SEC Rule 8995 33

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Conforming Version (To Conform to Release Published in the Federal Register)

SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 210, 211, 229, and 249
[Release Nos. 33-8995; 34-59192; FR-78; File No. S7-15-08]
RIN 3235-AK00
MODERNIZATION OF OIL AND GAS REPORTING
AGENCY: Securities and Exchange Commission.
ACTION: Final rule; interpretation; request for comment on Paperwork Reduction Act
burden estimates.
SUMMARY: The Commission is adopting revisions to its oil and gas reporting
disclosures which exist in their current form in Regulation S-K and Regulation S-X under
the Securities Act of 1933 and the Securities Exchange Act of 1934, as well as Industry
Guide 2. The revisions are intended to provide investors with a more meaningful and
comprehensive understanding of oil and gas reserves, which should help investors
evaluate the relative value of oil and gas companies. In the three decades that have
passed since adoption of these disclosure items, there have been significant changes in
the oil and gas industry. The amendments are designed to modernize and update the oil
and gas disclosure requirements to align them with current practices and changes in
technology. The amendments concurrently align the full cost accounting rules with the
revised disclosures. The amendments also codify and revise Industry Guide 2 in
Regulation S-K. In addition, they harmonize oil and gas disclosures by foreign private
issuers with the disclosures for domestic issuers.
DATES: Effective Date: January 1, 2010.

Comment Date: Comments on the Paperwork Reduction Act Analysis should be
received on or before February 13, 2009.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic comments:
•

Use the Commission’s Internet comment form
(http://www.sec.gov/rules/proposed.shtml); or

•

Send an e-mail to rule-comments@sec.gov. Please include File Number
S7-15-08 on the subject line; or

•

Use the Federal e-Rulemaking Portal http://www.regulations.gov. Follow
the instructions for submitting comments.

Paper comments:
•

Send paper submissions in triplicate to Secretary, Securities and Exchange
Commission, 100 F Street, NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-15-08. This file number should be
included on the subject line if e-mail is used. To help us process and review your
comments more efficiently, please use only one method. The Commission will post all
comments on the Commission’s Internet Web site
(http://www.sec.gov/rules/concept.shtml). Comments also are available for public
inspection and copying in the Commission’s Public Reference Room, 100 F Street, NE,
Washington, DC 20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. All comments received will be posted without change; we do not edit personal
identifying information from submissions. You should submit only information that you
wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Ray Be, Special Counsel, Office of
Chief Counsel at (202) 551-3500; Dr. W. John Lee, Academic Petroleum Engineering
Fellow, or Brad Skinner, Senior Assistant Chief Accountant, Office of Natural Resources
and Food at (202) 551-3740; Leslie Overton, Associate Chief Accountant, Office of
Chief Accountant for the Division of Corporation Finance at (202) 551-3400, Division of
Corporation Finance; or Mark Mahar, Associate Chief Accountant, Jonathan Duersch,
Assistant Chief Accountant, or Doug Parker, Professional Accounting Fellow, Office of
the Chief Accountant at (202) 551-5300; U.S. Securities and Exchange Commission, 100
F Street, NE, Washington, DC 20549-3628.
SUPPLEMENTAL INFORMATION: We are adopting amendments to Rule 4-10 1 of
Regulation S-X 2 and Items 102, 801 and 802 3 of Regulation S-K. 4 We also are adding
new Subpart 1200, including Items 1201 through 1208, to Regulation S-K.
TABLE OF CONTENTS
I.

II.

Introduction
A.
Background
B.
Issuance of the Concept Release
C.
Overview of the Comment Letters Received on the Proposing Release
Revisions and Additions to the Definition Section in Rule 4-10 of Regulation
S-X
A.
Introduction
B.
Pricing Mechanism for Oil and Gas Reserves Estimation
1.
12-month average price
2.
Prices used for disclosure and accounting purposes
3.
Alternate pricing schemes
4.
Time period over which the average price is to be calculated
C.
Extraction of Bitumen and Other Non-Traditional Resources

17 CFR 210.4-10.

17 CFR 210.

17 CFR 229.102, 17 CFR 229.801, and 17 CFR 229.802.

17 CFR 229.

III.
IV.

1.
Definition of “oil and gas producing activities”
2.
Disclosure by final products
D.
Proved Oil and Gas Reserves
E.
Reasonable Certainty
F.
Developed and Undeveloped Oil and Gas Reserves
1.
Developed oil and gas reserves
2.
Undeveloped oil and gas reserves
G.
Reliable Technology
1.
Definition of the term “reliable technology”
2.
Disclosure of technologies used
H.
Unproved Reserves—“Probable Reserves” and “Possible Reserves”
1.
Probable reserves
2.
Possible reserves
I.
Reserves
J.
Other Supporting Terms and Definitions
1.
Deterministic estimate
2.
Probabilistic estimate
3.
Analogous reservoir
4.
Definitions of other terms
5.
Proposed terms and definitions not adopted
K.
Alphabetization of the Definitions Section of Rule 4-10
Revisions to Full Cost Accounting and Staff Accounting Bulletin
Updating and Codification of the Oil and Gas Disclosure Requirements in
Regulation S-K
A.
Revisions to Items 102, 801, and 802 of Regulation S-K
B.
Proposed New Subpart 1200 to Regulation S-K Codifying Industry
Guide 2 Regarding Disclosures by Companies Engaged in Oil and Gas
Producing Activities
1.
Overview
2.
Item 1201 (General instructions to oil and gas industry-specific
disclosures)
a.
Geographic area
b.
Tabular disclosure
3.
Item 1202 (Disclosure of reserves)
a.
Oil and gas reserves tables
i.
Disclosure by final product sold
ii.
Aggregation
iii.
Optional disclosure of probable and possible
reserves
iv.
Resources not considered reserves
b.
Optional reserves sensitivity analysis table
c.
Separate disclosure of conventional and continuous
accumulations
d.
Preparation of reserves estimates or reserves audits
e.
Reserve audits and the contents of third party reports
f.
Process reviews
4

4.
5.
6.

Item 1203 (Proved undeveloped reserves)
Item 1204 (Oil and gas production)
Item 1205 (Drilling and other exploratory and development
activities)
7.
Item 1206 (Present activities)
8.
Item 1207 (Delivery commitments)
9.
Item 1208 (Oil and gas properties, wells, operations, and
acreage)
V.
Guidance for Management’s Discussion and Analysis for Companies
Engaged in Oil and Gas Producing Activities
VI.
Conforming Changes to Form 20-F
VII. Impact of Amendments on Accounting Literature
A.
Consistency with FASB and IASB Rules
B.
Change in Accounting Principle or Estimate
C.
Differing Capitalization Thresholds Between Mining Activities and
Oil and Gas Producing Activities
VIII. Application of Interactive Data Format to Oil and Gas Disclosures
IX.
Implementation Date
A.
Mandatory Compliance
B.
Voluntary Early Compliance
X.
Paperwork Reduction Act
A.
Background
B.
Summary of Information Collections
C.
Revisions to PRA Burden Estimates
D.
Request for Comment
XI.
Cost-Benefit Analysis
A.
Background
B.
Description of New Rules and Amendments
C.
Benefits
1.
Average price and first of the month price
2.
Probable and possible reserves
3.
Reserves estimate preparers and reserves auditors
4.
Development of proved undeveloped reserves
5.
Disclosure guidance
6.
Updating of definitions related to oil and gas activities
7.
Harmonizing foreign private issuer disclosure
D.
Costs
1.
Probable and possible reserves
2.
Reserves estimate preparers and reserves auditors
3.
Consistency with IASB
4.
Change of pricing mechanism
5.
Disclosure of PUD development
6.
Increased geographic disclosure
7.
Harmonizing foreign private issuer disclosure
XII. Consideration of Burden on Competition and Promotion of Efficiency,
Competition, and Capital Formation
5

XIII. Final Regulatory Flexibility Analysis
A.
Reasons for, and Objectives of, the New Rules and Amendments
B.
Significant Issues Raised by Commenters
C.
Small Entities Subject to the New Rules and Amendments
D.
Reporting, Recordkeeping, and Other Compliance Requirements
E.
Agency Action to Minimize Effect on Small Entities
XIV. Update to Codification of Financial Reporting Policies
XV. Statutory Basis and Text of Amendments
I.

Introduction
A.

Background

On June 26, 2008, the Commission issued a proposing release (Proposing
Release) seeking public comment on proposed amendments to the disclosure
requirements regarding oil and gas companies. 5 These proposals encompassed issues
that were previously addressed more generally in a concept release that the Commission
issued on December 12, 2007 (Concept Release), 6 which solicited comment on possible
revisions to the oil and gas reserves disclosure requirements specified in Rule 4-10 of
Regulation S-X 7 and Item 102 of Regulation S-K. 8 The Proposing Release also
contained proposals not addressed by the Concept Release related to the updating and
codification of Industry Guide 2.

Release No. 33-8935 (June 27, 2008) [73 FR 39181].

Release No. 33-8870 (Dec. 12, 2007) [72 FR 71610].

17 CFR 210.4-10. See Release No. 33-6233 (Sept. 25, 1980) [45 FR 63660] (adopting
amendments to Regulation S-X, including Rule 4-10). The precursor to Rule 4-10 was Rule 3-18
of Regulation S-X, which was adopted in 1978. See Accounting Series Release No. 253 (Aug. 31,
1978) [43 FR 40688]. See also Accounting Series Release No. 257 (Dec. 19, 1978) [43 FR 60404]
(further amending Rule 3-18 of Regulation S-X and revising the definition of proved reserves).

Item 102 of Regulation S-K [17 CFR 229.102]. In 1982, the Commission adopted Item 102 of
Regulation S-K. Item 102 contains the disclosure requirements previously located in Item 2 of
Regulation S-K. See Release No. 33-6383 (March 16, 1982) [47 FR 11380]. The Commission
also “recast . . . the disclosure requirements for oil and gas operations, formerly contained in Item
2(b) of Regulation S-K, as an industry guide.” See Release No. 33-6384 (Mar. 16, 1982) [47 FR
11476].

We initially adopted our oil and gas disclosure requirements in 1978 and 1982. 9
Since that time, there have been significant changes in the oil and gas industry and
markets, including technological advances, and changes in the types of projects in which
oil and gas companies invest their capital. 10 Prior to our issuance of the Concept Release
and the Proposing Release, many industry participants had expressed concern that our
disclosure rules are no longer in alignment with current industry practices and therefore
limit their usefulness to the market and investors. 11
B.

Issuance of the Concept Release

The Concept Release addressed the potential implications for the quality,
accuracy and reliability of oil and gas disclosure if the Commission were to:
•

Revise the definition of “proved reserves” in our rules, in particular, the
criteria used to assess and quantify resources that can be classified as
proved reserves; and

•

Expand the categories of resources that may be disclosed in Commission
filings to include resources other than proved reserves.

The disclosure requirements were introduced pursuant to a directive in the Energy Policy and
Conservation Act of 1975 (the “EPCA”). The EPCA directed the Commission to “take such steps
as may be necessary to assure the development and observance of accounting practices to be
followed in the preparation of accounts by persons engaged, in whole or in part, in the production
of crude oil or natural gas in the United States.” See 42 U.S.C. 6201-6422.

See, for example, Daniel Yergin and David Hobbs: “The Search for Reasonable Certainty in
Reserves Disclosure,” Oil and Gas Journal (July 18, 2005).

See, for example, Greg Courturier, “Standard & Poor’s Urges SEC to Change Disclosure Rules,”
International Oil Daily (Dec. 3, 2007); Steve Levine, “Tracking the Numbers: Oil Firms Want
SEC to Loosen Reserves Rules,” Wall Street Journal Online (Feb. 7, 2006); Christopher Hope,
“Oil Majors Back Attack on SEC Rules,” The Daily Telegraph (London) (Feb. 24, 2005); Barrie
McKenna, “Rules undervalue reserves report says: Volumes buried in Canada's oil sands not
counted by SEC's measure,” The Globe & Mail (Canada) (Feb. 24, 2005); and “Deloitte Calls on
Regulators to Update Rules for Oil and Gas Reserves Reporting,” Business Wire Inc. (Feb. 9,
2005).

In addition, the Concept Release questioned whether our revised disclosure rules should
be modeled on any particular resource classification framework currently being used
within the oil and gas industry. We also asked how any revised disclosure rules could be
made flexible enough to address future technological innovation and changes within the
oil and gas industry. The Concept Release sought further comment on whether the
Commission should require independent third-party assessments of reserves estimates
that a company includes in its filings.
In response to the Concept Release, commenters submitted 80 comment letters.12
We received comment letters from a variety of industry participants such as accounting
firms, engineering consulting firms, domestic and foreign oil and gas companies, federal
government agencies, individuals, law firms, professional associations, public interest
groups, and rating agencies. We considered these comments and addressed many of
them in issuing the Proposing Release.
C.

Overview of the Comment Letters Received on the Proposing Release

The Proposing Release sought significantly more detailed comment on issues
raised in the Concept Release, as well as proposed amendments to the disclosure items in
our rules and Industry Guide 2. In response to the Proposing Release, we received 65
comment letters, again from a variety of constituents with interests in oil and gas industry
disclosure.
Almost all commenters supported some form of revision to the current oil and gas
disclosure requirements, particularly given the length of time that has elapsed since the

The public comments we received are available for inspection in the Commission’s Public
Reference Room at 100 F St. NE , Washington, DC 20549 in File No. S7-29-07. They are also
available on-line at http://www.sec.gov/comments/s7-29-07/s72907.shtml.

requirements were initially adopted. 13 Commenters provided significantly more detailed
comments on the Proposing Release than on the Concept Release, which did not include
specific proposed regulatory text. We discuss those comments in detail in the relevant
sections of this release. However, in general, commenters focused on several key issues
raised by the Proposing Release. These issues included the following:
•

The proposal to permit disclosure of probable and possible reserves;

•

The proposed use of average historical prices to represent existing
economic conditions to determine the economic producibility of oil and
gas reserves for disclosure purposes while continuing to use a single day

See letters from American Association of Petroleum Geologists (“AAPG”), American Clean Skies
Foundation (“American Clean Skies”), American Petroleum Institute (“API”), AngloGold Ashanti
Ltd. (“AngloGold”), Apache Corporation (“Apache”), BHP Billiton Petroleum (“BHP”), BP Plc.
(“BP”), Brookwood Petroleum Advisors, Ltd. (“Brookwood”), Canadian Association of Petroleum
Producers (“CAPP”), Canadian Natural Resources Ltd. (“Canadian Natural”), Center for Audit
Quality (“CAQ”), Center for Corporate Policy (“CCP”), CFA Institute Centre for Financial
Market Integrity (“CFA”), Chesapeake Energy Corporation (“Chesapeake”), Chevron Corporation
(“Chevron”), Coeur d’Alene Mines Corporation (“Coeur”), Cunningham, Peter (“Cunningham”),
Davis, Polk & Wardwell (“Davis Polk”), Deloitte & Touche (“Deloitte”), Devon Energy
Corporation (“Devon”), EnCana Corporation (“EnCana”), Energen Corporation (“Energen”),
Energy Information Administration (of DOE) (“EIA”), Eni S.p.A. (“Eni”), Equitable Resources,
Inc. (“Equitable”), Ernst & Young (“E&Y”), Evolution Petroleum Corporation (“Evolution”),
ExxonMobil Corporation (“ExxonMobil”), Federal Energy Regulatory Commission (“FERC”),
Graff Consulting Group LLC (“Graff Consulting”), Grant Thornton (“Grant Thornton”), Imperial
Oil Ltd. (“Imperial”), Independent Petroleum Association of America (“IPAA”), KPMG
(“KPMG”), Luscher, Brian (“Luscher”), Magoto, Joseph (“Magoto”), McMoRan Exploration Co.
(“McMoRan”), Newfield Exploration Company (“Newfield”), Nexen, Inc. (“Nexen”), Peabody
Energy Corporation (“Peabody”), Petro-Canada (“Petro-Canada”), Petroleo Brasileiro S.A.
(“Petrobras”), Petroleos Mexicanos (“PEMEX”), PRA International Ltd. (“PRA”),
PriceWaterhouseCoopers (“PWC”), Questar Market Resources (“Questar”), RepsolYPF, S.A.
(“Repsol”), Ross Petroleum Ltd. (“Ross”), Ryder Scott Company, L.P. (“Ryder Scott”), Sasol Ltd.
(“Sasol”), Senator Robert Menendez, Senator Russell D. Feingold, and Senator Bernard Sanders,
U.S. Senate (“Three Senators”), Shearman & Sterling (“Shearman & Sterling”), Shell
International B.V. (“Shell”), Society of Exploration Geophysicists (“SEG”), Society of Petroleum
Engineers (“SPE”), Society of Petroleum Evaluation Engineers (“SPEE”), Southwestern Energy
Production Company (“Southwestern”), Standard Advantage (“Standard Advantage”),
StatoilHydro (“StatoilHydro”), Swift Energy Company (“Swift”), Talisman Energy Inc.
(“Talisman”), Total, S.A. (“Total”), van Wyk, Mike (“van Wyk”), Wagner, Robert (“Wagner”),
Zakaib, Geoff (“Zakaib”).

year-end price to determine the economic producibility of reserves for
accounting purposes;
•

The proposed inclusion of bitumen, oil shales, and other resources in the
definition of “oil and gas producing activities”;

•

The proposed provision to broaden the types of technology that a company
may use to establish reserves estimates and categories;

•

The proposed change in the definition of proved undeveloped reserves to
eliminate the “certainty” requirement; and

•

The increased detail of disclosure that would be required as a result of our
proposed definition of “geographic location.”

II.

Revisions and Additions to the Definition Section in Rule 4-10 of Regulation
S-X
A.

Introduction

The revisions and additions to the definition section in Rule 4-10(a) of Regulation
S-X 14 update our reserves definitions to reflect changes in the oil and gas industry and
markets and new technologies that have occurred in the decades since the current rules
were adopted. Many of the definitions are designed to be consistent with the Petroleum
Resource Management System (PRMS). 15 Among other things, the revisions to these
definitions address four issues that have been of particular interest to companies,
investors, and securities analysts:

17 CFR 210.4-10(a).
The Petroleum Resources Management System is a widely accepted standard for the management
of petroleum resources developed by several industry organizations. See Society of Petroleum
Engineers, the World Petroleum Council, American Association of Petroleum Geologists, and the
Society of Petroleum Evaluation Engineers, Petroleum Resources Management System,
SPE/WPC/AAPG/SPEE (2007).

•

The use of single-day year-end pricing to determine the economic
producibility of reserves;

•

The exclusion of activities related to the extraction of bitumen and other
“non-traditional” resources from the definition of oil and gas producing
activities;

•

The limitations regarding the types of technologies that an oil and gas
company may rely upon to establish the levels of certainty required to
classify reserves; and

•

The limitation in the current rules that permits oil and gas companies to
disclose only their proved reserves.

The revisions of, and additions to, the Rule 4-10 definitions attempt to address these
issues without sacrificing clarity and comparability, which provide protection and
transparency to investors. In addition, to the extent appropriate, we have revised our
proposals so that the final definitions are more consistent with terms and definitions in
the PRMS to improve compliance and understanding of our new rules.
B.

Pricing Mechanism for Oil and Gas Reserves Estimation

12-month average price

The final rules define the term “proved oil and gas reserves” in part as “those
quantities of oil and gas, which, by analysis of geoscience and engineering data, can be
estimated with reasonable certainty to be economically producible—from a given date
forward, from known reservoirs, and under existing economic conditions, operating
methods, and government regulations—prior to the time at which contracts providing the
right to operate expire, unless evidence indicates that renewal is reasonably certain,

regardless of whether deterministic or probabilistic methods are used for the estimation.”
The definition states that the economic producibility of a reservoir must be based on
existing economic conditions. It specifies that, in calculating economic producibility, a
company must use a 12-month average price, calculated as the unweighted arithmetic
average of the first-day-of-the-month price for each month within the 12-month period
prior to the end of the reporting period, unless prices are defined by contractual
arrangements, excluding escalations based upon future conditions. 16
Most commenters supported the use of a 12-month average price to serve as a
proxy for existing economic conditions to determine the economic producibility of
reserves. 17 Some noted that a 12-month average price is considered to reflect “current
economic conditions” by PRMS. 18 They noted that the use of an average price would
reduce the effects of short term volatility 19 and seasonality, 20 while maintaining
comparability of disclosures among companies. 21
Seven commenters recommended the use of first-of-the-month prices 22 instead of
the proposed use of end-of-the-month prices because the use of first-of-the-month prices

See Rule 4-10(a)(22)(v) [17 CFR 210.4-10(a)(22)(v)].

See letters from AngloGold, Apache, API, BHP, BP, Canadian Natural, CAPP, Chesapeake,
Chevron, Devon, EIA, EnCana, Equitable, Evolution, ExxonMobil, Newfield, Nexen, Petrobras,
Petro-Canada, PWC, Questar, Repsol, Ryder Scott, Sasol, Shell, Southwestern, SPE, Total, and
Wagner.

See letters from AngloGold, BHP, Equitable, Ryder Scott, and SPE.

See letters from Apache, API, BHP, BP, Canadian Natural, CAPP, Chesapeake, EIA, EnCana,
Equitable, Evolution, ExxonMobil, Imperial, IPAA, Newfield, Petrobras, Petro-Canada, Repsol,
Ryder Scott, SPE, Total, and Wagner.

See letters from Apache, Canadian Natural, Devon, EnCana, Evolution, IPAA, Petro-Canada,
Repsol, and Ryder Scott.

See letters from BHP, Canadian Natural, CAPP, Deloitte, Devon, IPAA, Newfield, Petro-Canada,
Total, and Wagner.

See letters from Apache, BP, Chesapeake, Chevron, Devon, Repsol, and Shell.

would provide companies with more time to estimate their reserves 23 and they thought
that these prices better reflect the actual price received under typical natural gas
contracts. 24 Conversely, six commenters recommended the use of a 12-month daily
average price 25 because they thought that a daily average price would be more
appropriate than a monthly average price. These commenters noted that oil sales
contracts often are based on daily averages. 26 Two commenters expressed concern that
end-of-the-month prices are not representative of actual prices because commodity
traders often “clear their books” at the end of the month. 27
One commenter opposed the use of average prices stating that, conceptually, the
use of average prices is poor regulatory policy and may encourage the market to pressure
standard setters to use historical average prices for financial instruments and other assets
and liabilities associated with volatile markets. 28 It noted that volatility reflects the
underlying economics of the oil and gas industry. 29
The objective of reserves estimation is to provide the public with comparable
information about volumes, not fair value, of a company’s reserves available to enable
investors to compare the business prospects of different companies. The use of a 12month average historical price to determine the economic producibility of reserves
quantities increases comparability between companies’ oil and gas reserve disclosures,

See letters from Chesapeake, Devon, and Shell.

See letters from Apache, Newfield, and Repsol.

See letters from Canadian Natural, CAPP, EnCana, Nexen, Petro-Canada, and Repsol.

See letter from Newfield.

See letters from Apache and Shell.

See letter from CFA.

while mitigating any additional variability that a single-day price may have on reserve
estimates. Although oil and gas prices themselves are subject to market-based volatility,
the estimation of reserves quantities based on any historical price assumption determines
those reserves quantities as if the oil or gas already has been produced, even though they
have not, and these measures do not attempt to portray a reflection of their fair value. If
the objective of reserve disclosures were to provide fair value information, we believe a
pricing system that incorporates assumptions about estimated future market prices and
costs related to extraction could be a more appropriate basis for estimation.
In order to provide disclosures which are more consistent with the objective of
comparability, the amendments state that the existing economic conditions for
determining the economic producibility of oil and gas reserves include the 12-month
average price, calculated as the unweighted arithmetic average of the first-day-of-themonth price for each month within the 12-month period prior to the end of the reporting
period. 30 For example, a company with a reporting year end of December 31 would
determine its reserves estimates for its annual report based on the average of the prices
for oil or gas on the first day of every month from January through December. Therefore,
the use of a 12-month average price provides companies with the ability to efficiently
prepare useful reserve information without sacrificing the objective of comparability. We
believe that the revised definition of the term “proved oil and gas reserves” will provide
investors with improved reserves information thereby enhancing their ability to analyze
the disclosures.

See new Rule 4-10(a)(22)(v) of Regulation S-X [17 CFR 210.4-10(a)(22)(v)].

Prices used for disclosure and accounting purposes

A proposal that resulted in significant comment was the use of a 12-month
average price to estimate reserves for disclosure purposes, but a single-day, year-end
price for accounting purposes. 31 All commenters addressing the issue of using different
prices to determine reserves for disclosure and accounting opposed the proposal. 32 We
are not adopting this aspect of the proposal. Instead, we are revising both our disclosure
rules and our full-cost accounting rules related to oil and gas reserves to use a single price
based on a 12-month average. 33 We also will continue to communicate with the FASB
staff to align their accounting standards with these rules.
Commenters pointed out that the use of two different prices for disclosure and
accounting purposes could:
•

Confuse investors and other users of financial statements. 34

•

Create misleading information; 35

Currently, companies use a single-day, year-end price to determine the quantity of its proved
reserves. From an accounting perspective, the quantity of those reserves, while not included on
the balance sheet, is used to determine the depreciation, depletion and amortization of certain
capitalized costs included on the balance sheet. If the final rule retained a single-day, year-end
price for determining reserves for accounting purposes (i.e., for determining depreciation,
depletion and amortization), then companies would effectively be required to calculate reserves
twice, using two different pricing assumptions—once for disclosure purposes and once for
accounting purposes. Similarly, under the full cost rules, the full cost ceiling test, as described in
Section III of this release, would have similar implications.

See letters from Apache, API, Audit Quality, BHP, BP, Canadian Natural, CAPP, CFA,
Chesapeake, Chevron, Deloitte, Devon, E&Y, EnCana, Energen, Eni, Equitable, Evolution,
ExxonMobil, Grant Thornton, Imperial, KPMG, McMoRan, Newfield, Nexen, PEMEX,
Petrobras, Petro-Canada, PWC, Questar, Repsol, Ross, Ryder Scott, Sasol, Shell, Southwestern,
SPEE, StatoilHydro, Swift, Talisman, Total, and Wagner.

See Rule 4-10.

See letters from Audit Quality, BHP, Canadian Natural, CAPP, Chesapeake, Deloitte, Devon,
Evolution, ExxonMobil, Imperial, Newfield, Nexen, Petrobras, Petro-Canada, PWC, Questar,
Repsol, Ryder Scott, Shell, Swift, Talisman, Total, and Wagner.

