Conservation Act of 1975] … altered the Commission’s traditional relationship with the FASB.”(28) The SEC argued that the 1975 legislation placed a unique burden on the SEC to find a solution, whereas the securities laws granted the Commission the “discretionary” authority to prescribe accounting practices. Since the 1975 law allowed the SEC to look to the FASB, this reasoning seemed tortured to some.

The FASB suspended SFAS No. 19 in February 1979. The SEC agreed to comprehensive disclosures for oil and gas producers developed in 1982 by the FASB, (29) but both successful efforts and full cost continue to be acceptable methods.

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(27) The Energy Policy and Conservation Act of 1975 [42 U.S. Code, Sec. 6383].

(28) August 31, 1978 ASR No. 253, Adoption of Requirements for Financial and Accounting Reporting Practices for Oil and Gas Producing Activities.

(29) November 1982 SFAS No. 69, Disclosures about Oil and Gas Producing Activities.

Related Museum Resources


May 16, 1963
transcript pdf (AICPA Collection, University of Mississippi)
June 30, 1976
image pdf (Government Records)
September 30, 1977
43rd Annual Report of the Securities and Exchange Commission

(Government Records)

February 24, 1978
Financial Accounting and Reporting by Oil and Gas Companies - Financial Accounting Standards Board Filings with SEC and Department of Energy

(JT Ball Collection, University of Mississippi)

February 27, 1978
image pdf (JT Ball Collection, University of Mississippi)
October 9, 1978
image pdf (Government Records)
April 30, 1979
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
September 30, 1979
image pdf (Government Records)
April 23, 1980
image pdf (Government Records)
September 30, 1981
image pdf (Government Records)

Oral Histories

07 July 2005

A. Clarence Sampson

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