See letters from BP, CFA, Devon, Eni, Nexen, Repsol, and Wagner.

•

Harm comparability; 36

•

Decrease transparency; 37

•

Increase costs and burden significantly; 38

•

Increase the complexity of disclosures; 39

•

Double record-keeping burden; 40

•

Require more disclosure to explain the differences in reserves estimates;
and 41

•

Break the connection between disclosures and accounting.42

Some commenters noted that the disclosure and accounting rules and guidance do
not use a different pricing method in other situations. 43 In addition, several commenters
believed that changing to the use of an average price to estimate proved reserves would
have a minimal impact on depreciation and net income. 44 We believe that changing the
rules to use a 12-month average price in reserves estimations is not inconsistent with the
principles and objectives of financial reporting in authoritative accounting guidance.

See letters from Apache, Canadian Natural, CAPP, Questar, StatoilHydro, and Wagner.

See letters from Canadian Natural, CAPP, ExxonMobil, Shell, Swift, and Wagner.

See letters from Apache, Audit Quality, BHP, Canadian Natural, CAPP, Chevron, Deloitte,
Devon, Eni, Equitable, Evolution, ExxonMobil, Imperial, McMoRan, Newfield, Nexen, Petrobras,
Questar, Petro-Canada, PWC, Ryder Scott, Shell, Swift, Total, and Wagner.

See letters from CAPP, CFA, and Devon.

See letters from Apache, Chesapeake, Eni, Equitable, and Imperial.

See letters from CAPP, Devon, Eni, ExxonMobil, Imperial, and Wagner.

See letters from Apache, Audit Quality, CAPP, CFA, Deloitte, E&Y, Energen, Eni, ExxonMobil,
Imperial, KPMG, Newfield, PWC, Repsol, and Total.

See letters from API, CAPP, and Shell.

See letters from API, Canadian Natural, EnCana, ExxonMobil, and Total.

With respect to accounting pronouncements that currently make reference to a
single-day pricing regime with respect to oil and gas reserves, we are communicating
with the FASB staff to align the standards used in its pronouncements with the 12-month
average price used in our new rules, as several commenters recommended. 45 As
discussed in more detail below, we are adopting a compliance date that will provide
sufficient time to coordinate such activities with the FASB. However, as we discuss our
revisions with the FASB, we will consider whether to delay the compliance date further.
3.

Alternate pricing schemes

Some commenters on the Proposing Release believed that oil and gas futures
prices, or management’s forecast of future prices, would better represent the value of the
reserves 46 and be better aligned with fair value of the reserves. 47 They indicated that
management uses futures prices, not historical prices, in its planning and day-to-day
decision making. 48 They suggested that the use of futures prices, combined with
disclosure of how management made the estimates, would provide greater transparency 49
and comparability of disclosure. 50 One noted that historical prices have little to do with a
company’s future investments and values. 51 Another commenter noted that differentials
can be calculated through established accounting procedures under SFAS 157. 52

See letters from Apache, BHP, Canadian Natural, CAPP, CFA, Deloitte, McMoRan, Newfield,
Nexen, Questar, Southwestern, Talisman, and Total.

See letters from CFA, Deloitte, Grant Thornton, and McMoRan.

See letters from CFA and Deloitte.

See letters from CFA, Grant Thornton, and McMoRan.

See letter from Deloitte.

See letters from Deloitte and McMoRan.

See letter from McMoRan.

See letter from CFA.

However, other commenters argued that futures prices are not available for all
reserves locations 53 and that applying differentials to prices would require subjective
estimates and reduce comparability among companies. 54 Two commenters noted that
standard prices are not consistently available in some geographic regions. 55 Similarly,
two commenters were concerned that futures price estimates would have to be
accompanied by estimates of future costs, which they thought would be very subjective
and not comparable for determining future economic conditions. 56 One commenter
asserted that the use of future prices would require companies to document assumptions
about future costs, or else the disclosure would be very inconsistent among reporting
companies. 57 Three commenters believed that futures prices are more subject to market
perceptions than market realities and are seldom used in actual physical trading of oil and
gas. 58
We share the concerns of many of these commenters that determinations of
expected future prices could require significant estimations which could fall into a wide,
albeit reasonable, range. For example, in many situations and parts of the world, natural
gas is sold through longer term contracts where observable market inputs are not widely
available. As a result, there could be less comparability among different companies
depending on their assumptions, which are inherent in determining futures prices.

See letters from ExxonMobil and Wagner.

See letters from EnCana, Evolution, ExxonMobil, Newfield, Ryder Scott, and Total.

See letters from Ryder Scott and Total.

See letters from SPE and Total.

See letter from SPE.

See letters from Evolution, Ryder Scott, and Wagner.

Difference in assumptions between companies could reduce the comparability of reserves
information between those companies.
We believe that the purpose of disclosing reserves estimates is to provide
investors with information that is both meaningful and comparable. The reserves
estimates in our disclosure rules, however, are not designed to be, nor are they intended
to represent, an estimation of the fair market value of the reserves. Rather, the reserves
disclosures are intended to provide investors with an indication of the relative quantity of
reserves that is likely to be extracted in the future using a methodology that minimizes
the use of non-reserves-specific variables. By eliminating assumptions underlying the
pricing variable, as any historical pricing method would do, investors are able to compare
reserves estimates where the differences are driven primarily by reserves-specific
information, such as the location of the reserves and the grade of the underlying resource.
We recognize that energy markets are continuing to develop. Therefore, we are not
adopting a rule that requires companies to use futures prices to estimate reserves at this
time.
4.

Time period over which the average price is to be calculated

Numerous commenters on the Proposing Release recommended that the 12-month
period used to calculate the average price for estimating reserves should not coincide
with the fiscal year, as we proposed. 59 Most of these commenters recommended a 12month period running from the beginning of the fourth quarter of the prior fiscal year
through the end of the third quarter of the present fiscal year. For example, for a

See letters from Apache, API, BP, Canadian Natural, CAPP, EnCana, Eni, ExxonMobil, PEMEX,
Petro-Canada, Repsol, Ryder Scott, Sasol, Shell, Total, van Wyk, and Wagner.

company with a fiscal year end of December 31, the relevant 12-month period would
span from October 1 of the prior year to September 30 of the fiscal year covered by the
annual report. 60 Several commenters suggested that we provide a two-month buffer
between the end of the measurement period and the end of the company’s fiscal year so
that reserves estimates would be based on prices from November 1 through October 31
by a company with a fiscal year ending on December 31. 61 Commenters attributed the
need for a buffer period to the accelerated filing dates for annual reports 62 and stated that
they expected that the additional time would result in better, more accurate disclosure. 63
Others noted that some agreements, like production sharing contracts and other complex
concession agreements, can make calculations difficult. 64 One commenter also noted that
shifting the relevant measurement period so that it ends three-months prior to the fiscalyear end would align economic calculations with technical calculations, which typically
occur at the end of the third quarter. 65
As noted above, we have considered all of these recommendations. We are
adopting a pricing formula based on the average of prices at the beginning of each month
in the 12-month period prior to the end of the reporting period. A number of commenters
believed that the use of first-of-the-month prices essentially would provide companies

See letters from Apache, API, BP, Canadian Natural, CAPP, Devon, Eni, ExxonMobil, PEMEX,
Petro-Canada, Repsol, Ryder Scott, Sasol, Shell, Total, van Wyk, and Wagner.

See letters from Canadian Natural, CAPP, Eni, Nexen, and Petro-Canada.

See letters from API, Canadian Natural, CAPP, Devon, Evolution, PEMEX, Petrobras, Ryder
Scott, Sasol, Shell, Total, and Wagner.

See letters from Canadian Natural, CAPP, Nexen, Petrobras, Petro-Canada, Ryder Scott, Sasol,
and Wagner.

See letters from API and Shell.

See letter from Shell.

with one month more to prepare the reserves disclosures, 66 while still aligning the time
period with the fiscal year. 67 We agree with the commenters that such an average will
provide companies more time to prepare more accurate disclosure, while still tying the
pricing formula to the period covered by the annual report.
C.

Extraction of Bitumen and Other Non-Traditional Resources

Definition of “oil and gas producing activities”

Our current definition of “oil and gas producing activities” explicitly excludes
sources of oil and gas from “non-traditional” or “unconventional” sources, that is, sources
that involve extraction by means other than “traditional” oil and gas wells. 68 These other
sources include bitumen extracted from oil sands, as well as oil and gas extracted from
coal and shales, even though some of these resources are sometimes extracted through
wells, as opposed to mining and surface processing. However, such sources are
increasingly providing energy resources to the world due in part to advancements in
extraction and processing technology. 69 Therefore, the rules we adopt today revise the
definition of “oil and gas producing activities” to include such activities. 70
All commenters on this issue supported including the extraction of
unconventional resources as oil and gas producing activities. 71 They believed that such

See letters from API, Devon, Eni, Evolution, ExxonMobil, PEMEX, Petrobras, PWC, Repsol, and
Total.

See letters from Devon and ExxonMobil.

See Rule 4-10(a)(1)(ii)(D) [17 CFR 210.4-10(a)(1)(ii)(D)].

Commenters noted that unconventional resources currently represent 45% of natural gas
production in the U.S. See letters from American Clean Skies and IPAA.

See Rule 4-10(a)(16) [17 CFR 210.4-10(a)(16)].

See letters from American Clean Skies, Apache, API, Canadian Natural, CAPP, CAQ, CFA,
Davis Polk, Devon, E&Y, EnCana, ExxonMobil, FERC, Imperial, IPAA, KPMG, Nexen,

inclusion would greatly improve the quality and completeness of the disclosures. 72 Eight
commenters noted that inclusion would better align disclosure with the way that
companies view their operations. 73 Some noted that, although the distinction was
reasonable decades ago when traditional resources dominated oil and gas production, the
reality of today is that such unconventional resources are mainstream and companies
invest significant amounts of capital to develop these resources. 74
The revised definition of “oil and gas producing activities” that we adopt today
includes the extraction of the non-traditional resources described above. 75 This
amendment is intended to shift the focus of the definition of “oil and gas producing
activities” to the final product of such activities, regardless of the extraction technology
used. The amended definition states specifically that oil and gas producing activities
include the extraction of saleable hydrocarbons, in the solid, liquid, or gaseous state, from
oil sands, shale, coalbeds, or other nonrenewable natural resources which are intended to
be upgraded into synthetic oil or gas, and activities undertaken with a view to such
extraction. 76

Petrobras, Petro-Canada, PRA, PWC, Repsol, Ryder Scott, Sasol, Shell, SPE, StatoilHydro,
Talisman, Total, and Wagner.
72

See letters from API, CAPP, CAQ, ExxonMobil, Imperial, PWC, Repsol, Ryder Scott, Total, and
Wagner.

See letters from API, CAQ, E&Y, ExxonMobil, Imperial, Petro-Canada, PWC, and Total.

See letters from Imperial, IPAA, Repsol, and Total.

See Rule 4-10(a)(16) [17 CFR 210.4-10(a)(16)].

A hydrocarbon product is saleable if it is in a state in which it can be sold even if there is no ready
market for that hydrocarbon product in the geographic location of the project. The absence of a
market does not preclude the activity from being considered an oil and gas producing activity.
However, in order to claim reserves for that hydrocarbon product from a particular location, there
must be a market, or a reasonable expectation of a market, for that product.

Currently, two types of natural resources pose a unique problem to establishing
oil and gas reserves. Coal and, to a lesser degree, oil shale are used both as direct fuel
and as feedstock to be converted into oil and gas. In response to our request for comment
on how best to treat these resources, several commenters recommended that the
extraction of coal 77 and oil shale 78 be categorized based on the final product. One
commenter noted that investment decisions are based on the value and disposition of the
final product. 79 We agree with these commenters and have revised the proposal to
require a company to include coal and oil shale that is intended to be converted into oil
and gas as oil and gas reserves. The adopted rules also, however, prohibit a company
from including coal and oil shale that is not intended to be converted into oil and gas as
oil and gas reserves.
2.

Disclosure by final products

We proposed that disclosure of reserves would be organized based on the preprocessed resource extracted from the ground. For example, under the proposal, a
company that extracted bitumen and processed that bitumen into synthetic crude oil in its
own processing plant would have had to base its reserves disclosure on the amount of
bitumen that was economically producible, not taking into account the economics of the
processing plant. This proposal was consistent with our traditional separation of
“upstream” activities such as drilling and producing oil and gas from “downstream”
activities such as refining. Distinguishing between traditional resources and

See letters from CAPP, ExxonMobil, Ryder Scott, Sasol, Shell, StatoilHydro, and Wagner.

See letters from CAPP, ExxonMobil, Shell, StatoilHydro, and Wagner.

See letter from ExxonMobil.

unconventional resources can be significant to investors because unconventional
resources often involve significantly different economics and company resources than oil
and gas from traditional wells.
Several commenters disagreed with our proposal, recommending that the
determining factor should be the final product. 80 They believed that a company should
be able to consider the prices of self-processed resources when estimating oil and gas
reserves because the economics of the processing plant are critical to the registrant’s
evaluation of the economic producibility of the resources. 81 One commenter was
concerned that distinguishing bitumen or other intermediate product from traditional oil
and gas creates a false and misleading sense of comparability because producers that
upgrade bitumen and sell synthetic crude do not face the same risks and rewards as do
producers who sell the bitumen itself. 82
We are persuaded by these commenters. However, we believe that the distinction
between a company’s traditional and unconventional activities is an important one from
an investor’s perspective because many of the unconventional activities are costlier and,
therefore, have a much higher threshold of economic producibility. Therefore, we are
revising the proposed table in Item 1202 to require separation of reserves based on final
product, but distinguishing between final products that are traditional oil or gas from final
products of synthetic oil or gas. We believe that with this separate disclosure, investors

See letters from Apache, Nexen, Petrobras, and Ryder Scott.

See letters from Apache, CAQ, and Nexen.

See letter from Nexen.

will be able to identify resources in projects that produce synthetic oil or gas that may be
more sensitive to economic conditions from other resources.
In addition, as proposed, we are amending the definition of “oil and gas producing
activities” to include activities relating to the processing or upgrading of natural resources
from which synthetic oil or gas can be extracted. However, the definition would continue
to exclude:
•

Transporting, refining, processing (other than field processing of gas to
extract liquid hydrocarbons by the company and the upgrading of natural
resources extracted by the company other than oil or gas into synthetic oil
or gas) or marketing oil and gas;

•

The production of natural resources other than oil, gas, or natural
resources from which synthetic oil and gas can be extracted; and

•

The production of geothermal steam.

Proved Oil and Gas Reserves

We proposed to significantly revise the definition of “proved oil and gas
reserves.” We are adopting that definition, substantially as proposed. 83 However, as
noted above, we have decided to base the price used to establish economic producibility
on the average price during the 12-month period prior to the ending date of the period
covered by the report, determined as an unweighted arithmetic average of the first-dayof-the-month price for each month within such period.

See Rule 4-10(a)(22) [17 CFR 210.4-10(a)(22)].

One commenter recommended against using an average price to calculate existing
economic conditions if the price is set by contractual arrangements. 84 We agree that
under such circumstances, the appropriate price to use for establishing economic
producibility is the price set by those contractual arrangements. Therefore, we have
revised the definition to reflect that situation. 85
The existing definition of the term “proved oil and gas reserves” incorporates
certain specific concepts such as “lowest known hydrocarbons” which limit a company’s
ability to claim proved reserves in the absence of information on fluid contacts in a well
penetration, 86 notwithstanding the existence of other engineering and geoscientific
evidence. 87 We proposed revisions to the definition that would permit the use of new
reliable technologies to establish the reasonable certainty of proved reserves. The
proposed revisions to the definition of “proved oil and gas reserves” also included
provisions for establishing levels of lowest known hydrocarbons and highest known oil
through reliable technology other than well penetrations. We are adopting those
revisions as proposed.
We also are adopting, as proposed, revisions that permit a company to claim
proved reserves beyond those development spacing areas that are immediately adjacent to
developed spacing areas if the company can establish with reasonable certainty that these

See letter from SPE.

See Rule 4-10(a)(22)(v) [17 CFR 210.4-10(a)(22)(v)].

In certain circumstances, a well may not penetrate the area at which the oil makes contact with
water. In these cases, the company would not have information on the fluid contact and must use
other means to estimate the lower boundary depths for the reservoir in which oil is located.

See previous Rule 4-10(a)(2)(i) [17 CFR 210.4-10(a)(2)(i)].

reserves are economically producible. 88 These revisions are designed to permit the use of
alternative technologies to establish proved reserves in lieu of requiring companies to use
specific tests. In addition, they establish a uniform standard of reasonable certainty that
applies to all proved reserves, regardless of location or distance from producing wells.
E.

Reasonable Certainty

Both the existing definition of the term “proved oil and gas reserves,” and the
definition of that term that we are adopting in this release, rely on the term “reasonable
certainty,” which previously was not defined in Rule 4-10. In the Proposing Release, we
proposed to define the term “reasonable certainty” as “much more likely to be achieved
than not” to avoid ambiguity in that term’s meaning. However, several commenters
recommended that the rules mirror the PRMS definition more closely. 89 Four
commenters were concerned that a different definition from the PRMS would cause
confusion. They recommended using the PRMS standard of “high degree of confidence
that the quantities will be recovered.” 90 One commenter recommended that, because the
proposed definition is new, the Commission should adopt a safe harbor, to avoid potential
uncertainty until a court interprets the phrase.91 But others believed that the proposed
definition is consistent with the PRMS definition. 92 One commenter opined that the

See Rule 4-10(a)(22) [17 CFR 210.4-10(a)(22)]. See Section II.G for a more detailed discussion
regarding this provision.

See letters from EIA, ExxonMobil, and Zakaib.

See letters from Apache, EIA, Energen, and SPE.

See letter from Evolution.

See letters from EnCana, ExxonMobil, Petrobras, and Ryder Scott.

concept of estimated ultimate recovery (EUR) is appropriate to establish proved oil and
gas reserves. 93
We believe that the terms “high degree of confidence” from the PRMS and “much
more likely to be achieved than not” in our proposal have the same meaning. Our
proposed language was not intended to change the level of certainty required to establish
reasonable certainty. However, we agree that the use of terminology that is consistent
with the PRMS will assist in the understanding of those terms. Therefore, we are
adopting the “high degree of confidence” standard that exists in the PRMS. We also are
clarifying that having a “high degree of confidence” means that a quantity is “much more
likely to be achieved than not, and, as changes due to increased availability of geoscience
(geological, geophysical, and geochemical), engineering, and economic data are made to
estimated ultimate recovery (EUR) with time, reasonably certain EUR is much more
likely to increase or remain constant than to decrease” to provide elaboration to the
definition of reasonable certainty.
We are adopting a definition of “reasonable certainty” that addresses, and permits
the use of, both deterministic methods and probabilistic methods for estimating reserves,
as proposed. Nine commenters supported permitting the use of either deterministic
methods or probabilistic methods. 94 One commenter believed that each method may be
more appropriate for different situations. 95 Other commenters also supported the
proposed alignment of the definitions of those terms with the definitions in the PRMS

Total.

See letters from Apache, Devon, Evolution, Petro-Canada, Ryder Scott, Shell, SPE, Total, and
Wagner.

See letter from Wagner.

definitions. 96 The definition that we are adopting states that, if deterministic methods are
used, reasonable certainty means a high degree of confidence that the quantities will be
recovered. 97 Consistent with the PRMS definition, if probabilistic methods are used,
there should be at least a 90% probability that the quantities actually recovered will equal
or exceed the estimate.
F.

Developed and Undeveloped Oil and Gas Reserves

We proposed to revise the definitions of the terms “proved developed oil and gas
reserves” and “proved undeveloped oil and gas reserves.” One commenter noted that the
terms “developed” and “undeveloped” are not restricted to proved oil and gas reserves,
but could apply to all classifications of reserves, including probable and possible
reserves. 98 We agree with that commenter. Although the development of a prospect may
provide the company with more information and data to determine reserves amounts
more accurately, companies may estimate proved, probable, and possible volumes
regardless of the development stage. In the past, these terms were linked to the concept
of proved reserves because our disclosure rules permitted the disclosure only of proved
reserves. In light of our revision to allow disclosure of probable and possible reserves,
the final rules define the terms “developed oil and gas reserves” and “undeveloped oil

See letters from AAPG, SPE, and Southwestern.

See Rule 4-10(a)(24) [17 CFR 210.4-10(a)(24)].

See letter from SPE. We note that with respect to oil and gas reserves, the term “classification” is
used to indicate the level of certainty that estimated amounts will be recovered. Thus, although
the terms “developed” and “undeveloped” may be considered means in which to generically
“classify” reserves, for clarity, we use that term to be consistent with industry usage.

and gas reserves” to indicate that the development status of the reserves is relevant to all
classifications of oil and gas reserves. 99
1.

Developed oil and gas reserves

Other than the change discussed above to eliminate “proved” from the term being
defined, we are adopting a definition of “developed oil and gas reserves” substantially as
proposed. We proposed to define the term “proved developed oil and gas reserves” as
proved reserves that:
•

In projects that extract oil and gas through wells, can be expected to be
recovered through existing wells with existing equipment and operating
methods; and

•

In projects that extract oil and gas in other ways, can be expected to be
recovered through extraction technology installed and operational at the
time of the reserves estimate.

Two commenters suggested that, consistent with the PRMS, reserves should be
considered developed if the cost of any required equipment is relatively minor compared
to the cost of a new well or the installed equipment. 100 Again, we agree that consistency
with PRMS would improve compliance with our rules. In addition, such a revision is
consistent with our existing definition of the term “proved undeveloped reserves” which
includes reserves on which a well exists, but a relatively “major” expenditure is required
for recompletion. 101 Therefore, the final rules provide that reserves also are developed if

See Rules 4-10(a)(6) and (31) [17 CFR 210.4-10(a)(6) and (31)].

100

See letters from SPE and Total.

101

See previous Rule 4-10(a)(4) [17 CFR 210.4-10(a)(4)].

the cost of any required equipment is relatively minor compared to the cost of a new
well. 102
2.

Undeveloped oil and gas reserves

In the Proposing Release, we proposed a significantly revised definition of the
term “proved undeveloped oil and gas reserves.” The most significant aspect of the
proposed revision was the replacement of the existing “certainty” test for areas beyond
one offsetting drilling unit 103 from a productive well with a “reasonable certainty” test.
Currently, the definition of the term “proved undeveloped reserves” imposes a
“reasonable certainty” standard for reserves in drilling units immediately adjacent to the
drilling unit containing a producing well and a “certainty” standard for reserves in
drilling units beyond the immediately adjacent drilling units. 104 All commenters on this
issue supported the proposal. 105 Three commenters noted that a single standard—
reasonable certainty—should apply to all proved reserves. 106 We are adopting this aspect
of the definition as proposed.
Many commenters opposed the proposed language that would have imposed a
five-year limit on maintaining undeveloped reserves unless “unusual” circumstances

102

See Rule 4-10(a)(6) [17 CFR 210.4-10(a)(6)].

103

As noted later in this section of the release, we are replacing the term “drilling unit” with the term
“development spacing area” in the final rules. However, for purposes of discussing the proposal
and the existing rules, we continue to use the term “drilling unit” because that is the term used in
the proposal and the existing rules.

104

See previous Rule 4-10(a)(4) [17 CFR 210.4-10(a)(4)]. A drilling unit refers to the spacing
between wells required by some local jurisdictions to prevent wasting resources and optimize
recovery.

105

See letters from American Clean Skies, Apache, API, Canadian Natural, CAPP, Chesapeake,
Devon, Evolution, ExxonMobil, McMoRan, Petro-Canada, Questar, Repsol, Southwestern, Shell,
SPE, Total, and Wagner.

106

See letters from Devon, EnCana, and Equitable.

existed. 107 They asserted that large projects, projects in remote areas, and projects in
continuous accumulations, such as oil sands, typically take more than five years to
develop, but they do not view such projects as “unusual.” 108 One commenter noted that
the proposed rule is not consistent with the PRMS, which uses the term “specific
circumstances,” rather than “unusual circumstances.” 109 Other commenters suggested
that we require the company to explain why it has not developed any undeveloped
reserves for more than five years. 110 The intent of the proposal was not to exclude
projects that typically take more than five years to develop from being considered
reserves. We agree that the rule should allow the recognition of reserves in projects that
are expected to run more than five years, regardless of whether “unusual” circumstances
exist. Therefore, we have revised the rule to replace the term “unusual” with the term
“specific.” 111 We note that, as proposed, Item 1203 of Regulation S-K would require
disclosure regarding why such undeveloped reserves have not been developed. 112
We also proposed to broaden the definition of the term “proved undeveloped
reserves” to permit a company to include, in its undeveloped reserves estimates,
quantities of oil that can be recovered through improved recovery projects and to expand
the technologies that a company can use to establish reserves. Under the existing
definition, a company can include such quantities only if techniques have been proved

107

See letters from American Clean Skies, Apache, CAPP, Chesapeake, EnCana, ExxonMobil,
Luscher, Newfield, Nexen, Petrobras, Petro-Canada, Ryder Scott, Shell, SPE, and Total.

108

See letters from American Clean Skies, CAPP, Chesapeake, EnCana, ExxonMobil, Newfield,
Nexen, Petrobras, Petro-Canada, Ryder Scott, Shell, and Total.

109

See letter from SPE.

110

See letters from Devon, Ryder Scott, and Wagner.

111

See Rule 4-10(a)(31) [17 CFR 210.4-10(a)(31)].

112

See Item 1203(d) [17 CFR 229.1203(d)].

effective by actual production from projects in the area and in the same reservoir. As
proposed, we are expanding this definition of the term “undeveloped oil and gas
reserves” to permit the use of techniques that have been proved effective by actual
production from projects in the same reservoir or an analogous reservoir or “by other
evidence using reliable technology that establishes reasonable certainty.” 113
We also are making other, less substantive revisions to the definition of
“undeveloped oil and gas reserves.” First, commenters suggested that we use the term
“development spacing” 114 or “drainage areas” 115 instead of “drilling units” because the
term “drilling units” is only relevant in jurisdictions that establish such units. They noted
that many foreign jurisdictions do not establish such units. We concur with those
commenters and have replaced the term “drilling units” with the term “development
spacing areas.”
One commenter also noted that the PRMS guidance on the use of analogs for
improved recovery projects does not limit such use to “within the immediate area” and
recommended that we delete this phrase from the definition. 116 Again, we agree that
consistency with PRMS would be beneficial in this instance and have deleted that phrase
from the definition. We also have eliminated two paragraphs of the proposed definition
because they were largely repetitive of other aspects of the definition and were
unnecessary. 117

113

See Rule 4-10(a)(31) [17 CFR 210.4-10(a)(31)].

114

See letter from Total.

115

See letter from SPE.

116

See letter from SPE.

117

These paragraphs would have clarified (1) in a conventional accumulation, offsetting productive
units must lie within an area in which economic producibility has been established by reliable

Reliable Technology

Definition of the term “reliable technology”

We are adopting, substantially as proposed, a new definition of “reliable
technology” that would broaden the types of technologies that a company may use to
establish reserves estimates and categories. All commenters on this topic supported the
proposed principles-based definition for reliable technology. 118
The current rules limit the use of alternative technologies as the basis for
determining a company’s reserves disclosures. For example, under the current rules, a
company must use actual production or flow tests to meet the “reasonable certainty”
standard necessary to establish the proved status of its reserves. 119 Similarly, the current
rules provide bright line tests for determining fluid contacts, such as lowest known
hydrocarbons and highest known oil, which establish the volume of the hydrocarbons in
place.
We recognize that technologies have developed, and will continue to develop,
improving the quality of information that can be obtained from existing tests and creating
entirely new tests that we cannot yet envision. Thus, the new definition of the term

technology to be reasonably certain and (2) proved reserves can be claimed in a conventional or
continuous accumulation in a given area in which engineering, geoscience, and economic data,
including actual drilling statistics in the area, and reliable technology show that, with reasonable
certainty, economic producibility exists beyond immediately offsetting drilling units. We do not
believe that these statements, based on the terms “conventional accumulation” and “continuous
accumulation” which are no longer being defined continue to serve a helpful purpose. See Section
II.J.5 of this release.
118

See letters from AAPG, American Clean Skies, Apache, CFA, Davis Polk, Devon, EnCana,
ExxonMobil, Petrobras, Ryder Scott, Sasol, Shell, SPE, Southwestern, and Wagner.

119

However, in the past, the Commission’s staff has recognized that flow tests can be impractical in
certain areas, such as the Gulf of Mexico, where environmental restrictions effectively prohibit
these types of tests. The staff has not objected to disclosure of reserves estimates for these
restricted areas using alternative technologies.

“reliable technology” permits the use of technology (including computational methods)
that has been field tested and has demonstrated consistency and repeatability in the
formation being evaluated or in an analogous formation. This new standard will permit
the use of a new technology or a combination of technologies once a company can
establish and document the reliability of that technology or combination of technologies.
We are adopting certain revisions to our proposed definition of the term “reliable
technology.” The proposal also would have required reliable technology to be “widely
accepted.” However, some commenters were concerned that this requirement would
exclude proprietary technologies that companies develop internally that have proven to
be reliable. 120 We concur with these commenters and have removed the “widely
accepted” requirement from the final rule.
We also proposed to define the term “reliable technology,” expressed in
probabilistic terms, as technology that has been proven empirically to lead to correct
conclusions in 90% or more of its applications. Several commenters expressed concern
that this proposed 90% threshold would be difficult to verify and support on an ongoing
basis. 121 We agree that a bright line test would be difficult to apply to a particular
technology or mix of technologies to determine their reliability. Therefore, we are not
adopting the 90% threshold as part of the definition.
2.

Disclosure of technologies used

The proposal would have required a company to disclose the technology used to
establish reserves estimates and categories for material properties in a company’s first

120

See letters from Chesapeake, ExxonMobil, Shell, and Total.

121

See letters from AAPG, Apache, EIA, Evolution, Ryder Scott, Shell, SPE, and Wagner.

filing with the Commission and for material additions to reserves estimates in subsequent
filings because, under the proposal, a company would be able to select the technology or
mix of technologies that it uses to establish reserves. Two commenters supported the
proposal because they believed that disclosure of the technologies used is reasonable if
the definition of “reliable technology” is principles-based. 122 However, many other
commenters were concerned that the proposed requirement to disclose the technologies
used to establish levels of certainty for reserves estimates would lead to very complex,
technical disclosures that would have little meaning to investors. 123 Others were
concerned that disclosure of the technology, or the mix of technologies, might cause
competitive harm. 124
As an alternative, some commenters recommended that the rule require a more
general overview of the technologies used. 125 We are clarifying that the required
disclosure would be limited to a concise summary of the technology or technologies used
to create the estimate. 126 A company would not be required to disclose proprietary
technologies, or a proprietary mix of technologies, at a level of specificity that would
cause competitive harm. Rather, the disclosure may be more general. For example, a
company may disclose that it used a combination of seismic data and interpretation,
wireline formation tests, geophysical logs, and core data to calculate the reserves
estimate. As noted, however, the Commission’s staff, as part of the review and comment

122

See letters from Davis Polk and Sasol.

123

See letters from API, Devon, Eni, ExxonMobil, PEMEX, Petro-Canada, Questar, Repsol, Ryder
Scott, Shell, Southwestern, StatoilHydro, and Total.

124

See letters from API, Devon, Evolution, ExxonMobil, Ryder Scott, StatoilHydro, and Total.

125

See letters from EnCana, Eni, Evolution, Ryder Scott, and Shell.

126

See Item 1202(a)(6) [17 CFR 229.1202(a)(6)].

process, may continue to request companies to provide supplemental data, consistent with
current practice, 127 which, under the new rules, may include information sufficient to
support a company’s conclusion that a technology or mix of technologies used to
establish reserves meets the definition of “reliable technology.”
Two commenters supported the proposal to limit the disclosures to technologies
used to establish reserves in a company’s first filing with the Commission and material
additions to reserves. 128 We are adopting this limitation as proposed. 129 If the company
has not previously disclosed reserves estimates in a filing with the Commission or is
disclosing material additions to its reserves estimates, the company must disclose the
technologies used to establish the appropriate level of certainty for reserves estimates
from material properties included in the total reserves disclosed and the particular
properties do not need to be identified. We believe that requiring such disclosure when
reserves, or material additions to reserves, are reported for the first time will discourage
the use of questionable technologies to establish reserves. However, we do not believe it
is necessary to require a company to disclose the technology or technologies relied upon
to establish reserves previously disclosed under our rules because the permitted
technologies have been limited to those permitted by our existing rule. In addition, we
believe that ongoing disclosure of the technologies used to establish all of a company’s
reserves would become unnecessarily cumbersome.

127

Currently, the Commission’s staff requests supplemental data pursuant to Instruction 4 to Item 102
of Regulation S-K [17 CFR 229.102], Rule 418 [17 CFR 230.418], and Rule 12b-4 [17 CFR
240.12b-4]

128

See letters from Southwestern and Wagner.

129

See Item 1202(a)(6) [17 CFR 229.1202(a)(6)].

Unproved Reserves—“Probable Reserves” and “Possible Reserves”

As discussed more fully in Section IV.B.3 of this release addressing the disclosure
requirements of new Subpart 1200, we are adopting the proposal to permit disclosure of
probable and possible reserves. Therefore, we are adopting the proposed definitions of
the terms “probable reserves” and “possible reserves” as proposed.
When producing an estimate of the amount of oil and gas that is recoverable from
a particular reservoir, a company can make three types of estimates:
•

An estimate that is reasonably certain;

•

An estimate that is as likely as not to be achieved; and

•

An estimate that might be achieved, but only under more favorable
circumstances than are likely.

These three types of estimates are known in the industry as (1) proved, (2) proved plus
probable, and (3) proved plus probable plus possible reserves estimates.
1.

Probable reserves

We are adopting the definition of the term “probable reserves” as proposed. It
states that “probable reserves” are those additional reserves that are less certain to be
recovered than proved reserves but which, in sum with proved reserves, are as likely as
not to be recovered. 130 This definition provides guidance for the use of both
deterministic and probabilistic methods. The definition clarifies that, when deterministic
methods are used, it is as likely as not that actual remaining quantities recovered will
equal or exceed the sum of estimated proved plus probable reserves. Similarly, when
probabilistic

methods are used, there must be at least a 50% probability that the actual quantities
recovered will equal or exceed the proved plus probable reserves estimates. This
definition was derived from the PRMS definition of the term “probable reserves.”
Several commenters agreed with the proposed definition of this term, noting that it is
roughly consistent with PRMS. 131
2.

Possible reserves

We also are adopting the definition of the term “possible reserves” as proposed.
The new definition states that possible reserves include those additional reserves that are
less certain to be recovered than probable reserves. 132 It clarifies that, when deterministic
methods are used, the total quantities ultimately recovered from a project have a low
probability to exceed the sum of proved, probable, and possible reserves. When
probabilistic methods are used, there must be at least a 10% probability that the actual
quantities recovered will equal or exceed the sum of proved, probable, and possible
estimates. Several commenters noted that our proposed definition of the term “possible
reserves” was consistent with PRMS, which also uses a 10% threshold. 133 One
commenter recommended that the threshold for “possible reserves” should be a 25%
likelihood of recovery because that percentage would be more meaningful than 10%. 134
We believe that a definition consistent with the PRMS will provide the most certainty and
clarity for companies and investors.

130

See Rule 4-10(a)(18) [17 CFR 210.4-10(a)(18)].

131

See letters from Devon, EnCana, SPE, and StatoilHydro.

132

See Rule 4-10(a)(17) [17 CFR 210.4-10(a)(17)].

133

See letters from Devon, EnCana, SPE, and StatoilHydro.

134

See letter from Evolution.

Reserves

We proposed to add a definition of the term “reserves” to our rules. The proposed
definition would have described the criteria that an accumulation of oil, gas, or related
substances must satisfy to be considered reserves (of any classification), including nontechnical criteria such as legal rights. Specifically, we proposed to define reserves as the
estimated remaining quantities of oil and gas and related substances anticipated to be
recoverable, as of a given date, by application of development projects to known
accumulations based on:
•

Analysis of geoscience and engineering data;

•

The use of reliable technology;

•

The legal right to produce;

•

Installed means of delivering the oil, gas, or related substances to markets,
or the permits, financing, and the appropriate level of certainty (reasonable
certainty, as likely as not, or possible but unlikely) to do so; and

•

Economic producibility at current prices and costs.

The proposed definition also would have clarified that reserves are classified as proved,
probable, and possible according to the degree of uncertainty associated with the
estimates. We are not adopting the definition as proposed. Four commenters
recommended clarification that the term “legal right to produce” extends beyond the
initial term of an oil and gas concession if there is a reasonable expectation that the
concession will be renewed, consistent with the PRMS and current staff position. 135 We

135

See letters from API, CAQ, Grant Thornton, and KPMG.

are adopting a definition of the term “reserves” that more closely parallels the PRMS
definition of that term.
Our final rules define the term “reserves” as the estimated remaining quantities of
oil and gas and related substances anticipated to be economically producible, as of a
given date, by application of development projects to known accumulations. 136 In
addition, there must exist, or there must be a reasonable expectation that there will exist,
the legal right to produce or a revenue interest in the production of oil and gas, installed
means of delivering oil and gas or related substances to market, and all permits and
financing required to implement the project.
A note to the definition clarifies that reserves should not be assigned to adjacent
reservoirs isolated by major, potentially sealing, faults until those reservoirs are
penetrated and evaluated as economically producible and that reserves should not be
assigned to areas that are clearly separated from a known accumulation by a nonproductive reservoir (i.e., absence of reservoir, structurally low reservoir, or negative test
results). Such areas may contain prospective resources (i.e., potentially recoverable
resources from undiscovered accumulations). 137
One notable difference between our final definition of “reserves” and the PRMS
definition is that our definition is based on “economic producibility” rather than
“commerciality.” One commenter believed that reserves must be “commercial,” as stated
in the PRMS definition. 138 However, commerciality introduces a subjective aspect to the

136

See Rule 4-10(a)(26) [17 CFR 210.4-10(a)(26)].

137

See Note to Rule 4-10(a)(26) [17 CFR 210.4-10(a)(26)].

138

See letter from StatoilHydro.

price used to establish existing economic conditions by factoring in the rate of return
required by a particular company before it will commit resources to the project. This rate
of return will vary among companies, reducing the comparability among disclosures.
Therefore, the adopted definition of the term “reserves” relies on economic producibility,
as proposed.
J.

Other Supporting Terms and Definitions

We also proposed to define several other terms primarily to support and clarify
the definitions of the key terms. We are adopting most of those supporting definitions as
discussed in further detail below.
1.

Deterministic estimate

A company can derive two different types of reserves estimates depending on the
method used to calculate the estimates. These two types of estimates are known as
“deterministic estimates” and “probabilistic estimates.” 139 In the Proposing Release, we
proposed to define the term “deterministic estimate” as an estimate based on a single
value for each parameter (from the geoscience, engineering, or economic data) in the
reserves calculation that is used in the reserves estimation procedure. We are adopting
that definition as proposed.
2.

Probabilistic estimate

We are adopting a new definition of the term “probabilistic estimate”
substantially as proposed. The new rule defines the term “probabilistic estimate” as an

139

See Rules 4-10(a)(5) and (a)(19) [17 CFR 210.4-10(a)(5) and (a)(19)]. These definitions are based
on the Canadian Oil and Gas Evaluation Handbook (COGEH). This handbook was developed by
the Calgary Chapter of the Society of Petroleum Evaluation Engineers and the Petroleum Society
of CIM to establish standards to be used within the Canadian oil and gas industry in evaluating oil
and gas reserves and resources.

estimate that is obtained when the full range of values that could reasonably occur from
each unknown parameter (from the geoscience and engineering data) is used to generate a
full range of possible outcomes and their associated probabilities of occurrence. 140 In
response to a comment received, however, we revised the definition so that it does not
include the application of a range of values with respect to economic conditions because
those conditions, such as prices and costs, are based on historical data, and therefore are
an established value, rather than a range of estimated values. 141
3.

Analogous reservoir

We proposed a definition of the term “analogous formation in the immediate
area.” As noted above, we received comment indicating that the use of appropriate
analogs should not be limited to the immediate area in which the reserves are being
estimated. 142 Therefore, we have changed the defined term to “analogous reservoir.” 143
In addition, based on commenters’ remarks, we are defining the term “analogous
reservoir” in a manner that is more consistent with the PRMS, which addresses more
specifically the types of reservoirs that may be used as analogues. The new definition of
the term “analogous reservoir” states that analogous reservoirs, as used in resources
assessments, have similar rock and fluid properties, reservoir conditions (depth,
temperature, and pressure) and drive mechanisms, but are typically at a more advanced
stage of development than the reservoir of interest and thus may provide concepts to

140

See Rule 4-10(a)(19) [17 CFR 210.4-10(a)(19)].

141

See letter from Shell.

142

See letter from SPE.

143

See Rule 4-10(a)(2) [17 CFR 210.4-10(a)(2)].

assist in the interpretation of more limited data and estimation of recovery. 144 When used
to support proved reserves, an “analogous reservoir” refers to a reservoir that shares the
following characteristics with the reservoir of interest:
•

Same geological formation (but not necessarily in pressure communication
with the reservoir of interest);

•

Same environment of deposition;

•

Similar geological structure; and

•

Same drive mechanism.

As proposed, the new definition includes an instruction that clarifies that reservoir
properties must, in the aggregate, be no more favorable in the analog than in the reservoir
of interest. The new definition also clarifies that, although an analogous reservoir must
be in the same geological formation as the reservoir of interest, it need not be in pressure
communication with the reservoir of interest.
4.

Definitions of other terms

We received no comment with regard to several of the proposed supporting
definitions. We are adopting those definitions substantially as proposed without material
changes. They include the following terms:
•

“Condensate”; 145

•

“Development project”; 146

144

See Rule 4-10(a)(2) [17 CFR 210.4-10(a)(2)].

145

See Rule 4-10(a)(4) [17 CFR 210.4-10(a)(4)].

146

See Rule 4-10(a)(8) [17 CFR 210.4-10(a)(8)].

•

“Economically producible”; 147

•

“Estimated ultimate recovery,” 148

•

“Exploratory well”; 149

•

“Extension well”; 150 and

•

“Resources.” 151

Most of these supporting terms and their definitions are based on similar terms in
the PRMS. The definition of “resources” is based on the Canadian Oil and Gas
Evaluation Handbook (COGEH).
In the Proposing Release, we solicited comment on whether we should adopt any
other supporting definitions. One commenter submitted an appendix to its letter
containing numerous other terms that it thought we should adopt. 152 We have decided
not to adopt those additional definitions because we feel that they are unnecessary at this
time. However, we have decided to adopt a definition for the term “bitumen.” We
believe that providing a definition for this term will lead to more consistency among
disclosures because there currently are several competing definitions of that term used in
the industry.
We are defining the term “bitumen” as “petroleum in a solid or semi-solid state in
natural deposits. In its natural state, it usually contains sulfur, metals, and other non-

147

See Rule 4-10(a)(10) [17 CFR 210.4-10(a)(10)].

148

See Rule 4-10(a)(11) [17 CFR 210-4-10(a)(11)].

149

See Rule 4-10(a)(13) [17 CFR 210.4-10(a)(13)].

150

See Rule 4-10(a)(14) [17 CFR 210.4-10(a)(14)].

151

See Rule 4-10(a)(28) [17 CFR 210.4-10(a)(28)].

152

See letter from SPE.

hydrocarbons. Bitumen has a viscosity greater than 10,000 centipoise measured at
original temperature in the deposit and atmospheric pressure, on a gas free basis.” 153
This definition is similar to the PRMS definition of “natural bitumen.”
5.

Proposed terms and definitions not adopted

We proposed definitions for the terms “continuous accumulations” and
“conventional accumulations” to assist companies in disclosing segregated reserves based
on these two types of accumulations. As noted elsewhere in this release, the final rules
do not require disclosure based on the type of accumulation in which the reserves are
found. 154 Therefore, there is no need to define these terms and we are not adopting the
proposed definitions.
Similarly, we proposed a definition for the term “sedimentary basin” because it
would have been part of our definition of the term “by geographic area.” As noted
elsewhere in this release, we have substantially revised the definition of the term “by
geographic area” 155 and the term “sedimentary basin” is no longer needed, so we are not
adopting this proposed term and definition.
As noted above, one commenter recommended that we adopt a large glossary of
terms and definitions that correspond with the PRMS definitions. 156 Rather than defining
an extensive glossary of terms in our rules and attempting to constantly update those
definitions, we advise companies to look to definitions that are commonly accepted

153

See Rule 4-10(a)(3) [17 CFR 210.4-10(a)(3)].

154

See Section III.B.3.c.

155

See Section III. B.2.a.

156

See letter from SPE.

within the oil and gas industry to the extent such definitions are not in, or inconsistent
with, our rules.
K.

Alphabetization of the Definitions Section of Rule 4-10

We are alphabetizing the definitional terms in Rule 4-10(a) because we are adding
a significant number of defined terms to this section.
III.

Revisions to Full Cost Accounting and Staff Accounting Bulletin
As we noted in Section II.B.2 of this release, commenters unanimously opposed

our proposal to use different prices for disclosure and accounting purposes. We agree
with those commenters and are revising our proposal to use a 12-month average price for
accounting purposes. These revisions primarily will appear under the full cost
accounting method described in Rule 4-10(c) 157 of Regulation S-X. The full cost
accounting method permits certain oil and gas extraction costs to accumulate on a
company’s balance sheet subject to a limitation test or a “ceiling” as described in Rule 410(c)(3)(4). Like reserve disclosures, these capitalized costs and the related limitation
test are not fair value based measurements. Rather the capitalized costs represent the
accumulated historical acquisition, exploration and development costs (net of any
previously recorded depletion, amortization or ceiling test write downs) incurred for oil
and gas producing activities, limited to a standardized mathematical calculation (the full
cost ceiling) adopted over 25 years ago. Costs that do not exceed the limitation are
deferred and amortized over time. The limitation test calculation on capitalized costs is
not designed or intended to represent a fair valuation of the related oil and gas assets. 158

157

17 CFR 210.4-10(c).

158

While not intended to represent fair value, costs that are written down because they exceed the
ceiling limitation are accounted for in the same manner as impairments recognized under

Similar to the single-day, year-end pricing used under the successful efforts
method, 159 the application of the full cost method of accounting in Rule 4-10(c) has used
“current prices,” interpreted as single-day, year-end prices, as the basis for calculating the
limitation on costs that may be capitalized under the full cost method. In order to further
the objective of providing comparable oil and gas reserve quantities, our final rule
clarifies that the term “current prices” as used in Rule 4-10(c) is consistent with the 12month average price as calculated in Rule 4-10(a)(22)(v). 160
However, since these calculations are not designed to result in a calculation of fair
value and since the change to the full cost accounting method would effectively eliminate
the anomalies caused by the single-day, year-end price currently used in the limitation
test, the SEC staff will eliminate portions of Staff Accounting Bulletin (SAB) Topic
12:D.3.c that permit consideration of the impact of price increases subsequent to the
period end on the ceiling limitation test.
The combination of adopting a 12-month average pricing mechanism and
eliminating portions of SAB Topic 12:D.3.c could have the effect of requiring a company
using the full cost accounting method to record a ceiling test write-down in income
during periods of rising oil and gas prices. In that situation, it is possible that using a
12-month average price in the ceiling test calculation might result in a write-down that
would not otherwise have been required had the full cost company been permitted to use

accounting generally. That is, once the asset is written down, it becomes the new historical cost
basis and cannot be reinstated for subsequent increases in the ceiling. See Rule 4-10(c)(4)(i) of
Regulation S-X [17 CFR 210-4-10(c)(4)(i)].
159

The accounting guidance refers to our definition of proved reserves under existing Rule
4-10(a)(2), which currently uses a single-day, year-end price to establish reserves amounts.

160

See Rule 4-10(c)(8) [17 CFR 210.4-10(c)(8)].

the single-day, year-end price. Conversely, it is also possible that in periods of declining
oil and gas prices, the application of this rule could result in the deferral of ceiling test
write-downs. In that situation, it is possible that using a 12-month average price in the
ceiling limitation test calculation might not result in a write-down in situations where a
write down would have otherwise been required had the full cost company been required
to use a single-day, year-end price in its ceiling limitation test calculation.
Because the application of the ceiling limitation test is not a fair-value-based
calculation but rather a limit on the amount of certain oil and gas related exploration costs
that can be capitalized, portions of which would have resulted in write-downs in prior
periods under other methods of accounting, we believe the benefits of using a single
pricing mechanism justify the potential changes to the timing of those ceiling test writedowns or amortizations amounts. However, as discussed in Section V of this release, we
believe that the company should discuss such situations, if material, particularly when
pricing trends indicate the possibility of future write-downs, in Management’s Discussion
and Analysis and, where appropriate, the notes to the financial statements.
IV.

Update and Codification of the Oil and Gas Disclosure Requirements in
Regulation S-K
The Proposing Release proposed to update and codify Securities Act and

Exchange Act Industry Guide 2: Disclosure of Oil and Gas Operations (Industry Guide
2). 161 Industry Guide 2 currently sets forth most of the disclosures that an oil and gas
company provides regarding its reserves, production, property, and operations.
Regulation S-K references Industry Guide 2 in Instruction 8 to Item 102 (Description of

161

Exchange Act Industry Guide 2 merely references, and therefore is identical to, Securities Act
Industry Guide 2.

Property), Item 801 (Securities Act Industry Guides), and Item 802 (Exchange Act
Industry Guides). However, Industry Guide 2 itself does not appear in Regulation S-K or
in the Code of Federal Regulations. The rules that we adopt today codify the contents of
Industry Guide 2 in a new Subpart 1200 of Regulation S-K.
A.

Revisions to Items 102, 801, and 802 of Regulation S-K

The instructions to Item 102 of Regulation S-K, as well as Items 801 and 802 of
Regulation S-K, currently reference the industry guides. Because we are codifying the
Industry Guide 2 disclosures in a new Subpart 1200 of Regulation S-K, we are revising
the instructions to Item 102 to reflect this change. 162 We also are eliminating the
references in Items 801 and 802 to Industry Guide 2 because that industry guide will
cease to exist upon effectiveness of the amendments we adopt today. 163
In addition, Instruction 5 to Item 102 of Regulation S-K currently prohibits the
disclosure of reserves other than proved oil and gas reserves. Because we are adopting
rules to permit disclosure of probable and possible oil and gas reserves, we are revising
Instruction 5 to limit its applicability to extractive enterprises other than oil and gas
producing activities, such as mining activities. 164 Similarly, Instruction 3 of Item 102,
regarding production, reserves, locations, development and the nature of the company's
interests, will no longer apply to oil and gas producing activities, so we also are limiting
that instruction to mining activities. 165

162

See revised Instructions 4 and 8 to Item 102 [17 CFR 229.102].

163

See revised Item 801 and 802 [17 CFR 229.801 and 802].

164

See revised Instruction 5 to Item 102 [17 CFR 229.102]. Extractive enterprises include enterprises
such as mining companies that extract resources from the ground.

165

See revised Instruction 3 to Item 102 [17 CFR 229.102].

Finally, we are eliminating Instruction 4 to Item 102 regarding the ability of the
Commission’s staff to request supplemental information, including reserves reports. This
instruction is duplicative of Securities Act Rule 418 166 and Exchange Act 12b-4, 167
regarding the staff’s general ability to request supplemental information.
B.

Proposed New Subpart 1200 to Regulation S-K Codifying Industry
Guide 2 Regarding Disclosures by Companies Engaged in Oil and Gas
Producing Activities

Overview

We are adding a new Subpart 1200 to Regulation S-K that codifies the disclosure
requirements related to companies engaged in oil and gas producing activities. This new
subpart largely includes the existing requirements of Industry Guide 2. However, we
have revised these requirements to update them, provide better clarity with respect to the
level of detail required in oil and gas disclosures, including the geographic areas by
which disclosures need to be made, and provide formats for tabular presentation of these
disclosures. In addition, Subpart 1200 contains the following new disclosure
requirements, many of which have been requested by industry participants:
•

Disclosure of reserves from non-traditional sources (e.g., bitumen, shale,
coal) as oil and gas reserves;

•

Optional disclosure of probable and possible reserves;

•

Optional disclosure of oil and gas reserves’ sensitivity to price;

•

Disclosure of the development of proved undeveloped reserves;

166

17 CFR 230.418.

167

17 CFR 240.12b-4.

•

Disclosure of technologies used to establish additions to reserves
estimates;

•

Disclosure of a company’s internal controls over reserves estimation and
the qualifications of the business entity or individual preparing or auditing
the reserves estimates; and

•

Disclosure based on a new definition of the term “by geographic area.”

We discuss each of these proposed new Items below.
2.

Item 1201 (General instructions to oil and gas industry-specific
disclosures)

We are adding new Item 1201 to Regulation S-K. This item sets forth the general
instructions to Subpart 1200. The new item contains three paragraphs that perform the
following tasks:
•

Instruct companies for which oil and gas producing activities are material
to provide the disclosures specified in Subpart 1200; 168

•

Clarify that, although a company must present specified Subpart 1200
information in tabular form, the company may modify the format of the
table for ease of presentation, to add additional information or to combine
two or more required tables;

•

State that the definitions in Rule 4-10(a) of Regulation S-X apply to
Subpart 1200; and

•

168

Define the term “by geographic area.”

This paragraph would maintain the existing exclusion in Industry Guide 2 for limited partnerships
and joint ventures that conduct, operate, manage, or report upon oil and gas drilling or income
programs, that acquire properties either for drilling and production, or for production of oil, gas, or
geothermal steam or water.

Geographic area

We received significant comments regarding the proposed definition of the term
“by geographic area.” We proposed to require disclosure by continent, country
containing 15% of more of the company’s reserves, and sedimentary basin or field
containing 10% or more of the company’s reserves. Several commenters were concerned
that the proposed definition would add too much detail to the disclosures, particularly at
the basin or field level. 169 They were concerned that this amount of detail would make
disclosures too complex and incoherent. 170 They were particularly concerned with the
extension of this standard to disclosures other than reserves, such as production, wells,
and acreage. 171 Commenters also believed that the disclosures, in particular by field,
could cause competitive harm in future property sales transactions, unitization
agreements, and other asset transfers. 172
Some commenters also believed that some of these disclosures may be prohibited
by foreign governments. 173 One commenter noted that separate determination of field or
basin reserves within a larger production sharing agreement may not be possible due to
concession-wide cost sharing terms. 174 Eight commenters recommended that the
determination of appropriate geographic disclosure should remain with management,

169

See letters from Apache, CAPP, Devon, ExxonMobil, Imperial, Nexen, Repsol, Shell, and
StatoilHydro.

170

See letters from Apache, CAPP, ExxonMobil, Imperial, Nexen, and Repsol.

171

See letters from ExxonMobil, Imperial, and Total.

172

See letters from Apache, API, BHP, Canadian Natural, CAPP, Devon, EnCana, Eni, Newfield,
Nexen, Petro-Canada, Shell, StatoilHydro, and Total.

173

See letters from Apache, API, CAPP, Eni, Newfield, Petro-Canada, and Total.

174

See letter from Apache.

consistent with Statement of Financial Accounting Standard No. 69 (SFAS 69). 175
However, two commenters indicated that a country-by-country breakdown would be
adequate. 176
Four commenters supported the proposed percentage thresholds for geographic
disclosure, stating that they would increase understanding of the total energy supply,
leading to better decisions by policy makers. 177 One commenter supported the 15%
threshold for countries. 178
As we noted in the Proposing Release, there have been differing interpretations
among oil and gas companies as to the level of specificity required when a company is
breaking out its reserves disclosures based on geographic area as required by Instruction
3 of Item 102 of Regulation S-K. 179 Some companies currently broadly organize their
reserves only by hemisphere or continent. SFAS 69 requires reserves disclosure to be
separately disclosed for the company’s home country and foreign geographic areas. It
defines “foreign geographic areas” as “individual countries or groups of countries as
appropriate for meaningful disclosure in the circumstances.” Since SFAS 69 was issued,
the operations of oil and gas companies have become much more diversified globally.
For many large U.S. oil and gas producers, the majority of reserves are now overseas,
with material amounts in individual countries and even individual fields or basins.

175

See letters from Apache, API, Canadian Natural, CAPP, Eni, ExxonMobil, Imperial, and PetroCanada.

176

See letters from ExxonMobil and Nexen.

177

See letters from AAPG, CFA, Chesapeake, and E&Y.

178

See letter from Shell.

179

17 CFR 229.102.

We think that greater specificity than simply disclosing reserves within “groups of
countries” would benefit investors and, in certain cases, may be necessary to meet the
requirements of Item 102 of Regulation S-K. Some countries in which many of these
companies operate and may have significant reserves are subject to unique risks, such as
political instability. However, we recognize that disclosure that is too detailed may
detract from the overall disclosure. Thus, we have revised the definition of the term “by
geographic area” to mean, as appropriate for meaningful disclosure under a company’s
particular circumstances:
(1)

By individual country;

(2)

By groups of countries within a continent; or

(3)

By continent. 180

This definition is substantially the same as the definition currently provided in
SFAS 69. However, as proposed, we are adopting specific percentage thresholds to the
geographic breakdowns of reserves estimates and production. With respect to
production, the final rules require disclosure of production in each country or field
containing 15% or more of the company’s proved reserves unless prohibited by the
country in which the reserves are located. We are raising the proposed 10% threshold for
field disclosure of production to 15% to make the threshold consistent. However, rather
than requiring disclosure based on a percentage of the amount of the company’s reserves
of an individual product, as proposed, the final rules require disclosure based on a

180

See Item 1201(d) [17 CFR 229.1201(d)].

percentage of a company’s total global oil and gas proved reserves, based on barrels of
oil equivalent. 181
With respect to reserves estimates, the final rules require disclosure of reserves in
countries containing more than 15% of the company’s proved reserves. As with the
production disclosure, this 15% threshold would be based on the company’s total global
oil and gas proved reserves, rather than on individual products, as proposed. 182 A
registrant need not provide disclosure of the reserves in a country containing 15% or
more of the registrant’s proved reserves if that country’s government prohibits disclosure
of reserves in that country.
We are not adopting the requirement that we proposed to disclose reserves by
sedimentary basin or field. We share commenters’ concerns that there is potential for
competitive harm from such disclosure in future property sales transactions, unitization
agreements, and other asset transfers. Moreover, we recognize that there may be
situations in which a particular field may encompass a significant portion of a company’s
reserves in a foreign country. To avoid compelling a company to provide, in effect, field
disclosure, the rule does not require disclosure of reserves in a country containing 15% of
the company’s reserves if that country prohibits disclosure of reserves in a particular field
and disclosure of reserves in that country would have the effect of disclosing reserves in
particular fields. 183 For example, if a company has 25% of its reserves in Country A and
Country A’s government prohibits disclosure of reserves by field within Country A, if

181

See Item 1204(a) [17 CFR 229.1204(a)].

182

See Item 1202(a)(2) [17 CFR 229.1202(a)(2)].

183

See Instruction 4 to Item 1202(a)(2).

almost all of that company’s reserves in Country A are located in a single field, the
company would not be required to specify the amount of its reserves located in Country
A.
b.

Tabular disclosure

We proposed to require much of the reserves disclosures and other disclosures in
Industry Guide 2 to be presented in tabular format. Two commenters encouraged using a
standardized table for reserves disclosure. 184 Another believed that companies should be
able to reorganize, supplement, or combine tables for better presentation of the
company’s strategy. 185 However, two commenters believed that the rules should not
propose a specified tabular format in general. 186 These commenters believed that
companies should have the flexibility to present data in a format that is most relevant and
meaningful to investors, whether it is tabular or narrative. 187 We continue to believe that
in certain circumstances, the required disclosures lend themselves to a tabular disclosure
format. We believe that standardizing such tables will improve the readability and
comparability of disclosures among companies. However, in response to comments
received, we have made several revisions to the individual disclosure items, including
whether the disclosure item must be presented in tabular format. We discuss each below.
3.

Item 1202 (Disclosure of reserves)

Existing Instruction 3 to Item 102 of Regulation S-K requires disclosure of an
extractive enterprise’s proved reserves. With respect to oil and gas producing companies,

184

See letters from Devon and Petrobras.

185

See letter from Petro-Canada.

186

See letters from Apache and ExxonMobil.

187

See letters from Apache and ExxonMobil.

we are replacing this Instruction by adding a new Item 1202 to Regulation S-K that
contains a similar disclosure requirement regarding a company’s proved reserves. 188
However, new Item 1202 expands on the requirements of Item 102 by specifically
permitting the disclosure of probable and possible reserves and permitting the disclosure
of reserves from non-traditional sources. In addition, because we are no longer
distinguishing between types of accumulations, the item contains only one table with
separate columns for different final products, specifically, oil, gas, synthetic oil, synthetic
gas, and other natural resources sold by the company.
a.

Oil and gas reserves tables

New Item 1202 requires disclosure, in the aggregate and by geographic area, of
reserves estimates using prices and costs under existing economic conditions, for each
product type, in the following categories:
•

Proved developed reserves;

•

Proved undeveloped reserves;

•

Total proved reserves;

•

Probable developed reserves (optional);

•

Probable undeveloped reserves (optional);

•

Possible developed reserves (optional); and

•

Possible undeveloped reserves (optional).

A form of this table is set forth below:

188

See Item 1202 [17 CFR 229.1202].

Summary of Oil and Gas Reserves as of Fiscal-Year End
Based on Average Fiscal-Year Prices
Oil
Reserves category
PROVED
Developed
Continent A
Continent B
Country A
Country B
Other Countries in Continent B
Undeveloped
Continent A
Continent B
Country A
Country B
Other Countries in Continent B
TOTAL PROVED

(mbbls)

Reserves
Natural Synthetic Synthetic
Gas
Oil
Gas
(mmcf)

(mbbls)

(mmcf)

Product A
(measure)

PROBABLE
Developed
Undeveloped
POSSIBLE
Developed
Undeveloped

Disclosure by final product sold

The table requires disclosure by final product sold by the company, specifically,
oil, gas, synthetic oil, synthetic gas, or other natural resource. Thus, if the company
processes a natural resource that it has extracted, such as bitumen, into synthetic oil or
gas prior to selling the product, it may include such reserves under the synthetic oil or gas
columns. As noted below, we have revised the proposal that would have required
disclosure by type of accumulation. In addition, in response to commenters, we have
revised the definition of “oil and gas producing activities” so that a company can use the
price of that synthetic oil or gas to determine the economic producibility of the reserves

because the economics of the processing activity are relevant to the determination of
whether to extract the underlying resource. 189
However, if a company extracts a resource other than oil or gas, such as bitumen,
and sells the product without processing it into synthetic oil or gas, it must disclose
reserves of that other natural resource. Although that company’s extractive activities
would be considered an oil and gas producing activity under the definition of that term,
such a company would not benefit from the economics of processing of that resource
because the price that determines whether such a company extracts the resource is the
price of the unprocessed resource and therefore the company may not establish reserves
estimates based on the price of the upgraded product. Similarly, if the company does not
itself extract the natural resource, but purchases the natural resource for processing or is
paid to process the natural resource, it may not claim reserves either of the resource or of
the processed product.
ii.

Aggregation

As proposed, the reserves to be reported in these tables would be aggregations (to
the company total level) of reserves determined for individual wells, reservoirs,
properties, fields, or projects. Regardless of whether the reserves were determined using
deterministic or probabilistic methods, the reported reserves should be simple arithmetic
sums of all estimates at the well, reservoir, property, field, or project level within each
reserves category. Eight commenters agreed that aggregation should not be permitted
beyond the field, property or project level, consistent with PRMS. 190

189

See Section II.C.2 of this release.

190

See letters from Devon, Evolution, ExxonMobil, Ryder Scott, Shell, SPE, Talisman, and Wagner.

iii.

Optional disclosure of probable and possible reserves

A company may, but is not required to, disclose probable or possible reserves in
these tables. If a company discloses probable or possible reserves, it must provide the
same level of geographic detail as it must with respect to proved reserves and must state
whether the reserves are developed or undeveloped. In addition, Item 1202 requires the
company to disclose the relative uncertainty associated with these classifications of
reserves estimations. By permitting disclosure of all three of these classifications of
reserves, our objective is to enable companies to provide investors with more insight into
the potential reserves base that managements of companies may use as their basis for
decisions to invest in resource development.
Most commenters addressing this issue supported permitting the disclosure of
probable and possible reserves in filed documents. 191 They believed that such disclosure
would provide a more complete picture of a company’s full portfolio of opportunities. 192
One commenter noted that this information often is already available on company
websites and in press releases. 193 However, several commenters supporting the proposal
cautioned that there could be significant variability among disclosures. 194
Other commenters expressed concern about disclosure of unproved reserves, but
conceded that voluntary disclosure would be acceptable. 195 These commenters were

191

See letters from CFA, Chesapeake, Deloitte, EnCana, Evolution, McMoRan, Newfield, Petrobras,
Petro-Canada, Questar, Ryder Scott, Sasol, Ryder Scott, Shell, SPE, Three Senators, Wagner, and
Zakaib.

192

See letters from CFA, Evolution, Petro-Canada, Ryder Scott, and Wagner.

193

See letter from Evolution.

194

See letter from EnCana.

195

See letters from API, ExxonMobil, Imperial, Repsol, and Total.

concerned that such disclosure may confuse investors and expose companies to increased
litigation because of the inherent uncertainty associated with probable and possible
reserves. 196 They noted that various technologies may be used to support these
estimates. 197
Several commenters opposed permitting disclosure of probable and possible
reserves in Commission filings for similar reasons. 198 Again, they were concerned that
the inherent uncertainty associated with such reserves estimates may lead to investor
confusion and misunderstanding. 199 They believed that the broad range of technologies
and methods used by companies to support these estimates would lead to inconsistent
disclosure among companies. 200
We note that numerous oil and gas companies already disclose unproved reserves
on their Web sites and in press releases. This practice does not appear to have created
confusion in the market. However, we understand commenters’ concerns that probable
and possible reserves estimates are less certain than proved reserves estimates and so may
increase litigation risk. By making these disclosures voluntary, a company could exercise
its own discretion as to whether to provide the market with this disclosure.
Some commenters were concerned that voluntary disclosure by some companies
may raise confusion as to why other companies do not disclose these classifications of

196

See letters from API, ExxonMobil, Imperial, and Repsol.

197

See letters from API, ExxonMobil, and Imperial.

198

See letters from Apache, Devon, Energen, Eni, and Southwestern.

199

See letters from Apache, Devon, Eni, and Southwestern.

200

See letters from Devon, Eni, and Southwestern.

reserves. 201 One commenter was concerned that voluntary disclosure may increase
market pressure on all companies to disclose probable and possible reserves estimates. 202
Considering the fact that many companies already make these disclosures public, we do
not believe that this is an adequate reason for prohibiting from filings disclosure that may
be helpful to investors.
iv.

Resources not considered reserves

Because we are permitting disclosure of probable and possible reserves, we are
revising existing Instruction 5 to Item 102 of Regulation S-K to continue to prohibit
disclosure of estimates of oil or gas resources other than reserves, and any estimated
values of such resources, in any document publicly filed with the Commission, unless
such information is required to be disclosed in the document by foreign or state law. 203
Five commenters recommended that the rules permit disclosure of all categories of
resources, including those that do not qualify as reserves. 204 One commenter believed
that the prohibition against disclosing all resources deprives public markets of significant
information without meaningfully enhancing investor protection and ultimately may
harm the efficiency and development of U.S. markets and U.S. companies raising
capital. 205 That commenter also thought such a restriction could also encourage
companies to form outside of the U.S. 206 Another commenter believed that the

201

See letters from Apache and Total.

202

See letter from Eni.

203

See Instruction 5 to Item 102 [17 CFR 229.102].

204

See letters from Davis Polk, Petro-Canada, Shearman & Sterling, SPE, and Zakaib.

205

See letter from Shearman & Sterling.

206

Id.

uncertainty of resource estimates is best communicated by reporting the full range of
estimates. 207 In addition, another commenter believed that clear disclosure would allay
concerns about investor misunderstanding of estimates of resources that do not qualify as
reserves. 208 That commenter noted that excluding resources that are not reserves is
inconsistent with international standards and the fact that these resources are disclosed in
the U.S. on websites and in press releases. 209 We continue to be concerned that such
resources are too speculative and may lead investors to incorrect conclusions. Therefore,
we are adopting the proposal to prohibit disclosure of resources other than reserves.
However, consistent with existing Instruction 5, a company may continue to
disclose such estimates of non-reserves resources in a Commission filing related to an
acquisition, merger, or consolidation if the company previously provided those estimates
to a person that is offering to acquire, merge, or consolidate with the company or
otherwise to acquire the company’s securities. 210 Several commenters recommended that
the Commission maintain this exception so that the company’s shareholders would not be
at an informational disadvantage compared to the counterparty when assessing a
merger. 211 We agree with these commenters and have retained the exception in the
revised Instruction 5 adopted today.

207

See letter from SPE.

208

See letter from Davis Polk.

209

See letter from Davis Polk.

210

Id.

211

See letters from Devon, ExxonMobil, Shell, and Total.

Optional reserves sensitivity analysis table

The rules that we are adopting require a company to determine whether its oil or
gas resources are economically producible based on a 12-month average price. We also
proposed, and are adopting, an optional reserves sensitivity table. This table would
permit companies to disclose additional information to investors, such as the sensitivity
that oil and gas reserves have to price fluctuations. If a company chooses to provide such
disclosure, it may choose the different scenario or scenarios, if any, that it wishes to
disclose in the table, provided that it also discloses the price and cost schedules and
assumptions on which the alternate reserves estimates are based.
Twelve commenters supported permitting such sensitivity analyses. 212 Some
believed that this would provide investors with a better view of management’s analysis of
future prices. 213 One recommended providing a set price change of 10% for the
sensitivity analysis. 214 Two other commenters believed that different circumstances may
require different types of sensitivity analyses, both with respect to the range of prices
used and the format of the presentation. 215 We agree that the appropriate range for a
sensitivity analysis may vary depending on the situation, and therefore, as proposed, we
are not specifying a range of prices to be used.

212

See letters from Canadian Natural, CAPP, CFA, Chesapeake, Deloitte, Devon, Evolution,
ExxonMobil, McMoRan, Nexen, Petro-Canada, and Total.

213

See letters from Chesapeake, Deloitte, and McMoRan.

214

See letter from CFA.

215

See letters from Evolution and Total.

However, five commenters specifically opposed requiring such an analysis. 216
They believed that such a requirement would cause confusion and harm comparability. 217
Three commenters opposed such a sensitivity analysis because using different prices
could mislead investors. 218 We are adopting this table, as proposed, as a voluntary
disclosure rather than a requirement. However, as proposed, the table would require
disclosure of the assumptions behind varying estimates. We believe this disclosure will
mitigate any investor confusion.
In addition, we remind companies that Item 303 of Regulation S-K
(Management’s Discussion and Analysis of Financial Condition and Results of
Operations) 219 requires discussion of known trends and uncertainties, which may include
changes to prices and costs. A form of this optional reserves sensitivity analysis table is
set forth below.
Sensitivity of Reserves to Prices
By Principal Product Type and Price Scenario
Price Case

Proved Reserves
Oil
Gas
Product A
Mbbls mmcf
measure

Probable Reserves
Oil
Gas
Product A
mbbls mmcf
measure

Possible Reserves
Oil
Gas
Product A
mbbls mmcf
measure

Scenario 1
Scenario 2

Separate disclosure of conventional and continuous accumulations

Under the proposal, new Item 1202 would have required companies to disclose
reserves from conventional accumulations separately from reserves in continuous

216

See letters from Canadian Natural, CAPP, Devon, EnCana, and ExxonMobil.

217

See letters from EnCana and Ryder Scott.

218

See letters from Apache, Petrobras, and Wagner.

219

See Item 303 of Regulation S-K [17 CFR 229.303].

accumulations. Nine commenters recommended disclosure based on the final product. 220
These commenters opposed segregating disclosure based on the type of accumulation that
is involved. 221 They believed that such disclosure would be too complex and detailed
and of little use to investors. 222 In addition, seven commenters pointed out that
separation may be impossible because some fields contain both conventional and
continuous accumulations. 223 This would make allocation of costs arbitrary. 224
However, four commenters supported the definitions and separate disclosure by type of
accumulation. 225 One commenter believed that such disclosure would allow investors to
assess the impact of unconventional sources on reserves. 226
Although we agree conceptually that the focus of reserves disclosure should be on
the final product, we also recognize that the production of oil and gas from varying
sources can have significantly different economics. Extraction of oil and gas from
continuous accumulations can be much more labor and resource intensive than extraction
of oil and gas from traditional wells. They often require greater ongoing efforts and
expense after the initial extraction equipment is in place, making such operations more
sensitive to price fluctuations.

220

See letters from Apache, API, Canadian Natural, CAPP, EnCana, ExxonMobil, Imperial, PetroCanada, and Total.

221

See letters from Apache, API, CAPP, Chesapeake, Devon, ExxonMobil, Imperial, Repsol, and
Shell.

222

See letters from Apache, API, BP, CAPP, Chesapeake, Chevron, Devon, E&Y, EnCana,
ExxonMobil, Imperial, Petro-Canada, Repsol, and Southwestern.

223

See letters from BP, Canadian Natural, CAPP, EnCana, Petro-Canada, Ryder Scott, and Talisman.

224

See letters from EnCana and Ryder Scott.

225

See letters from Davis Polk, EIA, Petrobras, and Wagner.

226

See letter from Wagner.

We agree with the commenters that disclosure based on the end product sold
would provide a more effective basis for distinguishing reserves that disclosure based on
the type of accumulation in which the reserves are held. Therefore, we have revised the
disclosure to be based on the end product that is sold by the company. 227 However, with
respect to the end product, new Item 1202 makes a distinction between oil and gas, on the
one hand, and synthetic oil and gas, on the other. Synthetic products require processing
of the raw resource material, either while it is still in the ground (“in situ”) or after it is
extracted, before it can be used as refinery feedstock or as natural gas. Such processes
currently include bitumen upgrading as well as coal liquefaction and gasification.
However, resources from some continuous accumulations, such as coalbed methane, do
not require such processing and therefore are not associated with the same level of
ongoing costs once a well has been drilled because the in-ground resource is already oil
or gas (in the case of coalbed methane, the in-ground resource is methane, trapped in a
coalbed). Thus, coalbed methane would not be considered a synthetic product.
d.

Preparation of reserves estimates or reserves audits

In the Proposing Release, we proposed to require a company to disclose whether
or not the technical person 228 primarily responsible for preparing the reserves estimate
possessed certain specified qualifications and was subject to a list of controls for
maintaining objectivity. Most commenters addressing the issue opposed this proposed

227

See Item 1202 [17 CFR 229.1202].

228

With regard to the objectivity of a technical person, the “person” could be an individual or an
entity, as appropriate. However, with regard to the qualifications of a person, the disclosure would
relate to the individual who is primarily responsible for the technical aspects of the reserves
estimation or audit. Thus, this individual is not necessarily the individual generally overseeing the
estimation or audit, but the individual who is primarily responsible for the actual calculations and
estimation or audit.

requirement. 229 However, many of these commenters appeared to believe that the
disclosure requirement would pertain to every person involved with the estimation
process. 230 If adopted, they noted that such disclosure would be voluminous, adding
unnecessary complexity to disclosures. 231 Four commenters suggested that we clarify
that the disclosure is limited to the chief technical person who oversees the company’s
overall reserves estimation process, 232 which was the intent of the proposal. Five
commenters supported this disclosure because it helps users understand the objectivity
and quality of reserves estimates. 233
It was our intent to limit the disclosure to the technical person primarily
responsible for overseeing the reserves estimates. However, there may have been
confusion with respect to this point based on a footnote which stated that we sought
disclosure about the person who “is primarily responsible for the actual calculations and
estimation or audit.” By that term, we did not intend to include any person making
“actual calculations.” We recognize that, ultimately, the reserves estimates are overseen
by top management, which may or may not have reserves estimation expertise. The
focus of the final rule is the primary technical person responsible for overseeing the
preparation of the reserves estimation process. We have revised the language in the rule
to clarify this point. 234

229

See letters from Apache, API, Chevron, Energen, Eni, ExxonMobil, Newfield, Nexen, PEMEX,
Petro-Canada, Ryder Scott, Shell, and Total.

230

See letters from Apache, API, ExxonMobil, Newfield, Nexen, PEMEX, Ryder Scott, and Total.

231

See letters from Apache, API, ExxonMobil, Newfield, Nexen, PEMEX, Repsol, and Total.

232

See letters from API, ExxonMobil, PEMEX, and Petro-Canada.

233

See letters from CFA, Devon, EnCana, Southwestern, and Wagner.

234

See Item 1202(a)(7) [17 CFR 229.1202(a)(7)].

Two commenters noted that it was inconsistent to require such precise disclosure
about reserves experts, but not other experts.235 One of those commenters recommended
that the rule require expert language, including clear disclosure of which portion of the
reserves estimate the third party is expertising and filed consents. 236 The concept of an
expert under the Securities Act is different from the disclosures that we seek regarding
the qualifications and objectivity of persons responsible for the preparation or audit of oil
and gas reserves. Under the Securities Act, disclosure must be made when the company
represents that disclosure is based on the authority of an expert. Although the Securities
Act concept of experts will continue to be relevant when the reserves disclosures are in,
or incorporated into, a Securities Act filing and the company represents that disclosure is
based on the authority of an expert, the new rules requiring disclosure about the reserves
preparer or auditor in a company’s Exchange Act reports are intended to help investors
determine whether reserves estimates, which are highly technical, have been prepared by
a qualified, objective person, regardless of whether that person is an employee of the
company.
However, we agree with commenters that a prescribed list of qualifications and
objectivity requirements may be too rigid for all situations. With respect to technical
qualifications, several commenters noted that licensing requirements can vary greatly
among jurisdictions. 237 Commenters also believed that disclosure of a person’s
objectivity was unnecessary because management is required to install appropriate

235

See letters from API and Deloitte.

236

See letter from Deloitte.

237

See letters from AAPG, API, Chevron, Eni, Petro-Canada, Questar, and SPE.

internal controls to ensure the reliability of reserves estimates. 238 In fact, some
commenters recommended that we limit the disclosure to a description of a company’s
internal controls, including the company’s technical assessment routine, management and
board review and approval processes, the internal audit process, the extent to which the
company uses external parties to estimate or audit reserves estimates, and a summary
description of the qualifications of the company’s typical reserves estimators. 239 We are
following these commenters’ recommendations and adopting a rule that requires a
company to provide a general discussion of the internal controls that it uses to assure
objectivity in the reserves estimation process and disclosure of the qualifications of the
technical person primarily responsible for preparing the reserves estimates or conducting
the reserves audit if the company discloses that such a reserves audit has been performed,
regardless of whether the technical person is an employee or an outside third party. 240
We did not propose, but sought comment on, whether the rules should require a
company to retain an independent third party to prepare, or conduct a reserves audit of,
the company’s reserves estimates. Most commenters urged the Commission not to adopt
such a requirement. 241 They believed that a company’s internal staff, particularly at
larger companies, is generally in a better position to prepare those estimates 242 and that
there is a potential lack of qualified third party engineers and other professionals

238

See letters from API, Chevron, Energen, ExxonMobil, Newfield, Nexen, Petrobras, Ryder Scott,
Shell, StatoilHydro, and Total.

239

See letters from ExxonMobil, Nexen, Shell, and StatoilHydro.

240

See Item 1202(a)(7) [17 CFR 229.1202(a)(7)].

241

See letters from API, BHP, BP, CFA, CNOOC, Denbury, Devon, Eni, Energy Literacy,
ExxonMobil, Imperial, R. Jones, D. McBride, Newfield, Nexen, Petro-Canada, Ross, D. Ryder,
Sasol, Shell, Talisman, Total, and W. van de Vijver.

242

See letters from API, Denbury, ExxonMobil, Imperial, Nexen, Shell, and Talisman.

available to conduct the increased work that would result from such a requirement. 243
We agree with these commenters and are not adopting a requirement that an independent
third party prepare, or conduct a reserves audit of, the company’s reserves estimates.
e.

Reserve audits and the contents of third-party reports

In the Proposing Release, we proposed that, if a company represents that its
estimates of reserves are prepared or audited by a third party, the company must file a
report of the third party as an exhibit to the relevant registration statement or report. Two
commenters believed that a company description of the third party’s report would be
sufficient because the reports can contain sensitive information. 244 However, another
commenter was concerned that not filing the report may lead to mischaracterizations by
the company. 245 This commenter supported the filing of a report by the third party
reserves estimator or auditor, but believed that the Commission should determine the
contents of such a report. 246 Two commenters supported the filing of the report “letter”
as an exhibit, but not the full reserves report because it may contain proprietary
information. 247
As proposed, we are adopting a new rule to require that if the company represents
that a third party prepared the reserves estimate or conducted a reserves audit of the
reserves estimates, the company must file a report of the third party as an exhibit to the

243

See letters from AAPG, API, BP, Devon, ExxonMobil, Imperial, D. McBride, Newfield, D.
Ryder, and Sasol.

244

See letters from Evolution and Petro-Canada.

245

See letter from Wagner.

246

See letter from Wagner.

247

See letters from Devon and Ryder Scott.

relevant registration statement or report. 248 These reports need not be the full “reserves
report,” which is often very detailed and voluminous. Rather, these reports could be
shorter form reports that summarize the scope of work performed by, and conclusions of,
the third party. These reports must include the following disclosure, based on the Society
of Petroleum Evaluation Engineers’s audit report guidelines:
•

The purpose for which the report is being prepared and for whom it is
prepared;

•

The effective date of the report and the date on which the report was
completed;

•

The proportion of the company’s total reserves covered by the report and
the geographic area in which the covered reserves are located;

•

The assumptions, data, methods, and procedures used to conduct the
reserves audit, including the percentage of company’s total reserves
reviewed in connection with the preparation of the report, and a statement
that such assumptions, data, methods, and procedures are appropriate for
the purpose served by the report;

•

A discussion of primary economic assumptions;

•

A discussion of the possible effects of regulation on the ability of the
registrant to recover the estimated reserves;

•

A discussion regarding the inherent risks and uncertainties of reserves
estimates;

248

See Item 1202(a)(8) [17 CFR 229.1202(a)(8)].

•

A statement that the third party has used all methods and procedures as it
considered necessary under the circumstances to prepare the report; and

•

The signature of the third party.

In addition, if the report is related to a reserves audit, it must contain a brief summary of
the third party’s conclusions with respect to the reserves estimates. Finally, if the
disclosures are made in, or incorporated into, a Securities Act registration statement, the
company must file a consent of the third party as an exhibit to the filing.
In the Proposing Release, we proposed to define the term “reserves audit” as “the
process of reviewing certain of the pertinent facts interpreted and assumptions made that
have resulted in an estimate of reserves prepared by others and the rendering of an
opinion about the appropriateness of the methodologies employed, the adequacy and
quality of the data relied upon, the depth and thoroughness of the reserves estimation
process, the classification of reserves appropriate to the relevant definitions used, and the
reasonableness of the estimated reserves quantities. In order to disclose that a ‘reserves
audit’ has been conducted, the report resulting from this review must represent an
examination of at least 80% of the portion of the registrant’s reserves covered by the
reserves audit.” We are substantively adopting the first sentence of this definition as
proposed.
However, in response to comments received, we are not adopting the proposed
second sentence of the definition of the term “reserves audit.” Two commenters
supported the proposed 80% threshold regarding the proportion of reserves that a reserves
auditor must review in order for the company to characterize that auditor’s work as a

“reserves audit.” 249 Another commenter believed that the 80% threshold was appropriate
for preparing reserves estimates. 250 But three commenters believed that an audit should
simply disclose the percentage that was audited. 251 One of these noted that it has its
reserves audit performed on a rolling basis. 252 We believe that disclosure of the work
done in the required third-party report makes a bright-line percentage test unnecessary. If
a company conducts its reserves audit on a rolling basis, it is appropriate for its
shareholders to be aware of that fact. Therefore, we are not adopting the proposed 80%
threshold. We believe that disclosure of the scope of the review will enable investors to
assess the significance to attribute to a reserves audit.
f.

Process reviews

In the Proposing Release, we solicited comment regarding whether we should
permit a company to disclose that it has hired a third party to perform a process review
under the Society of Petroleum Engineers’ (SPE’s) reserves auditing standards. 253 Those
standards define a process review as an investigation by a person who is qualified by
experience and training equivalent to that of a reserves auditor to address the adequacy
and effectiveness of an entity’s internal processes and controls relative to reserves
estimation. However, those standards also note that a process review should not include
an opinion relative to the reasonableness of the reserves quantities and should be limited
to the processes and control system reviewed. The SPE’s standards state that, although

249

See letters from Evolution and Wagner.

250

See letter from Ryder Scott.

251

See letters from Devon, Ryder Scott, and Talisman.

252

See letter from Talisman.

253

See SPE Reserves Auditing Standards.

such reviews may provide value to the entity, an external or internal process review is not
of sufficient rigor to establish appropriate classifications and quantities of reserves and
should not be represented to the public as being equivalent to a reserves audit.
Five commenters believed that internal process reviews are helpful in promoting
accuracy and effectiveness, so companies should be permitted to disclose them. 254
However, one commenter was concerned that, although a process review can be helpful
for a company, disclosure may give investors a false sense of security. 255 Two
commenters suggested that, if a company discloses that it performed a process review, it
should clearly disclose what a process review is. 256
We agree that a process review can be helpful to the company and ultimately to
investors. However, we also agree that if a company discloses that it has hired a third
party to perform a process review, it must clearly disclose the details surrounding that
process review. As such, the new rules treat a process review similar to a reserves audit.
If the company discloses that it has hired a third party to conduct a process review, it
must file a report of the third party as an exhibit to the relevant registration statement or
report and, if the disclosures are made in, or incorporated into, a Securities Act
registration statement, the company must file a consent of the third party as an exhibit to
the filing. 257

254

See letters from Devon, ExxonMobil, Petro-Canada, Ryder Scott, and Shell.

255

See letter from Wagner.

256

See letters from Devon and Petro-Canada.

257

See Item 1202(a)(8) [17 CFR 229.1202(a)(8)].

Item 1203 (Proved undeveloped reserves)

We proposed requiring tabular disclosure of the aging of proved undeveloped
reserves (PUDs). Proposed Item 1203 would have required an oil and gas company to
prepare a table showing, for each of the last five fiscal years and by product type, proved
reserves estimated using current prices and costs in the following categories:
•

Proved undeveloped reserves converted to proved developed reserves
during the year; and

•

Net investment required to convert proved undeveloped reserves to proved
developed reserves during the year. 258

Numerous commenters were concerned that the proposed five-year table would be
too complex for investors to understand. 259 They expressed concern that the proposed
table may mislead investors by not clearly attributing costs to the year in which the
corresponding PUDs are converted because much of the costs may have been spent in
previous years. 260 In addition, commenters noted that maintenance of such data would be
costly 261 and that companies currently do not always capture this type of information
because management does not use it to run the business. 262
Eight commenters suggested an alternative of disclosing (1) the quantity of
undeveloped reserves if material, (2) the progress in converting PUDs, and (3) any

258

See Item 1204 [17 CFR 229.1204].

259

See letters from API, BP, Canadian Natural, CAPP, Chevron, Eni, Equitable, ExxonMobil, Nexen,
Petrobras, Repsol, Shell, and Wagner.

260

See letters from API, ExxonMobil, Petrobras, Ryder Scott, Total, and Wagner.

261

See letters from API, Canadian Natural, CAPP, Chevron, Eni, Equitable, ExxonMobil, Nexen,
Petrobras, Southwestern, and Wagner.

262

See letter from Apache.

material changes in the current year. 263 Three U.S. Senators recommended requiring
disclosure of development plans in addition to the table. 264 They believed that requiring
reporting of investments and planned investments in oil and gas development would
provide investors with certainty about companies’ intentions to develop the federal lands
that they have at their disposal. 265 However, three commenters opposed disclosure of a
company’s plans to drill and expected capital expenditures because disclosing their
business plan may cause competitive harm and might expose them to litigation if results
differ from their plan. 266 Six commenters supported the proposed table. 267
We recognize the concern that the PUD table that we proposed may be confusing
to investors because it would not attribute capital expenditures to the corresponding
reserves as they are developed. As an alternative to the proposed table, we are adopting
rules that require a company to disclose the following in narrative form:
•

The total quantity of PUDs at year end;

•

Any material changes in PUDs that occurred during the year, including
PUDs converted into proved developed reserves;

•

Investments and progress made during the year to convert PUDs to proved
developed oil and gas reserves; and

263

See letters from API, Canadian Natural, Chevron, ExxonMobil, Newfield, Nexen, Petrobras, and
Ryder Scott.

264

See letter from Three Senators.

265

See letter from Three Senators.

266

See letters from Chesapeake, Devon, and Newfield.

267

See letters from Chesapeake, Deloitte, Devon, Three Senators, Talisman, and Wagner.

•

An explanation of the reasons why material concentrations of PUDs in
individual fields or countries have remained undeveloped for five years or
more after disclosure as PUDs. 268

These disclosures would have been required under the proposal, but much of it
would have been presented in tabular format. We believe that a narrative approach to
these disclosures will provide companies with a better vehicle to explain the status of
their PUDs and their track record for developing such reserves. Rather than requiring
forward-looking information about a company’s plans to develop reserves that may lead
to exaggeration of a company’s capability to actually convert such reserves, we believe
that disclosure of a company’s verifiable, established track record of converting such
reserves, including its ability to obtain financing for such activities, would be a better
indication of the likelihood of that company’s success in developing reserves in the
future. Specific required disclosure regarding a company’s failure to develop material
concentrations of PUDs for five or more years should address commenters’ concerns that
the company may have no intention to develop such reserves.
5.

Item 1204 (Oil and gas production)

We proposed to codify the Industry Guide 2 disclosure regarding oil and gas
production as Item 1204 of Regulation S-K, in tabular form and with greater detail. One
commenter did not believe that separating production, sales price and production costs
based on whether they were related oil wells or gas wells would be valuable to
investors. 269 It believed that companies do not use this information to manage their

268

See Item 1203 [17 CFR 229.1203].

269

See letter from Apache.

business and do not maintain systems to capture this information on that basis, so
tracking such data would require costly changes to their systems. 270 Two commenters
also believed that it would not be possible to separate production cost by product because
many units extract different products. 271 One commenter also recommended that
production not be segregated by type of accumulation. 272
We have decided not to adopt Item 1204 as proposed. Rather, we are codifying
the existing Industry Guide 2 disclosure item with several revisions. Consistent with the
Industry Guide 2 disclosure item, the Item 1204, as adopted, requires disclosure, for each
of the prior three fiscal years, of production, by final product sold, of oil, gas, and other
products. In addition, for the same time period, the company must disclose, by
geographical area:
•

The average sales price (including transfers) per unit of oil, gas and other
products produced; and

•

The average production cost, not including ad valorem and severance
taxes, per unit of production.

However, unlike the Industry Guide disclosure item, this disclosure must be made by
geographical area and for each country and field containing 15% or more of the
registrant’s proved reserves, expressed on an oil-equivalent-barrels basis.
Similarly, we are codifying the instructions to the Industry Guide 2 item. One
commenter recommended that we maintain some of the existing instructions from the

270

See letter from Apache.

271

See letters from Total and ExxonMobil.

272

See letter from ExxonMobil.

Industry Guide. 273 The first instruction codified from the Industry Guide clarifies that net
production should include only production that is owned by the registrant and produced
to its interest, less royalties and production due others. However, in special situations
(e.g., foreign production), net production before any royalties may be provided, if more
appropriate. If “net before royalty” production figures are furnished, the change from the
usage of “net production” should be noted.
The second instruction, which is also from the Industry Guide, states that
production of natural gas should include only marketable production of natural gas on an
“as sold” basis. Production will include dry, residue, and wet gas, depending on whether
liquids have been extracted before the registrant transfers title. Flared gas, injected gas,
and gas consumed in operations should be omitted. Recovered gas-lift gas and
reproduced gas should not be included until sold. Synthetic gas, when marketed as such,
should be included in natural gas sales.
We are adding a third instruction that was not in the Industry Guide. This
instruction states that, if any product, such as bitumen, is sold or custody is transferred
prior to conversion to synthetic oil or gas, the product’s production, transfer prices, and
production costs should be disclosed separately from all other products. This instruction
is necessary because the existing Industry Guide 2 disclosure requirement only required
separate disclosure based on whether the end product was oil or gas. This instruction
merely clarifies that disclosures under this item must be based on the end product, which
may not be oil or gas because the amendments will permit the disclosure of reserves of
other end products, such as bitumen.

273

See letter from ExxonMobil.

The fourth instruction codified from the Industry Guide states that the transfer
price of oil and gas (natural and synthetic) produced should be determined in accordance
with SFAS 69. And the fifth instruction codified from the Industry Guide clarifies that
the average production cost per unit of production should be computed using production
costs disclosed pursuant to SFAS 69. Units of production should be expressed in
common units of production with oil, gas, and other products converted to a common unit
of measure on the basis used in computing amortization. This instruction also adds
products from unconventional sources to the existing disclosure Item in Industry Guide 2.
6.

Item 1205 (Drilling and other exploratory and development activities)

We proposed to codify the Industry Guide 2 disclosure item regarding drilling
activities as Item 1205 of Regulation S-K, in tabular form, with several revisions to that
Industry Guide 2 disclosure item, including applying a new definition of the term
“geographic area” and adding two categories of wells:
•

Extension wells; and

•

Suspended wells.

Three commenters believed that the disclosures required under this proposed Item
would become too detailed. 274 One of these commenters also believed that the number of
wells being drilled does not provide an accurate picture of a company’s drilling activities
because of the increased usage of horizontal wells. 275

274

See letters from Apache, ExxonMobil, and Total.

275

See letter from ExxonMobil.

Some commenters also did not believe that creating new categories for extension
wells and suspended wells would be meaningful. 276 They noted the burden of the added
detail would exceed the value of the information to investors. 277 One pointed out that
determining whether a well constitutes an extension well would be difficult because of
multipurpose drilling. 278
After considering the above comments, we have decided not to adopt all of the
proposed revisions to the existing Industry Guide 2 disclosure. We recognize that, for
some companies that use advanced drilling techniques, the proposed disclosure may not
be a good indicator of the extent of their exploratory and development activities, although
we believe that this disclosure is still important for many companies. Therefore, we have
decided to codify the existing disclosures found in Industry Guide 2 related to drilling
activities without revision and to not require tabular disclosure. 279 However, as
proposed, we are adding a new provision to this Item that requires companies to discuss
their exploratory and development activities regarding oil and gas resources that are
extracted by mining techniques because we are now including such resources under the
definition of “oil and gas producing activities.”
7.

Item 1206 (Present activities)

Item 1206 codifies existing Item 7 of Industry Guide 2, which calls for disclosure
of present activities, including the number of wells in the process of being drilled
(including wells temporarily suspended), waterfloods in process of being installed,

276

See letters from Apache, API, and Imperial.

277

See letters from Apache and Southwestern.

278

See letter from Total.

279

See Item 1205 [17 CFR 229.1205].

pressure maintenance operations, and any other related activities of material
importance. 280 We are adopting Item 1206 substantially as proposed.
8.

Item 1207 (Delivery commitments)

Item 1207 codifies existing Item 8 of Industry Guide 2, which calls for disclosure
of arrangements under which the company is required to deliver specified amounts of oil
or gas and how the company intends to meet such commitments. 281 We are not adopting
any substantive changes to the disclosure currently called for by Item 8 of Industry Guide
2. However, we are restructuring and rewording the disclosure item to make it easier to
understand, including separating embedded lists into separate subparagraphs and making
general plain English revisions. As proposed, these revisions are not intended to change
the substance of the disclosures.
9.

Item 1208 (Oil and gas properties, wells, operations, and acreage)

We proposed to codify disclosure about oil and gas properties, wells, operations,
and acreage as Item 1208 of Regulation S-K, in tabular form, as well as make several
revisions to the existing disclosures, including applying a new definition of the term
“geographic area” and adding language that better illustrates the types of properties and
the types of disclosures for those properties, including the following:
•

Identification and description generally of the company’s material
properties, plants, facilities, and installations;

•

Identification of the geographic area in which they are located;

•

Indication of whether they are located onshore or offshore; and

280

See Item 1206 [17 CFR 229.1206].

281

See Item 1207 [17 CFR 229.1207].

•

Description of any statutory or other mandatory relinquishments,
surrenders, back-ins, or changes in ownership.

Six commenters believed that it is not necessary to enhance this section from
Industry Guide 2 because the requirements are already covered by Item 102 of
Regulation S-K. 282 Commenters were particularly concerned with the segmentation of
this disclosure by product, by type of accumulation, and by geographic location. 283 They
believed that this level of detail would not be helpful to investors and would impose
added costs on companies because they currently do not collect this detailed
information. 284 Moreover, seven commenters thought that the well count disclosure is no
longer meaningful because of technologies such as horizontal drilling. 285 They thought
that, in light of these new technologies, well count disclosure could be misleading. 286
As with the case of drilling activities, we agree that the proposed added detail
could make the disclosures too cumbersome. In addition, such disclosure may be of less
importance to many companies because of new drilling technology. Therefore, we are
merely codifying the existing Industry Guide 2 disclosure, without revision. 287
V.

Guidance for Management’s Discussion and Analysis for Companies
Engaged in Oil and Gas Producing Activities
We proposed to add a new Item 1209, which would have specified topics that a

company should address either as part of its Management’s Discussion and Analysis of

282

See letters from API, Chevron, ExxonMobil, Imperial, Shell, and Total.

283

See letters from Apache, ExxonMobil, Shell, and Total.

284

See letters from Apache, ExxonMobil, and Petro-Canada.

285

See letters from API, BP, Chevron, ExxonMobil, Imperial, StatoilHydro, and Total.

286

See letters from API and Imperial.

287

See Item 1208 [17 CFR 229.1208].

Financial Condition and Results of Operations (MD&A) or in a separate section. 288 Four
commenters were concerned that, although the proposed Item was intended to provide
more guidance regarding the disclosures required, it would effectively require companies
to address all of the issues listed in the Item. 289 One recommended that, instead of a
detailed list, the requirement should clarify that companies should address “material
changes due to technology, prices, concession conditions, commercial terms, known
trends, demands, commitments, uncertainties and any events that are reasonably likely to
have a material effect on reserves estimates and financial condition.” 290 Similarly,
another commenter recommended that the Commission clarify that the Item is limited to
material impacts. 291
We are not adopting the proposed Item as part of Regulation S-K because it is
intended to be guidance, rather than a specific disclosure Item. We agree that, if
companies were to discuss every issue provided in the list, the disclosure would be too
long and detailed to be of much use to most investors. Important issues could be hidden
amid unnecessary detail. However, we believe that added guidance would be beneficial
to companies regarding the issues that the Commission’s staff commented upon in its
review of the MD&A section of filings made by oil and gas companies.
To begin, a fundamental premise of MD&A is that the information provided
should be related to issues that are material to a company. Although we discuss a list of
topics that a company might need to discuss, a company need only discuss a topic if it

288

See Item 303 of Regulation S-K [17 CFR 229.303].

289

See letters from Chevron, ExxonMobil, Petrobras, and Shell.

290

See letter from Repsol.

291

See letter from Total.

constitutes, involves, or indicates known trends, demands, commitments, uncertainties,
and events that are reasonably likely to have a material effect on the company. These
topics include:
•

Changes in proved reserves and, if disclosed, probable and possible
reserves, and the sources to which such changes are attributable, including
changes made due to:
o

Changes in prices;

Technical revisions; and

Changes in the status of any concessions held (such as
terminations, renewals, or changes in provisions);

•

Technologies used to establish the appropriate level of certainty for any
material additions to, or increases in, reserves estimates, including any
material additions or increases to reserves estimates that are the result of
any of the final rules adopted in this release;

•

Prices and costs, including the impact on depreciation, depletion and
amortization as well as the full cost ceiling test;

•

Performance of currently producing wells, including water production
from such wells and the need to use enhanced recovery techniques to
maintain production from such wells;

•

Performance of any mining-type activities for the production of
hydrocarbons;

•

The company’s recent ability to convert proved undeveloped reserves to
proved developed reserves, and, if disclosed, probable reserves to proved
reserves and possible reserves to probable or proved reserves;

•

The minimum remaining terms of leases and concessions;

•

Material changes to any line item in the tables described in Items 1202
through 1208 of Regulation S-K;

•

Potential effects of different forms of rights to resources, such as
production sharing contracts, on operations; and

•

Geopolitical risks that apply to material concentrations of reserves.

The MD&A is typically presented in a self-contained section of the registration
statement or report. However, the disclosure requirements that comprise new Subpart
1200 of Regulation S-K will cause a substantial amount of an oil and gas company’s
disclosure to appear in tabular format, providing an outline of much of a company’s
operations. Because the tables will present many of the types of changes that
management often discusses in its MD&A, we believe it may be more helpful to
investors to locate such discussion close to the tables themselves. Thus, to the extent that
any discussion or analysis of known trends, demands, commitments, uncertainties, and
events that are reasonably likely to have a material effect on the company is directly
relevant to a particular disclosure required by Subpart 1200, the company may include
that discussion or analysis with the relevant table, with appropriate cross-references,
rather than including it in its general MD&A section.

VI.

Conforming Changes to Form 20-F
Form 20-F is the form on which foreign private issuers file their annual reports

and Exchange Act registration statements. Currently, Form 20-F contains instructions
that are similar to those in Item 102 of Regulation S-K. However, rather than referring to
Industry Guide 2 for disclosures regarding oil and gas producing activities, Form 20-F
contains its own “Appendix A to Item 4.D—Oil and Gas” (Appendix A) that provides
guidance for oil and gas disclosures for foreign private issuers. 292 Appendix A is
significantly shorter, and provides far less guidance regarding disclosures, than Subpart
1200 or Industry Guide 2. We proposed to revise Form 20-F to eliminate the reference to
Appendix A, and rather refer to Subpart 1200, which would expand the disclosures
required by foreign private issuers.
Six commenters supported harmonizing the Form 20-F disclosures with
Regulation S-K. 293 One noted that the proposal would make disclosure more consistent
and comparable among oil companies. 294 It believed the proposal would put all oil
companies on a level playing field. 295
However, one commenter recommended that the Commission exempt companies
reporting under International Financial Reporting Standards (IFRS). 296 It also
recommended that instead of applying the proposed Subpart 1200 to foreign private
issuers, the Commission should revise Appendix A to Form 20-F itself, making

292

See Appendix A to Item 4.D—Oil and Gas of Form 20-F [17 CFR 249.220f].

293

See letters from CAQ, Deloitte, ExxonMobil, KPMG, PWC, and Shell.

294

See letter from ExxonMobil.

295

See letter from ExxonMobil.

296

See letter from Total.

appropriate limitations for foreign private issuers, such as eliminating the disclosure of
wells and acreage. 297 Another commenter was concerned because the proposals may
hinder, rather than facilitate, transition to the use of IFRS. 298
We continue to believe that Subpart 1200 would be appropriate disclosure for all
public companies engaged in oil and gas producing activities, including foreign private
issuers. The added guidance in Subpart 1200 should promote more consistent and
comparable disclosures among oil and gas companies. It is our understanding that many
of the larger foreign private issuers already provide disclosure in their filings with the
Commission comparable to the disclosure provided by domestic companies. Thus, we
are revising Form 20-F to incorporate Subpart 1200 with respect to oil and gas
disclosures and delete Appendix A to Item 4.D in that form. We recognize that this
requirement may require a foreign private issuer to prepare two different reserves
estimates if the rules in their home jurisdiction require a different pricing standard than
the 12-month average that we adopt in this release. However, we believe the same
conflict would have existed under our previous rule to the extent our pricing method
differed from the home jurisdiction’s method.
Appendix A currently allows a foreign private issuer to exclude required
disclosures about reserves and agreements if its home country prohibits the disclosures.
Two commenters suggested that the rule continue to provide an exception for disclosures
about reserves and agreements that are prohibited by foreign laws. 299 However, another

297

See letter from Total.

298

See letter from Ross.

299

See letters from Shell and Total.

commenter believed that a company taking advantage of such an exception should be
required to disclose the country, the citation of the relevant law or regulation, and the fact
that the disclosed estimates do not include amounts from the named country. 300 We are
not revising this provision. Rather, because these considerations still apply to such
foreign private issuers, we are moving that provision from Appendix A and adopting it as
Instruction 2 to Item 4 of Form 20-F, as proposed. 301
One commenter recommended clarifying that the new disclosures would not
apply to foreign private issuers under the Multi-Jurisdictional Disclosure System (MJDS)
using Form 40-F that comply with NI 51-101 in Canada because those rules already are
broadly consistent with PRMS. 302 We agree with this commenter and believe that such
issuers need not provide disclosures beyond those required in Canada.
VII.

Impact of Amendments on Accounting Literature
A.

Consistency with FASB and IASB Rules

Numerous commenters recommended that the SEC generally coordinate its
efforts with the IASB and FASB to create a cohesive whole and not adopt competing
models. 303 We have begun, and will continue, to work with both of these organizations
to ensure a smooth transition to the new reporting rules.
B.

Change in Accounting Principle or Estimate

In the Proposing Release, we expressed our view that the change from using
single-day year-end price to an average price should be treated as a change in accounting

300

See letter from ExxonMobil.

301

Id.

302

See letter from Deloitte.

303

See letters from CAQ, CFA, Eni, Grant Thornton, KPMG, and PWC.

principle, or a change in the method of applying an accounting principle, that is
inseparable from a change in accounting estimate. Therefore, this change would be
considered a change in accounting estimate pursuant to Statement of Financial
Accounting Standard No. 154 “Accounting Changes and Error Corrections” (SFAS 154)
and would be accounted for prospectively.
Commenters believed that the change would be best described as:
•

A change in accounting estimate; 304

•

A change in accounting principle that is inseparable from a change in
accounting estimate; or 305

•

A change in accounting estimate effected by a change in accounting
principle. 306

We believe that any accounting change resulting from the changes in definitions
and required pricing assumptions in Rule 4-10, should be treated as a change in
accounting principle that is inseparable from a change in accounting estimate, which does
not require retroactive revision. We note that pursuant to AU 420.13, such a change
requires recognition in the independent auditor’s report through the addition of an
explanatory paragraph.
All commenters on the issue agreed that adoption of the rules should not require
retroactive revision of past reserves estimates. 307 Some believed retroactive revision of

304

See letters from CAQ, Canadian Natural, CAPP, Deloitte, Devon, KPMG, Petrobras, PWC,
Repsol, Shell, and StatoilHydro.

305

See letter from Deloitte.

306

See letter from Petro-Canada.

307

See letters from Apache, CAQ, Canadian Natural, CAPP, Deloitte, Devon, Evolution,
ExxonMobil, Petrobras, Petro-Canada, PWC, Repsol, Shell, StatoilHydro, and Total.

reserves estimates would be very burdensome or impossible because such data was not
maintained. 308 We agree with those commenters and believe that no retroactive revisions
will be necessary.
Three commenters recommended that the FASB revise Statement of Financial
Accounting Standard No. 19 (SFAS 19) to include unconventional resources currently
accounted for as mining activities and also provide guidance that no retroactive revisions
would be required in that scenario. 309 We will continue to work with the FASB on this
issue.
C.

Differing Capitalization Thresholds Between Mining Activities and
Oil and Gas Producing Activities

As noted elsewhere in this release, extraction of products such as bitumen now
will be considered oil and gas producing activities, and not mining activities. Under
current U.S. accounting guidance, costs associated with proven plus probable mining
reserves may be capitalized for operations extracting products through mining methods,
like bitumen. Under the new rules, bitumen extraction and operations that produce oil or
gas through mining methods are included under oil and gas accounting rules, which only
permit capitalization of costs associated with proved reserves. 310 Moreover, the mining
guidelines do not provide specified percentages for establishing levels of certainty for
proven or probable reserves for mining activities. It is possible that these differences
could result in changing reserves estimates for these resources during the transition to the
new rules.

308

See letters from Canadian Natural, Deloitte, Evolution, Petrobras, and Shell.

309

See letters from CAQ, Petrobras, and PWC.

310

See Rule 4-10(c) of Regulation S-X [17 CFR 210.4-10(c)].

One commenter believed that the industry would need guidance regarding how to
transition operations that are disclosed and accounted for as mining operations to oil and
gas disclosure and accounting. 311 It noted that this issue would be relevant not only
coincident with the new rules, but could be relevant to future events, such as a coal
mining company that in subsequent years changes its operations to in situ coal
gasification. 312 That commenter believed that, without guidance, the change from mining
treatment to oil and gas treatment could be considered a change in accounting principle
which requires retroactive revision. 313 We acknowledge this commenter’s concerns.
With respect to resources formerly considered mining activities, we view the change
from mining treatment to oil and gas treatment as a change in accounting principle that is
inseparable from a change in accounting estimate, which does not require retroactive
revision.
VIII. Application of Interactive Data Format to Oil and Gas Disclosures
In the Proposing Release, we sought comment on the desirability of rules that
would permit, or require, oil and gas companies to present the tabular disclosures in
Subpart 1200 in interactive data format in addition to the currently required format. Most
commenters addressing the topic supported the use of XBRL for oil and gas
disclosures. 314 They believed using interactive data would be very helpful to investors
and analysts. 315

311

See letter from KPMG.

312

See letter from KPMG.

313

See letter from KPMG.

314

See letters from Audit Policy, CFA, Deloitte, Devon, E&Y, ExxonMobil, PWC, Shell, Standard
Advantage, StatoilHydro, and Zakaib.

315

See letters from CFA, Devon, E&Y, StatoilHydro, and Zakaib.

However, they also recommended that the Commission wait until a welldeveloped taxonomy exists. 316 Some recommended that the Commission implement it in
stages, initially with a voluntary program. 317 One commenter recommended that the SEC
work with other groups like SPE, IASB, and the United Nations to ensure tags ultimately
become the industry standard. 318
We agree that much of the disclosures regarding oil and gas companies would be
conducive to interactive data. We intend to continue to work on developing a taxonomy
for such disclosure. Once a well-developed taxonomy is created, we will address this
issue further. We are not, however, adopting interactive data requirements in this release.
We will continue to consider whether to require interactive oil and gas disclosure filings
in the future and, if so, when such filings should be required based on the development
status of an oil and gas disclosure taxonomy.
IX.

Implementation Date
A.

Mandatory Compliance

We proposed to require companies to begin complying with the disclosure
requirements for registration statements filed on or after January 1, 2010, and for annual
reports on Forms 10-K and 20-F for fiscal years ending on or after December 31, 2009. A
company may not apply the new rules to disclosures in quarterly reports prior to the first
annual report in which the revised disclosures are required.

316

See letters from Audit Policy, Deloitte, Devon, E&Y, ExxonMobil, PWC, Shell, StatoilHydro, and
Zakaib.

317

See letters from Audit Policy, Devon, E&Y, PWC, StatoilHydro, and Zakaib.

318

See letter from Zakaib.

Fifteen commenters agreed that a delayed compliance date would be helpful in
allowing companies to familiarize themselves with the new disclosure requirements
before having to comply with them. 319 Four commenters supported the proposed January
1, 2010 compliance date of Securities Act filings and Exchange Act filings related to
fiscal periods ending on or after December 31, 2009. 320 However, one conditioned this
approval upon the adoption of the rules before December 31, 2008. 321 Another suggested
one year after adoption of the rules. 322
Four commenters believed that the proposed compliance date would be too
soon. 323 One recommended a compliance date of December 31, 2010 to enable
companies to make necessary changes in IT systems and data processing. 324 Another
noted the magnitude of the proposed changes, length of time to design, program and
implement system changes, and the goal of getting the best possible disclosure. 325 One
commenter suggested delaying implementation for two years after adoption. 326
We continue to believe that the proposed compliance dates are appropriate.
However, as we discuss our revisions with the FASB and IASB, we will consider
whether to delay the compliance date further.

319

See letters from Apache, Chevron, Davis Polk, Deloitte, ExxonMobil, KPMG, Newfield,
Petrobras, Petro-Canada, PWC, Ryder Scott, Shell, Southwestern, Talisman, and Total.

320

See letters from Davis Polk, ExxonMobil, Shell, and StatoilHydro.

321

See letter from ExxonMobil.

322

See letter from Talisman.

323

See letters from Apache, Petrobras, PWC, and Total.

324

See letter from Petrobras.

325

See letter from Apache.

326

See letter from Devon.

Voluntary Early Compliance

Seven commenters recommended that early compliance not be permitted to
maintain consistency and comparability of disclosure among issuers, which could be
misleading or confusing to investors. 327 However, one commenter believed that the
Commission should permit early adoption of the new rules because companies with
different fiscal year ends are not comparable anyway. 328 One commenter suggested that
the Commission permit companies to provide the new disclosures supplementally. 329 We
agree that voluntary compliance may make disclosures incomparable. Therefore,
companies may not elect to follow the new disclosure rules prior to the effective date.
X.

Paperwork Reduction Act
A.

Background

Our new rules and amendments contain “collection of information” requirements
within the meaning of the Paperwork Reduction Act of 1995 (“PRA”). 330 We submitted
the new rules and amendments to the Office of Management and Budget (OMB) for
review in accordance with the PRA. 331 OMB has approved the revisions. The titles for
these collections of information are:
(1) “Regulation S-K” (OMB Control No. 3235-0071); 332

327

See letters from Davis Polk, Devon, ExxonMobil, Petrobras, Ryder Scott, Shell, and Wagner.

328

See letter from Evolution.

329

See letter from Davis Polk.

330

44 U.S.C. 3501 et seq.

331

44 U.S.C. 3507(d) and 5 CFR 1320.11.

332

The paperwork burden from Regulation S-K and the Industry Guides is imposed through the
forms that are subject to the disclosures in Regulation S-K and the Industry Guides and is reflected
in the analysis of those forms. To avoid a Paperwork Reduction Act inventory reflecting
duplicative burdens, for administrative convenience, we estimate the burdens imposed by each of
Regulation S-K and the Industry Guides to be a total of one hour.

(2) “Industry Guides” (OMB Control No. 3235-0069);
(3) “Regulation S-X” (OMB Control No. 3235-0009);
(4) “Form S-1” (OMB Control No. 3235-0065);
(5) “Form S-4” (OMB Control No. 3235-0324);
(6) “Form F-1” (OMB Control No. 3235-0258);
(7) “Form F-4” (OMB Control No. 3235-0325);
(8) “Form 10” (OMB Control No. 3235-0064);
(9) “Form 10-K” (OMB Control No. 3235-0063); and
(10) “Form 20-F” (OMB Control No. 3235-0063).
We adopted all of the existing regulations and forms pursuant to the Securities
Act and the Exchange Act. These regulations and forms set forth the disclosure
requirements for annual reports 333 and registration statements that are prepared by issuers
to provide investors with the information they need to make informed investment
decisions in registered offerings and in secondary market transactions. The industry
guides supplement the existing regulations and forms and provide guidance with respect
to industry-specific disclosures.
Our amendments to these existing forms are intended to modernize and update
our reserves definitions to better reflect changes in the oil and gas industry and markets
and new technologies that have occurred in the decades since the current rules were
adopted, including expanding the scope of permissible technologies for establishing
certainty levels of reserves, reserves classifications that a company can disclose in a
Commission filing, and the types of resources that can be included in a company’s

333

The pertinent annual reports are those on Forms 10-K and 20-F.

reserves, as well as providing information regarding a company’s internal controls over
reserves estimation and the qualifications of person preparing reserves estimates or
conducting reserves audits. The new rules and amendments also are intended to codify,
modernize, and centralize the disclosure items for oil and gas companies in Regulation
S-K. Finally, the new rules and amendments are intended to harmonize oil and gas
disclosures by foreign private issuers with disclosures by domestic companies. Overall,
the new rules and amendments attempt to provide improved disclosure about an oil and
gas company’s business and prospects without sacrificing clarity and comparability,
which provide protection and transparency to investors.
The hours and costs associated with preparing disclosure, filing forms, and
retaining records constitute reporting and cost burdens imposed by the collection of
information. An agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless it displays a currently valid control number.
Many, but not all, of the information collection requirements related to annual
reports and registration statements will be mandatory. There is no mandatory retention
period for the information disclosed, and the information will be publicly available on the
EDGAR filing system.
B.

Summary of Information Collections

The new rules and amendments increase existing disclosure burdens for annual
reports on Forms 10-K 334 and 20-F and registration statements on Forms 10, 20-F, S-1,

334

The disclosure requirements regarding oil and gas properties and activities are in Form 10-K as
well as the annual report to security holders required pursuant to Rule 14a-3(b) [17 CFR
240.14a-3(b)]. Form 10-K permits the incorporation by reference of information from the Rule
14a-3(b) annual report to security holders to satisfy the Form 10-K disclosure requirements. The
analysis that follows assumes that companies would either provide the proposed disclosure in a

S-4, F-1, and F-4 by creating the following new disclosure requirements, many of which
were requested by industry participants:
•

Disclosure of reserves from non-traditional sources (i.e., bitumen, shale,
coalbed methane) as oil and gas reserves;

•

Optional disclosure of probable and possible reserves;

•

Optional disclosure of oil and gas reserves’ sensitivity to price;

•

Disclosure of the company’s progress in converting proved undeveloped
reserves into proved developed reserves, including those that are held for
five years or more and an explanation of why they should continue to be
considered proved;

•

Disclosure of technologies used to establish reserves in a company’s initial
filing with the Commission and in filings which include material additions
to reserves estimates;

•

The company’s internal controls over reserves estimates and the
qualifications of the technical person primarily responsible for overseeing
the preparation or audit of the reserves estimates;

•

If a company represents that disclosure is based on the authority of a third
party that prepared the reserves estimates or conducted a reserves audit or
process review, filing a report prepared by the third party; and

•

Disclosure based on a new definition of the term “by geographic area.”

Form 10-K or incorporate the required disclosure into the Form 10-K by reference to the Rule 14a3(b) annual report to security holders if the company is subject to the proxy rules. This approach
takes into account the burden from the proposed disclosure requirements that are included in both
Form 10-K and Regulation 14A or 14C.

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In addition, the amendments harmonize the disclosure requirements that apply to
foreign private issuers with the disclosure requirements that apply to domestic issuers
with respect to oil and gas activities. In particular, foreign private issuers must disclose
the information required by Items 1205 through 1208 of Regulation S-K regarding
drilling activities, present activities, delivery commitments, wells, and acreage, which
previously were not specified in Appendix A to Form 20-F. These disclosure items
codify the substantive disclosures called for by Items 4 through 8 of Industry Guide 2,
although much of this disclosure may have been disclosed by some companies under the
more general discussions of business and property on that form.
C.

Revisions to PRA Burden Estimates

For purposes of the PRA, we estimated, in the Proposing Release, the total annual
increase in the paperwork burden for all affected companies to comply with our proposed
collection of information requirements to be approximately 7,472 hours of in-house
company personnel time and to be approximately $1,659,000 for the services of outside
professionals. 335 These estimates included the time and the cost of preparing and
reviewing disclosure and filing documents. Our methodologies for deriving the above
estimates are discussed below.
Our estimates represented the burden for all oil and gas companies that file annual
reports or registration statements with the Commission. Based on filings received during
the Commission’s last fiscal year, we estimate that 241 oil and gas companies file annual
reports and 67 oil and gas companies file registration statements. Most of the

335

For administrative convenience, the presentation of the totals related to the paperwork burden
hours have been rounded to the nearest whole number and the cost totals have been rounded to the
nearest thousand.

101

information called for by the new disclosure requirements, including the optional
disclosure items, is readily available to oil and gas companies and includes information
that is regularly used in their internal management systems. These disclosures include:
•

Disclosure of reserves from non-traditional sources (i.e., bitumen, shale,
coalbed methane) as oil and gas reserves;

•

Optional disclosure of probable and possible reserves;

•

Optional disclosure of oil and gas reserves’ sensitivity to price;

•

Disclosure of technologies used to establish reserves in a company’s initial
filing with the Commission and in filings which include material additions
to reserves estimates;

•

The company’s internal controls over reserves estimates and the
qualifications of the technical person primarily responsible for overseeing
the preparation or audit of the reserves estimates;

•

Disclosure based on a new definition of the term “by geographic area.”

We estimated that, on average, each company would incur a burden of 35 hours to
prepare these disclosures in an annual report or registration statement.
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The amendments also apply several disclosure items to foreign private issuers that
previously did not apply to them. As noted above, many of these disclosure items, such
as drilling activities, wells and acreage, require the issuer to provide more specificity
about its business and property. Foreign private issuers that do not currently provide
such specificity would incur an added burden to present such disclosures in their filings.
In the Proposing Release, we estimated that this burden would be 20 hours per foreign
private issuer.
We received few comments regarding our estimates. Several large oil companies,
and an industry organization that primarily represents large oil companies, believed that
the estimates were too low. They believed that the new rules and amendments would
increase their burden by 10,000 to 15,000 hours per year. However, these commenters
included the initial cost to change their internal systems to provide the new required
disclosures in their estimates. Based on conversations with these commenters, the staff
understands that they believed that the ongoing burden would be approximately one third
of that estimate. For purposes of its Paperwork Reduction Act estimate, the staff
considers the ongoing annual burden and spreads the initial transitional burden of
compliance with new rules and regulations over a three year period.
In addition, these commenters indicated that the two most significant burdens that
stemmed from the proposed use of different prices for disclosure and accounting
purposes and the increased detail in disclosures that would result from the proposed
definition of the term “geographic area” and the proposed disclosure by type of
accumulation. It should be noted that these commenters have significant reserves spread
worldwide. Some of these large companies have as much as 10,000 times the amount of

103

reserves of the median oil and gas company. These large companies likely would be
more significantly impacted by the level of detailed disclosure that the proposals would
have required compared to the vast majority of oil and gas companies in our reporting
system, which do not have such extensive global operations. Therefore, we do not
believe that the estimate provided by those large oil and gas companies necessarily would
be applicable to most oil and gas companies. However, in response to the concerns that
they expressed, the final rules do not require the use of different prices for disclosure and
full cost accounting purposes. We also intend to continue to work with the FASB to
align the accounting standards with that pricing mechanism. In addition, we have
significantly reduced the level of detailed geographic and product disclosure that the rules
require. Finally, we are providing for a substantial transition period to allow companies
to adjust their systems to comply with the new rules. We believe that these changes will
help to mitigate the increased burden of the new rules.
We do, however, believe that our initial burden estimates may have been too low.
We are therefore adjusting our burden estimate to reflect an additional increase of 100
hours per company per year. In addition, we are increasing our burden estimate for
foreign private issuers by an additional 150 hours per company per year. Consistent with
current Office of Management and Budget estimates and recent Commission
rulemakings, we estimate that 25% of the burden of preparation of registration statements
on Forms S-1, S-4, F-1, F-4, 10, and 20-F is carried by the company internally and that
75% of the burden is carried by outside professionals retained by the issuer at an average

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cost of $400 per hour. 336 We estimate that 75% of the burden of preparation of annual
reports on Form 10-K or Form 20-F is carried by the company internally and that 25% of
the burden is carried by outside professionals retained by the company at an average cost
of $400 per hour. The portion of the burden carried by outside professionals is reflected
as a cost, while the portion of the burden carried by the company internally is reflected in
hours. The following tables summarize the additional changes to the PRA estimates:
Table 1: Calculation of Incremental Paperwork Reduction Act Burden Estimates for Exchange Act Periodic
Reports
Form
337

10-K
20-F
Total

Annual
Responses

Incremental
Hours/Form

(A)

(B)
206

100

35
241

150

Incremental
Burden
(C)=(A)*(B)
20,600

(D)=( C)*0.75
15,450

(E)=(C)*0.25
5,150

$400
Professional
Cost
(F)=(E)*$400
2,060,000

5,250
25,850

3,938
19,388

1,312
6,462

525,000
2,585,000

75% Issuer

25%
Professional

Table 2: Calculation of Incremental Paperwork Reduction Act Burden Estimates for Securities Act
Registration Statements and Exchange Act Registration Statements
Annual
Responses
(A)

Form
10
20-F
S-1
S-4
F-1
F-4
Total

5
2
38
17
2
3
67

Incremental
Hours/Form
(B)
100
150
100
100
150
150

Incremental
Burden
(C)=(A)*(B)
500
300
3,800
1,700
300
450
7,050

25% Issuer
(D)=( C)*0.25
125
75
950
425
75
112.5
1762.5

75%
Professional
(E)=(C)*0.75
375
225
2,850
1,275
225
337.5
5,287.5

$400 Professional
Cost
(F)=(E)*$400
150,000
90,000
1,140,000
510,000
90,000
135,000
2,115,000

Request for Comment

We request comment in order to evaluate the accuracy of our estimates of the
burden of the revised information collections. Any member of the public may direct to us

336

In connection with other recent rulemakings, we have had discussions with several private law
firms to estimate an hourly rate of $400 as the average cost of outside professionals that assist
issuers in preparing disclosures and conducting registered offerings.

337

The burden estimates for Form 10-K assume that the requirements are satisfied by either including
information directly in the annual reports or incorporating the information by reference from the
Rule 14a-3(b) annual report to security holders.

105

any comments concerning the accuracy of these burden estimates. Persons who desire to
submit comments on the collection of information requirements should direct their
comments to the OMB, Attention: Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Washington DC 20503, and
should send a copy of the comments to Secretary, Securities and Exchange Commission,
100 F Street NE, Washington, DC 20549-1090, with reference to File No. S7-15-08.
Requests for materials submitted to the OMB by us with regard to this collection of
information should be in writing, refer to File No. S7-15-08, and be submitted to the
Securities and Exchange Commission, Records Management Branch, 100 F Street NE,
Washington, DC 20549-1126. Because OMB is required to make a decision concerning
the collections of information between 30 and 60 days after publication, your comments
are best assured of having their full effect if OMB receives them within 30 days of
publication.
XI.

Cost-Benefit Analysis
A.

Background

We are adopting revisions to the oil and gas reserves disclosure regime of
Regulation S-K and Regulation S-X under the Securities Act of 1933 and the Securities
Exchange Act of 1934 and Industry Guide 2. The revisions are intended to modernize
and update oil and gas disclosure. The oil and gas industry has experienced significant
changes since the Commission initially adopted its current rules and disclosure regime
between 1978 and 1982, including advancements in technology and changes in the types
of projects in which oil and gas companies invest. The revisions also are intended to

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provide investors with improved disclosure about an oil and gas company’s business and
prospects without sacrificing clarity and comparability.
B.

Description of New Rules and Amendments

Currently, Industry Guide 2 specifies many of the disclosure guidelines for oil and
gas companies. The Industry Guide calls for disclosure relating to reserves, production,
property, and operations in addition to that which is required by Regulation S-K.
Generally, the new rules and amendments codify and update the existing Industry Guide
2 disclosures in a new Subpart 1200 of Regulation S-K, clarify the level of detail required
to be disclosed, and require reserves disclosure in a tabular presentation. The changes
relate primarily to disclosure of the following:
•

Disclosure of reserves from non-traditional sources (e.g., bitumen, shale)
as oil and gas reserves;

•

Optional disclosure of probable and possible reserves;

•

Optional disclosure of oil and gas reserves’ sensitivity to price;

•

Disclosure of technologies used to establish reserves in a company’s initial
filing with the Commission and in filings which include material additions
to reserves estimates;

107

•

The company’s internal controls over reserves estimates and the
qualifications of the technical person primarily responsible for overseeing
the preparation or audit of the reserves estimates;

•

Disclosure based on a new definition of the term “by geographic area.”

The new rules and amendments also make revisions and additions to the
definitions section of Rule 4-10 of Regulation S-X. These revisions update and extend
reserves definitions to reflect changes in the oil and gas industry and new technologies.
In particular, the new and revised definitions:
•

Expand the definition of “oil and gas producing activities” to include the
extraction of hydrocarbons from oil sands, shale, coalbeds, or other natural
resources and activities undertaken with a view to such extraction;

•

Add a definition of “reasonable certainty” to provide better guidance
regarding the meaning of that term;

•

Add a definition of “reliable technology” to permit the use of new
technologies to establish proved reserves;

•

Define probable and possible reserves estimates; and

•

Add definitions to explain new terms used in the revised definitions.

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require foreign private issuers to disclose the information required by Items 1205 through
1208 of Regulation S-K regarding drilling activities, present activities, delivery
commitments, wells, and acreage, which are not currently specified under Appendix A to
Form 20-F, although much of this disclosure is often disclosed by companies under the
more general discussions of business and property on that form.
C.

Benefits

We expect that the new rules and amendments will increase transparency in
disclosure by oil and gas companies by providing improved reporting standards. The
revisions to the definitions should align our disclosure rules with the realities of the
modern oil and gas markets. For example, we believe that the inclusion of bitumen and
other resources from continuous accumulations as oil and gas producing activities is
consistent with company practice to treat these operations as part of, rather than separate
from, their traditional oil and gas producing activities. Similarly, the expansion of
permissible technologies for determining certainty levels of reserves recognizes that
companies now take advantage of these technological advances to make business
decisions. We expect these new rules and amendments to improve disclosure by aligning
the required disclosure more closely with the way companies conduct their business.
Allowing companies to disclose probable and possible reserves is designed to
improve investors’ understanding of a company’s unproved reserves. For those
companies that already disclose such reserves on their Web sites, the new rules and
amendments permit them to unify such disclosures into a single, filed document.
Disclosure of these categories of reserves beyond proved reserves may foster better
company valuations by investors, creditors, and analysts, thus improving capital

109

allocation and reducing investment risk. Because some of the disclosure items are
optional, the amount of increased transparency will depend on the extent to which
companies elect to provide the additional disclosures permitted under the new rules. If
companies elect not to provide the optional disclosure, then the benefits from increased
transparency would be limited to the extent that the new rules improve the transparency
of proved reserves disclosure.
By permitting increased disclosure and promoting more consistency and
comparability among disclosures, the new rules and amendments provide a mechanism
for oil and gas companies to seek more favorable financing terms through more
disclosure and increased transparency. Investors may be able to request such additional
disclosure in Commission filings during negotiations regarding bond and debt covenants.
Thus, we expect that, as a result of competing factors in the marketplace, the new rules
and amendments will result in increased transparency, either because companies elect to
voluntarily provide increased disclosure, or because investors may discount companies
that do not do so. We believe that the benefits and costs of disclosing unproved reserves
ultimately will be determined by market conditions, rather than regulatory requirements.
We expect that permitting companies to disclose probable and possible reserves
will increase market transparency, provide investors with more reserves information, and
allow for more accurate production forecasts. By relating standards used in deterministic
methods to comparable percentage thresholds used in probabilistic methods for
establishing a given level of certainty, the new rules and amendments should result in
increased standardization in reporting practices which would promote comparability of
reserves across companies. The new rules would define the term “reliable technology” to

110

permit oil and gas companies to prepare their reserves estimates using new types of
technology that companies are not permitted to use under the current rules. This new
definition also is designed to encompass new technologies as they are developed in the
future, thereby providing investors and the market with a more comprehensive
understanding of a company’s estimated reserves.
We expect that replacing the Industry Guide with new Regulation S-K items will
provide greater certainty because the disclosure requirements would be in rules
established by the Commission. In addition, we believe that disclosure of reserves
concentrated in particular countries should provide better information to investors
regarding the geopolitical risk to which some companies may be exposed. Overall, we
believe that the amendments, as a whole, will provide investors with more information
that management uses to make business decisions in the oil and gas industry.
1.

Average price and first of the month price

The revision to change the price used to calculate reserves from a year-end singleday price to an historical average price over the company’s most recently ended fiscal
year is expected to reduce the effects of seasonality. In particular, many commenters
suggested the use of a 12-month average price to mitigate the risk of a year-end price
affected by short-term price volatility such that it does not reflect the true nature of a
company investment, planning, and performance. Our Office of Economic Analysis
studied the publicly-available pricing data and found evidence of year-end price
volatility. The historical volatility of year-end prices is between 16% and 41% higher
than the volatility of annual average prices depending on the grade and geography of oil
or gas prices considered. This difference demonstrates variability in oil and gas prices,

111

likely due to seasonal demands, that does not reflect long term fundamental values, but
that cannot be immediately corrected due to the costs of transportation and speed of
delivery. Given this variability, it is likely that a 12-month average price will yield better
reserves estimates–that reflect management planning and investment to the extent that
they discount the short-term component of oil and gas prices–than a year-end spot price.
Many of the commenters to the Proposing Release supported the use of an
historical price, even though this approach may be less useful in determining the fair
value of a company’s reserves compared to a futures market price. We believe investors
are concerned not only about the quantity of a company’s reserves, but also about the
profitability of those reserves. We also recognize that some reserves will be of more
value than others due to extraction and transportation costs. As a result, since the new
rules and amendments require the use of a single price to estimate reserves and since that
price may not be as informative of value as a futures price, the new rules and
amendments also gives companies the option of providing a sensitivity analysis and
reporting reserves based on additional price estimates.
If companies elect to provide a sensitivity analysis, we expect this to benefit
investors by allowing them to formulate better projections of company prospects that are
more consistent with management’s planning price and prices higher and lower that may
reasonably be achieved. In particular, it allows companies the flexibility to communicate
how their reserves would change under alternative economic conditions, including those
that they may believe better reflect their future prospects. We expect that companies
would be more likely to adopt a sensitivity analysis approach if investors and other
market participants determine that this information would reduce investment risk, or if

112

companies believe such disclosure will reduce the cost of capital formation. The new
rules and amendments should result in increased price stability in determining whether
reserves are economically producible. This should mitigate seasonal effects, resulting in
reserves estimates that more closely reflect those used by management in planning and
investment decisions. We expect this to allow for more accurate company assessments
and improve projections of company prospects.
In addition to an average annual price, many of the commenters suggested that the
price be computed on the first day of the month. Two reasons were given. First,
beginning month prices would allow an additional month of preparation time in
calculating reserves for financial reporting. Second, some commenters suggested that
month-end, and in particular year-end, prices were subject to additional short-term
volatility because many oil and gas financial contracts expire on those days, resulting in
higher than normal trading activity. While the staff of the Office of Economic Analysis
did not find systematic evidence of increased volatility around month-end or year-end oil
and gas prices relative to other days in the month, we agree that additional preparation
time is beneficial because reserves estimations require significant time and resources. An
additional month would help reduce errors that might otherwise result from the financial
reporting time constraints.
Finally, we believe that revising the full cost accounting method to use the same
pricing mechanism as the reserves disclosure requirements should provide consistency
between the disclosure and accounting presentations. The use of a single pricing method
should also minimize the incremental burden placed on companies as a result of the rule
changes because they would not be required to prepare two separate estimates.

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Probable and possible reserves

We anticipate that disclosure of probable and possible reserves, if companies elect
to do so, will allow investors, creditors, and other users to better assess a company’s
reserves. In addition, the tabular format for disclosing probable and possible reserves
should reduce investor search costs by making it easier to locate reserves disclosures and
facilitating comparability among oil and gas companies.
While we recognize that many companies already communicate with investors
about their unproved and other reserves through alternative means, such as company Web
sites or press releases, some commenters remarked that an objective comparison among
companies is difficult because different companies have defined such reserves
classifications differently. We believe that permitting disclosure of this information in
Commission filings will provide a more consistent means of comparison because
disclosure in our filings must comply with our definitions. Although our new rules make
disclosure of probable and possible reserves optional, and large oil and gas producers
suggested in their comment letters that such disclosure would be of limited benefit
because of the relative uncertainty of those estimates, we believe that competitive
pressures within the industry might make it beneficial for large producers to disclose this
information. Increased disclosure might, for example, improve credit quality and lower
the cost of debt financing, or reduce the risk associated with business transactions
between the company and its customers or suppliers. Regardless, since the disclosure
decision is voluntary, it should occur only to the extent that companies find that the
benefits justify the costs of doing so.

114

We believe that permitting the disclosure of probable and possible reserves will
benefit smaller companies, in particular. Larger issuers tend to already have large
amounts of proved reserves. The new rules and amendments permit smaller companies,
who often participate in a significant amount of exploratory activity, to better disclose
their business prospects. Consequently, we anticipate that the new rules and amendments
could lead to efficiencies in capital formation, as more information will be available
regarding the prospects of smaller issuers.
3.

Reserves estimate preparers and reserves auditors

We believe that investors would benefit from a greater level of assurance with
respect to the reliability of reserve estimates, particularly if companies are allowed to
disclose unproved reserves because unproved reserves are inherently less certain than
proved reserves. We proposed disclosure requirements relating to whether the person
primarily responsible for preparing reserves estimates or conducting a reserves audit, if
the company represents that it has enlisted a third party to conduct a reserves audit, met a
specified list of qualifications based on the Society of Petroleum Engineers’s reserves
audit guidelines. However, commenters expressed concern that many of these
qualifications such as membership in professional societies were not standardized
worldwide. Without control over those standards, the disclosures would not be
comparable. We agree with those commenters and, as suggested, have adopted a more
principles-based disclosure requirement. Under the adopted rules, a company must
disclose its internal controls over reserves estimations and disclose the qualifications of
the primary technical person in charge of overseeing the reserves estimations or reserves
audit. We believe that disclosure of the individual qualifications, rather than simple

115

acknowledgement of meeting certain criteria, which may differ within countries, will
provide investors with better information to compare companies and the qualifications of
persons in charge of the reserves estimations and reserves audits, which should enable
more accurate assessments of the quality of audit reports. We believe that disclosure of a
company’s internal controls over reserves estimates will allow investors to assess
whether a company has implemented appropriate controls without dictating to companies
specified criteria for establishing those controls.
Although we do not expect all companies to undertake a third-party reserves audit
because our rules do not require such a reserves audit, third party participation in the
estimation of reserves should add credibility to a company’s public disclosure. The
opinion of an objective, qualified person on the reserves estimates is designed to increase
the reliability of these estimates and investor confidence.
4.

Development of proved undeveloped reserves

The new rules and amendments also require disclosure of a company’s progress in
developing undeveloped reserves and the reasons why any PUDs have remained
undeveloped for five years or more. We believe that such disclosure supplements our
amendments that ease the requirements for recognizing PUDs and thereby should
increase the amount of PUDs disclosed in filings, even though the properties representing
such proved reserves have not yet been developed and therefore do not provide the
company with cash flow. We believe that the disclosure requirements will increase the
accountability of companies that disclose reserves for extended periods of time without
adequate justification for their failure to develop those reserves.

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Disclosure guidance

The release also provides guidance about the type of information that companies
should consider disclosing in Management’s Discussion and Analysis, and allows
companies to include this information with the relevant tables. Providing the additional
guidance should assist companies in preparing their disclosure, improving the quality and
consistency of this disclosure. Locating this discussion with the tables themselves should
benefit investors by simplifying the presentation of disclosure, and providing insight into
the information disclosed in the tables.
6.

Updating of definitions related to oil and gas activities

The new rules and amendments also update the definition of the term “oil and gas
producing activities” as well as updating or creating new definitions for other terms
related to such activities, including “proved oil and gas reserves” and “reasonable
certainty.” We believe that updating these definitions will help companies disclose oil
and gas operations in the same way that companies manage and assess those operations.
This includes resources extracted from nontraditional sources that companies consider oil
and gas activities, which previously were excluded them from the definition of “oil and
gas producing activities.” In addition, adding definitions for terms like “reasonable
certainty” (which currently is in the definition of “proved oil and gas reserves,” but not
defined) will provide companies with added guidance and assist them in providing
consistent disclosures between companies.
7.

Harmonizing foreign private issuer disclosure

We believe that the harmonization of foreign private issuer disclosure will help
make disclosures of foreign private issuers more comparable with domestic companies.

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The oil and gas industry has changed significantly since the rules were adopted. Today,
many companies have interests that span the globe. In addition, many of these projects
are joint ventures between foreign private issuers and domestic companies. Having
differing levels of disclosure for companies that may be participating in the same projects
harms comparability between investment choices. The harmonization of foreign private
issuer disclosure is intended to promote comparability among all oil companies.
D.

Costs

We expect that the new rules and amendments will result in initial and ongoing
costs to oil and gas companies. These burdens will vary significantly among companies.
Based on disclosures in company filings, the largest oil and gas companies can have as
much as 10,000 times the reserves of the median reporting oil and gas company. As
would be expected, companies that have more reserves and larger operations will have a
correspondingly larger amount of information that they must disclose and, therefore, the
burden of complying with our disclosure requirements would be greater for larger
companies.
Although we are adding a new subpart to Regulation S-K to set forth the
disclosure requirements that are unique to oil and gas companies, the subpart, for the
most part, codifies the substantive disclosure called for by Industry Guide 2. The
disclosure requirements have been updated and clarified, and require the disclosure to be
presented in a tabular format, where appropriate. Although many companies already
present this information in tabular form, for companies that do not, this requirement
could impose a burden on companies as they transition from a narrative to tabular
disclosure format. We expect, however, that any increased preparation costs would be

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highest in the first year after adoption, but would decline in subsequent years as
companies adjust to the new format. We think this burden is justified because tabular
disclosure will increase comparability and facilitate understanding and analysis by
investors.
1.

Probable and possible reserves

Allowing disclosure of probable and possible reserves could create an increased
risk of litigation because these categories of reserves estimates are less certain than
proved reserves. Companies may choose not to disclose such reserves, in part, because
of the risk of incurring litigation costs to defend their disclosures due to the increased
uncertainty of these categories. Disclosure of probable and possible reserves may also
result in revealing competitive information because it might reveal a company’s business
strategy, such as the geographic location and nature of its exploration and discoveries.
For example, if geographical detail can be inferred from estimates of unproved reserves,
this might reveal information about the value of a company’s assets to competitors and
could put the producer at a competitive disadvantage. We have reduced the level of
geographical detail to reduce the burden on companies, while still providing sufficient
information to investors regarding concentrations of risk, including political risk.
We expect companies will incur costs in preparing the additional disclosures such
as calculating and aggregating the reserve projections in a prescribed format. However,
if probable and possible categories of reserves have different extraction cost structures
and they are not disclosed separately from proved reserves, this could result in increased
uncertainty in an investor’s assessment of a company’s prospects.

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Companies also expressed concern that mandatory disclosure of probable and
possible reserves could expose them to increased litigation risk. We believe that making
these disclosures voluntary mitigates these concerns. Companies unwilling to bear the
added risk can simply opt not to provide this disclosure.
2.

Reserves estimate preparers and reserves auditors

If a company chooses to use a third party to prepare or audit reserve estimates, it
will incur costs to hire these outside consultants. The new rules and amendments do not
require companies to hire such a person. If enough companies that currently do not use
such consultants begin to hire them, we believe that industry wages could potentially
increase due to increased demand for reserves calculating specialists unless that demand
is compensated by an increase in the supply of such persons. If wages increased, then all
companies, not just those employing third party consultants, would incur added costs.
Large companies may be less likely to hire third parties because they tend to have
staff to make reserves estimates. However, if such large companies chose to hire thirdparty consultants, third parties would expend significantly more effort on such projects
than for smaller companies because larger companies have more properties to evaluate.
Thus, we expect third-party fees, and the time required to conduct such projects, would
scale upwards with the quantity of company reserves.
Disclosure of unproved reserves without third-party certification may present a
risk with respect to smaller oil and gas producers because smaller companies are likely to
have less in-house expertise and ability to accurately estimate such reserves than larger
companies. However, we understand that the vast majority of smaller oil and gas
companies already hire third parties to estimate their reserves or certify their estimates.

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Consistency with IASB

Some commenters remarked that the International Accounting Standards Board is
currently preparing a set of guidelines for oil and gas extractive activities, including
definitions of oil and gas reserves, and recommended that the Commission align its
regulations with those guidelines. We intend to monitor this initiative and work with the
IASB, but our new rules may differ from the guidelines ultimately established by the
International Accounting Standards Board. This could make it more difficult for
investors to compare foreign and domestic companies.
4.

Change in pricing mechanism

We do not anticipate significant costs with the change in pricing mechanisms for
establish reserves. Companies simply will apply a different price scenario to determine
the economic producibility of reserves. It is possible that the use of a 12-month average
price may reduce the cost of disclosure because it should reduce the volatility of reserves
estimates and therefore reduce the need to make significant adjustments to those
estimates on a yearly basis due to daily price swings.
5.

Disclosure of PUD development

The required disclosure of a company’s progress in developing PUDs will
increase the cost of reporting. However, we believe that companies regularly track their
progress in this arena. Until a company develops a property, it cannot begin to realize the
cash flows from production and the actual sale of products. Thus, the development of
reserves is of utmost importance to an oil and gas company’s business.

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Increased geographic disclosure

The requirements to provide increased geographic disclosure of reserves and
production, in certain circumstances, may increase the amount of disclosure that a
company must present. However, because the threshold that we are adopting in the
release is 15% of the company’s total reserves, a company would be required to disclose,
at most, reserves and production in six countries. Considering the relatively large
proportion of reserves that must exist in a country before a company is required to
provide country-level disclosure, we believe that such information is readily available to
companies. As noted in the body of this release, we have attempted to draft this
provision to minimize any competitive harm that such disclosure may cause a company.
7.

Harmonizing foreign private issuer disclosure

The harmonization of foreign private issuer disclosure regarding oil and gas
activities may increase the burden on foreign private issuers. However, it is our
understanding that the large foreign private issuers already voluntarily provide disclosure
comparable to the level required from domestic companies. Much of the added new
disclosure relates to the day-to-day business and properties of these companies, including
drilling activities, number of wells and acreage. This is information that is central to the
activities of oil and gas companies, and therefore is readily known to these companies.
We believe that applying Subpart 1200 to these companies could prompt more detailed
disclosure regarding these activities, which would cause these companies to incur some
cost. The provision permitting foreign private issuers to omit disclosures if prohibited
from making those disclosures by their home jurisdiction could mitigate some of these
costs.

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XII.

Consideration of Burden on Competition and Promotion of Efficiency,
Competition, and Capital Formation
Securities Act Section 2(b) 338 and Section 3(f) of the Exchange Act 339 require us,

when engaging in rulemaking where we are required to consider or determine whether an
action is necessary or appropriate in the public interest, to consider, in addition to the
protection of investors, whether the action will promote efficiency, competition, and
capital formation. Section 23(a)(2) of the Exchange Act 340 requires us, when adopting
rules under the Exchange Act, to consider the impact that any new rule would have on
competition. In addition, Section 23(a)(2) prohibits us from adopting any rule that would
impose a burden on competition not necessary or appropriate in furtherance of the
purposes of the Exchange Act.
We expect the new rules and amendments to increase efficiency and enhance
capital formation, and thereby benefit investors, by providing the market with better
information based on updated technology as well as increased information covering a
broader range of reserves classifications held by a company and reserves found in nontraditional sources of oil and gas. Such increased and improved information should
permit investors to better assess a company’s prospects. In particular, the existing
prohibitions against disclosing reserves other than proved reserves, using modern
technology to determine the certainty level of reserves, and including resources from
non-traditional sources can lead to incomplete disclosures about a company’s actual

338

15 U.S.C. 77b(b).

339

15 U.S.C. 78c(f).

340

15 U.S.C. 78w(a)(2).

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resources and prospects. The new rules and amendments are designed to better align the
disclosure requirements with the way companies make business decisions.
We believe that permitting the disclosure of probable and possible reserves will
benefit smaller companies, in particular. Larger issuers tend to already have large
amounts of proved reserves. The new rules and amendments permit smaller companies,
who often participate in a significant amount of exploratory activity, to better disclose
their business prospects. Consequently, we anticipate that the new rules and amendments
could lead to efficiencies in capital formation, as more information will be available
regarding the prospects of smaller issuers.
The effects of the new rules and amendments on competition are difficult to
predict, but it is possible that permitting public issuers to disclose probable and possible
reserves will lead to a reallocation of capital, as companies that previously could show
few proved reserves will be able to disclose a broader range of its business prospects,
making it easier for these issuers to raise capital and compete with companies that have
large proved reserves. Although our new rules make disclosure of probable and possible
reserves optional, and large oil and gas producers suggested in their comment letters that
such disclosure would be of limited benefit because of the relative uncertainty associated
with such reserves, we believe that competitive pressures within the industry might make
it beneficial for large producers to disclose this information. Increased disclosure might,
for example, improve credit quality and lower the cost of debt financing, or reduce the
risk associated with business transactions between the company and its customers or
suppliers.

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XIII. Final Regulatory Flexibility Analysis
We have prepared this Final Regulatory Flexibility Analysis in accordance with
Section 603 of the Regulatory Flexibility Act. 341 This analysis relates to the
modernization of the oil and gas disclosure requirements. An Initial Regulatory
Flexibility Analysis (IRFA) was prepared in accordance with the Regulatory Flexibility
Act in conjunction with the Proposing Release. The Proposing Release included, and
solicited comment on, the IRFA.
A.

Reasons for, and Objectives of, the New Rules and Amendments

The Commission adopted the current disclosure regime for oil and gas producing
companies in 1978 and 1982, respectively. Since that time, there have been significant
changes in the oil and gas industry and markets, including technological advances, and
changes in the types of projects in which oil and gas companies invest their capital. On
December 12, 2007, the Commission published a Concept Release on possible revisions
to the disclosure requirements relating to oil and gas reserves. 342 Prior to our issuance of
the Concept Release, many industry participants had expressed concern that our
disclosure rules are no longer in alignment with current industry practices and therefore
have limited usefulness to the market and investors.
Our new rules and amendments to these existing forms are intended to modernize
and update our reserves definitions to reflect changes in the oil and gas industry and
markets and new technologies that have occurred in the decades since the current rules
were adopted, including expanding the scope of permissible technologies for establishing

341

5 U.S.C. 603.

342

See Release No. 33-8870 (Dec. 12, 2007) [72 FR 71610].

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certainty levels of reserves, reserves classifications that a company can disclose in a
Commission filing, and the types of resources that can be included in a company’s
reserves, as well as providing information regarding the objectivity and qualifications of
any third party primarily responsible for preparing or auditing the reserves estimates, if
the company represents that it has enlisted a third party to conduct a reserves audit, and
the qualifications and measures taken to assure the independence and objectivity of any
employee primarily responsible for preparing or auditing the reserves estimates. The
amendments also harmonize our full cost accounting rules with the changes that we are
adopting with respect to disclosure of oil and gas reserves. The new rules and
amendments also are intended to codify, modernize and centralize the disclosure items
for oil and gas companies into Regulation S-K. Finally, the new rules and amendments
are intended to harmonize oil and gas disclosures by foreign private issuers with
disclosures by domestic companies. Overall, the new rules and amendments attempt to
provide improved disclosure about an oil and gas company’s business and prospects
without sacrificing clarity and comparability, which provide protection and transparency
to investors.
B.

Significant Issues Raised by Commenters

We did not receive comments specifically addressing the impact of the proposed
rules and amendments on small entities. However, several of the comments related to
burdens that would be placed on all companies affected by the proposals. In particular,
commenters believed that the proposal to require the use of different prices for disclosure
and accounting purposes would impose a significant burden on all oil and gas companies.
We have considered those comments and are adopting amendments to our disclosure

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rules and the full cost accounting method that will require the use of a single price for
both purposes. Similarly, commenters were concerned that certain aspects of the
proposal, such as the new definition of geographic area and disclosure by accumulation
type would increase the detail in the disclosures significantly. We agree with those
commenters and have significantly reduced the level of detail required in the disclosure
requirements.
C.

Small Entities Subject to the New Rules and Amendments

The new rules and amendments affect small entities that are engaged in oil and
gas producing activities, the securities of which are registered under Section 12 of the
Exchange Act or that are required to file reports under Section 15(d) of the Exchange
Act. The new rules and amendments also would affect small entities that file, or have
filed, a registration statement that has not yet become effective under the Securities Act
and that has not been withdrawn. Securities Act Rule 157 343 and Exchange Act Rule 010(a) 344 define an issuer to be a “small business” or “small organization” for purposes of
the Regulatory Flexibility Act if it had total assets of $5 million or less on the last day of
its most recent fiscal year. The new rules and amendments affect small entities that are
operating companies and engage in oil and gas producing activities. Based on filings in
2007, we estimate that there are approximately 28 oil and gas companies that may be
considered small entities.

343

17 CFR 230.157.

344

17 CFR 240.0-10(a).

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Reporting, Recordkeeping, and Other Compliance Requirements

The new rules and amendments to Regulation S-K expand some existing
disclosures, and eliminate others. In particular, the new disclosure requirements, many of
which were requested by industry participants, include the following:
•

Disclosure of reserves from non-traditional sources (e.g., bitumen and
shale) as oil and gas reserves;

•

Optional disclosure of probable and possible reserves;

•

Optional disclosure of oil and gas reserves’ sensitivity to price;

•

Disclosure of the development of proved undeveloped reserves, including
those that are held for 5 years or more and an explanation of why they
should continue to be considered proved;

•

Disclosure of technologies used to establish reserves in a company’s initial
filing with the Commission and in filings which include material additions
to reserves estimates;

•

Disclosure of the company’s internal controls over reserves estimates and
the qualifications the technical person primarily responsible for overseeing
the preparation or audit of the reserves estimates;

•

Disclosure based on a new definition of the term “by geographic area.”

There would be no mandatory retention period for the information disclosed, and the
information disclosed would be made publicly available on the EDGAR filing system.
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Agency Action to Minimize Effect on Small Entities

We considered different compliance standards for the small entities that will be
affected by the new rules and amendments. In the Proposing Release, we solicited
comment regarding the possibility of different standards for small entities. We did not
receive comment on this particular issue. However, we believe that such differences
would be inconsistent with the purposes of the rules.
The new rules and amendments are designed to modernize the disclosure
requirements for oil and gas companies. As such, we believe all oil and gas companies
will benefit from the modernization of the rules. Under the new rules and amendments,
all companies will be allowed to use modern technologies to establish reserves and
include operations in unconventional resources in their oil and gas reserves estimates.
Adopting differing standards for disclosure for small entities would significantly reduce
the comparability between companies. However, the new rules and amendments do
permit companies to disclose probable and possible reserves. We believe the removal of
the prohibition against such reserves will enable companies to disclose a broader view of
their prospects. We believe this will particularly benefit smaller oil and gas companies
that may have significant unproved reserves in their portfolio. Such disclosure may assist
smaller companies in raising capital for development projects in those properties.
XIV. Update to Codification of Financial Reporting Policies
The Commission amends the "Codification of Financial Reporting Policies"
announced in Financial Reporting Release No. 1 (April 15, 1982) [47 FR 21028] as
follows:

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1. By removing the seven introductory paragraphs before Section 406.01, the last
sentence of Section 406.01.c.vi., the first paragraph of Section 406.01.d, the introductory
paragraph of Section 406.02.d, and removing and reserving Sections 406.01.a., 406.02.a,
406.02.b., 406.02.d.iii., and 406.02.e.
2. By revising Section 406.01B to read as follows:
The rules in Rule 4-10(b) specify that the application of successful efforts shall
comply with SFAS 19. In 2008, the Commission published amendments to the
definitions in Rule 4-10(a) that may not align completely with SFAS 19’s existing
terminology and application. Further, paragraph 7 of SFAS 25 states: “For purposes of
applying this Statement and Statement 19, the definition of proved reserves, proved
developed reserves, and proved undeveloped reserves shall be the definitions adopted by
the SEC for its reporting purposes that are in effect on the date(s) as of which the reserve
disclosures are to be made. Previous reported quantities shall not be revised retroactively
if the SEC definitions are changed.” In any case, the Commission expects the practical
application of SFAS 19 will remain unchanged other than incorporating the effects of the
new definitions.
3. By removing the first three sentences of Section 406.02.c. and in the fourth
sentence replacing the phrase “this sort of information” with “information to assess the
impact of oil and gas producing activities on near term cash flows and liquidity”.
4. By adding a new Section 406.03 entitled “Transition” and including the text of
the 3rd paragraph of Section VII.B and the last sentence of the 2nd paragraph of Section
VII.C of this release.

130

5. By adding a new Section 406.04 entitled “MD&A Guidance” and including the
text beginning with the last sentence of the 2nd paragraph of Section V of this release
through the end of that Section.
The Codification is a separate publication of the Commission. It will not be
published in the Federal Register or Code of Federal Regulations. For more information
on the Codification of Financial Reporting Policies, contact the Commission’s Public
Reference Room at 202-551-5850.
XV.

Statutory Basis and Text of Amendments
We are adopting the amendments pursuant to Sections 3(b), 6, 7, 10 and 19(a) of

the Securities Act and Sections 12, 13, 14(a), 15(d), and 23(a) of the Exchange Act, as
amended.
TEXT OF AMENDMENTS
List of Subjects
17 CFR Part 210
Accountants, Accounting, Reporting and recordkeeping requirements, Securities.
17 CFR Parts 211, 229 and 249
Reporting and recordkeeping requirements, Securities.
For the reasons set out in the preamble, title 17, chapter II of the Code of Federal
Regulations is amended as follows:
PART 210—FORM AND CONTENT OF AND REQUIREMENTS FOR
FINANCIAL STATEMENTS, SECURITIES ACT OF 1933, SECURITIES
EXCHANGE ACT OF 1934, PUBLIC UTILITY HOLDING COMPANY ACT OF
1935, INVESTMENT COMPANY ACT OF 1940, INVESTMENT ADVISERS ACT
OF 1940, AND ENERGY POLICY AND CONSERVATION ACT OF 1975
1.

The authority citation for part 210 continues to read as follows:

131

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z–2, 77z–3, 77aa(25), 77aa(26),
78c, 78j–1, 78l , 78m, 78n, 78o(d), 78q, 78u–5, 78w(a), 78ll , 78mm, 80a–8, 80a–20,
80a–29, 80a–30, 80a–31, 80a–37(a), 80b–3, 80b–11, 7202 and 7262, unless otherwise
noted.
2.

Amend § 210.4-10 by:
a.

Redesignating the subparagraphs in paragraph (a) as follows:
Old paragraph number
(a)(1)
(a)(2)
(a)(5)
(a)(6)
(a)(7)
(a)(8)
(a)(9)
(a)(10)
(a)(11)
(a)(12)
(a)(13)
(a)(14)
(a)(15)
(a)(16)
(a)(17)

New paragraph number
(a)(16)
(a)(22)
(a)(23)
(a)(32)
(a)(21)
(a)(15)
(a)(27)
(a)(13)
(a)(9)
(a)(29)
(a)(30)
(a)(1)
(a)(12)
(a)(7)
(a)(20)

Removing paragraphs (a)(3) and (a)(4);

Adding new paragraphs (a)(2), (a)(3), (a)(4), (a)(5), (a)(6), (a)(8), (a)(10),

(a)(11), (a)(14), (a)(17), (a)(18), (a)(19), (a)(24), (a)(25), (a)(26), (a)(28), (a)(31), and
(c)(8);
d.

Revising newly redesignated paragraphs (a)(13), (a)(16), (a)(22), and

(a)(30); and
e.

Removing the authority citations following the section.

The additions and revisions read as follows:
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§ 210.4-10 Financial accounting and reporting for oil and gas producing activities
pursuant to the Federal securities laws and the Energy Policy and Conservation Act
of 1975.
*
(a)

Definitions. *

* * *

*
*

(2)

Analogous reservoir. Analogous reservoirs, as used in resources

assessments, have similar rock and fluid properties, reservoir conditions (depth,
temperature, and pressure) and drive mechanisms, but are typically at a more advanced
stage of development than the reservoir of interest and thus may provide concepts to
assist in the interpretation of more limited data and estimation of recovery. When used to
support proved reserves, an “analogous reservoir” refers to a reservoir that shares the
following characteristics with the reservoir of interest:
(i)

Same geological formation (but not necessarily in pressure communication
with the reservoir of interest);

(ii)

Same environment of deposition;

(iii)

Similar geological structure; and

(iv)

Same drive mechanism.

Instruction to paragraph (a)(2): Reservoir properties must, in the aggregate, be no
more favorable in the analog than in the reservoir of interest.
(3)

Bitumen. Bitumen, sometimes referred to as natural bitumen, is petroleum

in a solid or semi-solid state in natural deposits with a viscosity greater than 10,000
centipoise measured at original temperature in the deposit and atmospheric pressure, on a

133

gas free basis. In its natural state it usually contains sulfur, metals, and other nonhydrocarbons.
(4)

Condensate. Condensate is a mixture of hydrocarbons that exists in the

gaseous phase at original reservoir temperature and pressure, but that, when produced, is
in the liquid phase at surface pressure and temperature.
(5)

Deterministic estimate. The method of estimating reserves or resources is called

deterministic when a single value for each parameter (from the geoscience, engineering, or
economic data) in the reserves calculation is used in the reserves estimation procedure.
(6)

Developed oil and gas reserves. Developed oil and gas reserves are

reserves of any category that can be expected to be recovered:
(i)

Through existing wells with existing equipment and operating methods or

in which the cost of the required equipment is relatively minor compared to the cost of a
new well; and
(ii)

Through installed extraction equipment and infrastructure operational at

the time of the reserves estimate if the extraction is by means not involving a well.
*
(8)

Development project. A development project is the means by which

petroleum resources are brought to the status of economically producible. As examples,
the development of a single reservoir or field, an incremental development in a producing
field, or the integrated development of a group of several fields and associated facilities
with a common ownership may constitute a development project.
*

134

(10)

Economically producible. The term economically producible, as it relates

to a resource, means a resource which generates revenue that exceeds, or is reasonably
expected to exceed, the costs of the operation. The value of the products that generate
revenue shall be determined at the terminal point of oil and gas producing activities as
defined in paragraph (a)(16) of this section.
(11)

Estimated ultimate recovery (EUR). Estimated ultimate recovery is the

sum of reserves remaining as of a given date and cumulative production as of that date.
*
(13)

Exploratory well. An exploratory well is a well drilled to find a new field

or to find a new reservoir in a field previously found to be productive of oil or gas in
another reservoir. Generally, an exploratory well is any well that is not a development
well, an extension well, a service well, or a stratigraphic test well as those items are
defined in this section.
(14)

Extension well. An extension well is a well drilled to extend the limits of

a known reservoir.
*
(16)

Oil and gas producing activities. (i) Oil and gas producing activities

include:
(A)

The search for crude oil, including condensate and natural gas liquids, or

natural gas (“oil and gas”) in their natural states and original locations;
(B)

The acquisition of property rights or properties for the purpose of further

exploration or for the purpose of removing the oil or gas from such properties;

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(C)

The construction, drilling, and production activities necessary to retrieve

oil and gas from their natural reservoirs, including the acquisition, construction,
installation, and maintenance of field gathering and storage systems, such as:
(1)

Lifting the oil and gas to the surface; and

(2)

Gathering, treating, and field processing (as in the case of processing gas

to extract liquid hydrocarbons); and
(D)

Extraction of saleable hydrocarbons, in the solid, liquid, or gaseous state,

from oil sands, shale, coalbeds, or other nonrenewable natural resources which are
intended to be upgraded into synthetic oil or gas, and activities undertaken with a view to
such extraction.
Instruction 1 to paragraph (a)(16)(i): The oil and gas production function shall be
regarded as ending at a “terminal point”, which is the outlet valve on the lease or field
storage tank. If unusual physical or operational circumstances exist, it may be
appropriate to regard the terminal point for the production function as:
a.

The first point at which oil, gas, or gas liquids, natural or synthetic, are

delivered to a main pipeline, a common carrier, a refinery, or a marine terminal; and
b.

In the case of natural resources that are intended to be upgraded into

synthetic oil or gas, if those natural resources are delivered to a purchaser prior to
upgrading, the first point at which the natural resources are delivered to a main pipeline, a
common carrier, a refinery, a marine terminal, or a facility which upgrades such natural
resources into synthetic oil or gas.

136

Instruction 2 to paragraph (a)(16)(i): For purposes of this paragraph (a)(16), the
term saleable hydrocarbons means hydrocarbons that are saleable in the state in which the
hydrocarbons are delivered.
(ii)

Oil and gas producing activities do not include:

(A)

Transporting, refining, or marketing oil and gas;

(B)

Processing of produced oil, gas or natural resources that can be upgraded

into synthetic oil or gas by a registrant that does not have the legal right to produce or a
revenue interest in such production;
(C)

Activities relating to the production of natural resources other than oil,

gas, or natural resources from which synthetic oil and gas can be extracted; or
(D)

Production of geothermal steam.

(17)

Possible reserves. Possible reserves are those additional reserves that are

less certain to be recovered than probable reserves.
(i)

When deterministic methods are used, the total quantities ultimately

recovered from a project have a low probability of exceeding proved plus probable plus
possible reserves. When probabilistic methods are used, there should be at least a 10%
probability that the total quantities ultimately recovered will equal or exceed the proved
plus probable plus possible reserves estimates.
(ii)

Possible reserves may be assigned to areas of a reservoir adjacent to

probable reserves where data control and interpretations of available data are
progressively less certain. Frequently, this will be in areas where geoscience and
engineering data are unable to define clearly the area and vertical limits of commercial
production from the reservoir by a defined project.

137

(iii)

Possible reserves also include incremental quantities associated with a

greater percentage recovery of the hydrocarbons in place than the recovery quantities
assumed for probable reserves.
(iv)

The proved plus probable and proved plus probable plus possible reserves

estimates must be based on reasonable alternative technical and commercial
interpretations within the reservoir or subject project that are clearly documented,
including comparisons to results in successful similar projects.
(v)

Possible reserves may be assigned where geoscience and engineering data

identify directly adjacent portions of a reservoir within the same accumulation that may
be separated from proved areas by faults with displacement less than formation thickness
or other geological discontinuities and that have not been penetrated by a wellbore, and
the registrant believes that such adjacent portions are in communication with the known
(proved) reservoir. Possible reserves may be assigned to areas that are structurally higher
or lower than the proved area if these areas are in communication with the proved
reservoir.
(vi)

Pursuant to paragraph (a)(22)(iii) of this section, where direct observation

has defined a highest known oil (HKO) elevation and the potential exists for an
associated gas cap, proved oil reserves should be assigned in the structurally higher
portions of the reservoir above the HKO only if the higher contact can be established
with reasonable certainty through reliable technology. Portions of the reservoir that do
not meet this reasonable certainty criterion may be assigned as probable and possible oil
or gas based on reservoir fluid properties and pressure gradient interpretations.

138

(18)

Probable reserves. Probable reserves are those additional reserves that are

less certain to be recovered than proved reserves but which, together with proved
reserves, are as likely as not to be recovered.
(i)

When deterministic methods are used, it is as likely as not that actual

remaining quantities recovered will exceed the sum of estimated proved plus probable
reserves. When probabilistic methods are used, there should be at least a 50% probability
that the actual quantities recovered will equal or exceed the proved plus probable reserves
estimates.
(ii)

Probable reserves may be assigned to areas of a reservoir adjacent to

proved reserves where data control or interpretations of available data are less certain,
even if the interpreted reservoir continuity of structure or productivity does not meet the
reasonable certainty criterion. Probable reserves may be assigned to areas that are
structurally higher than the proved area if these areas are in communication with the
proved reservoir.
(iii)

Probable reserves estimates also include potential incremental quantities

associated with a greater percentage recovery of the hydrocarbons in place than assumed
for proved reserves.
(iv)

See also guidelines in paragraphs (a)(17)(iv) and (a)(17)(vi) of this

section.
(19)

Probabilistic estimate. The method of estimation of reserves or resources

is called probabilistic when the full range of values that could reasonably occur for each
unknown parameter (from the geoscience and engineering data) is used to generate a full
range of possible outcomes and their associated probabilities of occurrence.

139

*
(22)

Proved oil and gas reserves. Proved oil and gas reserves are those

quantities of oil and gas, which, by analysis of geoscience and engineering data, can be
estimated with reasonable certainty to be economically producible—from a given date
forward, from known reservoirs, and under existing economic conditions, operating
methods, and government regulations—prior to the time at which contracts providing the
right to operate expire, unless evidence indicates that renewal is reasonably certain,
regardless of whether deterministic or probabilistic methods are used for the estimation.
The project to extract the hydrocarbons must have commenced or the operator must be
reasonably certain that it will commence the project within a reasonable time.
(i)

The area of the reservoir considered as proved includes:

(A)

The area identified by drilling and limited by fluid contacts, if any, and

(B)

Adjacent undrilled portions of the reservoir that can, with reasonable

certainty, be judged to be continuous with it and to contain economically producible oil
or gas on the basis of available geoscience and engineering data.
(ii)

In the absence of data on fluid contacts, proved quantities in a reservoir

are limited by the lowest known hydrocarbons (LKH) as seen in a well penetration unless
geoscience, engineering, or performance data and reliable technology establishes a lower
contact with reasonable certainty.
(iii)

Where direct observation from well penetrations has defined a highest

known oil (HKO) elevation and the potential exists for an associated gas cap, proved oil
reserves may be assigned in the structurally higher portions of the reservoir only if

140

geoscience, engineering, or performance data and reliable technology establish the higher
contact with reasonable certainty.
(iv)

Reserves which can be produced economically through application of

improved recovery techniques (including, but not limited to, fluid injection) are included
in the proved classification when:
(A)

Successful testing by a pilot project in an area of the reservoir with

properties no more favorable than in the reservoir as a whole, the operation of an installed
program in the reservoir or an analogous reservoir, or other evidence using reliable
technology establishes the reasonable certainty of the engineering analysis on which the
project or program was based; and
(B)

The project has been approved for development by all necessary parties

and entities, including governmental entities.
(v)

Existing economic conditions include prices and costs at which economic

producibility from a reservoir is to be determined. The price shall be the average price
during the 12-month period prior to the ending date of the period covered by the report,
determined as an unweighted arithmetic average of the first-day-of-the-month price for
each month within such period, unless prices are defined by contractual arrangements,
excluding escalations based upon future conditions.
*
(24)

Reasonable certainty. If deterministic methods are used, reasonable

certainty means a high degree of confidence that the quantities will be recovered. If
probabilistic methods are used, there should be at least a 90% probability that the
quantities actually recovered will equal or exceed the estimate. A high degree of

141

confidence exists if the quantity is much more likely to be achieved than not, and, as
changes due to increased availability of geoscience (geological, geophysical, and
geochemical), engineering, and economic data are made to estimated ultimate recovery
(EUR) with time, reasonably certain EUR is much more likely to increase or remain
constant than to decrease.
(25)

Reliable technology. Reliable technology is a grouping of one or more

technologies (including computational methods) that has been field tested and has been
demonstrated to provide reasonably certain results with consistency and repeatability in
the formation being evaluated or in an analogous formation.
(26)

Reserves. Reserves are estimated remaining quantities of oil and gas and

related substances anticipated to be economically producible, as of a given date, by
application of development projects to known accumulations. In addition, there must
exist, or there must be a reasonable expectation that there will exist, the legal right to
produce or a revenue interest in the production, installed means of delivering oil and gas
or related substances to market, and all permits and financing required to implement the
project.
Note to paragraph (a)(26): Reserves should not be assigned to adjacent reservoirs
isolated by major, potentially sealing, faults until those reservoirs are penetrated and
evaluated as economically producible. Reserves should not be assigned to areas that are
clearly separated from a known accumulation by a non-productive reservoir (i.e., absence
of reservoir, structurally low reservoir, or negative test results). Such areas may contain
prospective resources (i.e., potentially recoverable resources from undiscovered
accumulations).

142

*
(28)

Resources. Resources are quantities of oil and gas estimated to exist in

naturally occurring accumulations. A portion of the resources may be estimated to be
recoverable, and another portion may be considered to be unrecoverable. Resources
include both discovered and undiscovered accumulations.
*
(30)

Stratigraphic test well. A stratigraphic test well is a drilling effort,

geologically directed, to obtain information pertaining to a specific geologic condition.
Such wells customarily are drilled without the intent of being completed for hydrocarbon
production. The classification also includes tests identified as core tests and all types of
expendable holes related to hydrocarbon exploration. Stratigraphic tests are classified as
“exploratory type” if not drilled in a known area or “development type” if drilled in a
known area.
(31)

Undeveloped oil and gas reserves. Undeveloped oil and gas reserves are

reserves of any category that are expected to be recovered from new wells on undrilled
acreage, or from existing wells where a relatively major expenditure is required for
recompletion.
(i)

Reserves on undrilled acreage shall be limited to those directly offsetting

development spacing areas that are reasonably certain of production when drilled, unless
evidence using reliable technology exists that establishes reasonable certainty of
economic producibility at greater distances.

143

(ii)

Undrilled locations can be classified as having undeveloped reserves only

if a development plan has been adopted indicating that they are scheduled to be drilled
within five years, unless the specific circumstances, justify a longer time.
(iii)

Under no circumstances shall estimates for undeveloped reserves be

attributable to any acreage for which an application of fluid injection or other improved
recovery technique is contemplated, unless such techniques have been proved effective
by actual projects in the same reservoir or an analogous reservoir, as defined in paragraph
(a)(2) of this section, or by other evidence using reliable technology establishing
reasonable certainty.
*

(c)

* * *

(8)

For purposes of this paragraph (c), the term “current price” shall mean the

average price during the 12-month period prior to the ending date of the period covered
by the report, determined as an unweighted arithmetic average of the first-day-of-themonth price for each month within such period, unless prices are defined by contractual
arrangements, excluding escalations based upon future conditions.
*

PART 211—INTERPRETATIONS RELATING TO FINANCIAL REPORTING
MATTERS
3.

Amend Part 211, subpart A, by adding “Modernization of Oil and Gas

Reporting,” Release No. FR-78 and the release date of December 31, 2008, to the list of
interpretive releases.
PART 229—STANDARD INSTRUCTIONS FOR FILING FORMS UNDER
SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND
ENERGY POLICY AND CONSERVATION ACT OF 1975—REGULATION S-K
144

The authority citation for part 229 continues to read in part as follows:

Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z–2, 77z–3, 77aa(25),
77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 77nnn, 77sss, 78c, 78i, 78j, 78l, 78m,
78n, 78o, 78u–5, 78w, 78ll, 78mm, 80a–8, 80a–9, 80a–20, 80a–29, 80a–30, 80a–31(c),
80a–37, 80a–38(a), 80a–39, 80b–11, and 7201 et seq.; and 18 U.S.C. 1350, unless
otherwise noted.
*
5.

Amend § 229.102 by revising the introductory text of Instruction 3 and

Instructions 4, 5 and 8 to read as follows.
§ 229.102 (Item 102) Description of property.
*
Instructions to Item 102: *
3.

In the case of an extractive enterprise, not involved in oil and gas

producing activities, material information shall be given as to production, reserves,
locations, development, and the nature of the registrant's interest. If individual properties
are of major significance to an industry segment:
*
4.

A registrant engaged in oil and gas producing activities shall provide the

information required by Subpart 1200 of Regulation S-K.
5.

In the case of extractive reserves other than oil and gas reserves, estimates

other than proven or probable reserves (and any estimated values of such reserves) shall
not be disclosed in any document publicly filed with the Commission, unless such
information is required to be disclosed in the document by foreign or state law; provided,
145

however, that where such estimates previously have been provided to a person (or any of
its affiliates) that is offering to acquire, merge, or consolidate with the registrant, or
otherwise to acquire the registrant's securities, such estimates may be included in
documents relating to such acquisition.
*
8.

The attention of certain issuers engaged in oil and gas producing activities

is directed to the information called for in Securities Act Industry Guide 4 (referred to in
§229.801(d)).
*
6.

Amend § 229.801 by removing and reserving paragraph (b) and removing

the authority citation following the section.
7.

Amend § 229.802 by removing and reserving paragraph (b) and removing

the authority citation following the section.
8.

Add Subpart 229.1200 to read as follows:

Subpart 229.1200—Disclosure by Registrants Engaged in Oil and Gas Producing
Activities
Sec.
229.1201 (Item 1201) General instructions to oil and gas industry-specific disclosures.
229.1202 (Item 1202) Disclosure of reserves.
229.1203 (Item 1203) Proved undeveloped reserves.
229.1204 (Item 1204) Oil and gas production, production prices and production costs.
229.1205 (Item 1205) Drilling and other exploratory and development activities.
229.1206 (Item 1206) Present activities.
229.1207 (Item 1207) Delivery commitments.
146

229.1208 (Item 1208) Oil and gas properties, wells, operations, and acreage.
Subpart 229.1200—Disclosure by Registrants Engaged in Oil and Gas Producing
Activities
§ 229.1201 (Item 1201) General instructions to oil and gas industry-specific
disclosures.
(a)

If oil and gas producing activities are material to the registrant’s or its

subsidiaries’ business operations or financial position, the disclosure specified in this
Subpart 229.1200 should be included under appropriate captions (with cross references,
where applicable, to related information disclosed in financial statements). However,
limited partnerships and joint ventures that conduct, operate, manage, or report upon oil
and gas drilling or income programs, that acquire properties either for drilling and
production, or for production of oil, gas, or geothermal steam or water, need not include
such disclosure.
(b)

To the extent that Items 1202 through 1208 (§§ 229.1202 – 229.1208) call

for disclosures in tabular format, as specified in the particular Item, a registrant may
modify such format for ease of presentation, to add information or to combine two or
more required tables.
(c)

The definitions in Rule 4–10(a) of Regulation S-X (17 CFR 210.4-10(a))

shall apply for purposes of this Subpart 229.1200.
(d)

For purposes of this Subpart 229.1200, the term by geographic area

means, as appropriate for meaningful disclosure in the circumstances:
(1)

By individual country;

(2)

By groups of countries within a continent; or

(3)

By continent.

147

§ 229.1202 (Item 1202) Disclosure of reserves.
(a)

Summary of oil and gas reserves at fiscal year end. (1) Provide the

information specified in paragraph (a)(2) of this Item in tabular format as provided
below:
Summary of Oil and Gas Reserves as of Fiscal-Year End
Based on Average Fiscal-Year Prices
Oil
Reserves category
PROVED
Developed
Continent A
Continent B
Country A
Country B
Other Countries in Continent B
Undeveloped
Continent A
Continent B
Country A
Country B
Other Countries in Continent B
TOTAL PROVED

(mbbls)

Reserves
Natural Synthetic Synthetic
Gas
Oil
Gas
(mmcf)

(mbbls)

(mmcf)

Product A
(measure)

PROBABLE
Developed
Undeveloped
POSSIBLE
Developed
Undeveloped

(2)

Disclose, in the aggregate and by geographic area and for each country

containing 15% or more of the registrant’s proved reserves, expressed on an oilequivalent-barrels basis, reserves estimated using prices and costs under existing
economic conditions, for the product types listed in paragraph (a)(4) of this Item, in the
following categories:
(i)

Proved developed reserves;

148

(ii)

Proved undeveloped reserves;

(iii)

Total proved reserves;

(iv)

Probable developed reserves (optional);

(v)

Probable undeveloped reserves (optional);

(vi)

Possible developed reserves (optional); and

(vii)

Possible undeveloped reserves (optional).

Instruction 1 to paragraph (a)(2): Disclose updated reserves tables as of the close
of each fiscal year.
Instruction 2 to paragraph (a)(2): The registrant is permitted, but not required, to
disclose probable or possible reserves pursuant to paragraphs (a)(2)(iv) through
(a)(2)(vii) of this Item.
Instruction 3 to paragraph (a)(2): If the registrant discloses amounts of a product
in barrels of oil equivalent, disclose the basis for such equivalency.
Instruction 4 to paragraph (a)(2): A registrant need not provide disclosure of the
reserves in a country containing 15% or more of the registrant’s proved reserves if that
country’s government prohibits disclosure of reserves in that country. In addition, a
registrant need not provide disclosure of the reserves in a country containing 15% or
more of the registrant’s proved reserves if that country’s government prohibits disclosure
in a particular field and disclosure of reserves in that country would have the effect of
disclosing reserves in particular fields.
(3)

Reported total reserves shall be simple arithmetic sums of all estimates for

individual properties or fields within each reserves category. When probabilistic methods

149

are used, reserves should not be aggregated probabilistically beyond the field or property
level; instead, they should be aggregated by simple arithmetic summation.
(4)

Disclose separately material reserves of the following product types:

(i)

Oil;

(ii)

Natural gas;

(iii)

Synthetic oil;

(iv)

Synthetic gas; and

(v)

Sales products of other non-renewable natural resources that are intended

to be upgraded into synthetic oil and gas.
(5)

If the registrant discloses probable or possible reserves, discuss the

uncertainty related to such reserves estimates.
(6)

If the registrant has not previously disclosed reserves estimates in a filing

with the Commission or is disclosing material additions to its reserves estimates, the
registrant shall provide a general discussion of the technologies used to establish the
appropriate level of certainty for reserves estimates from material properties included in
the total reserves disclosed. The particular properties do not need to be identified.
(7)

Preparation of reserves estimates or reserves audit. Disclose and describe

the internal controls the registrant uses in its reserves estimation effort. In addition,
disclose the qualifications of the technical person primarily responsible for overseeing the
preparation of the reserves estimates and, if the registrant represents that a third party
conducted a reserves audit, disclose the qualifications of the technical person primarily
responsible for overseeing such reserves audit.

150

(8)

Third party reports. If the registrant represents that a third party prepared,

or conducted a reserves audit of, the registrant’s reserves estimates, or any estimated
valuation thereof, or conducted a process review, the registrant shall file a report of the
third party as an exhibit to the relevant registration statement or other Commission filing.
If the report relates to the preparation of, or a reserves audit of, the registrant’s reserves
estimates, it must include the following disclosure, if applicable to the type of filing:
(i)

The purpose for which the report was prepared and for whom it was

prepared;
(ii)

The effective date of the report and the date on which the report was

completed;
(iii)

The proportion of the registrant’s total reserves covered by the report and

the geographic area in which the covered reserves are located;
(iv)

The assumptions, data, methods, and procedures used, including the

percentage of the registrant’s total reserves reviewed in connection with the preparation
of the report, and a statement that such assumptions, data, methods, and procedures are
appropriate for the purpose served by the report;
(v)

A discussion of primary economic assumptions;

(vi)

A discussion of the possible effects of regulation on the ability of the

registrant to recover the estimated reserves;
(vii)

A discussion regarding the inherent uncertainties of reserves estimates;

(viii)

A statement that the third party has used all methods and procedures as it

considered necessary under the circumstances to prepare the report;

151

(ix)

A brief summary of the third party’s conclusions with respect to the

reserves estimates; and
(x)

The signature of the third party.

(9)

For purposes of this Item 1202, the term reserves audit means the process

of reviewing certain of the pertinent facts interpreted and assumptions underlying a
reserves estimate prepared by another party and the rendering of an opinion about the
appropriateness of the methodologies employed, the adequacy and quality of the data
relied upon, the depth and thoroughness of the reserves estimation process, the
classification of reserves appropriate to the relevant definitions used, and the
reasonableness of the estimated reserves quantities.
(b)

Reserves sensitivity analysis (optional). (1) The registrant may, but is not

required to, provide the information specified in paragraph (b)(2) of this Item in tabular
format as provided below:
Sensitivity of Reserves to Prices
By Principal Product Type and Price Scenario
Price Case
Oil
mbbls

Proved Reserves
Syn.
Syn.
Oil
Gas
mmcf
mbbls
mmcf
Gas

Product
A
measure

Oil
mbbls

Probable Reserves
Syn.
Syn.
Oil
Gas
mmcf
mbbls
mmcf
Gas

Product
A
measure

Oil
mbbls

Possible Reserves
Syn.
Syn
Oil
Gas
mmcf
mbbls
mmcf
Gas

Scenario 1
Scenario 2

(2)

The registrant may, but is not required to, disclose, in the aggregate, an

estimate of reserves estimated for each product type based on different price and cost
criteria, such as a range of prices and costs that may reasonably be achieved, including
standardized futures prices or management’s own forecasts.
(3)

If the registrant provides disclosure under this paragraph (b), disclose the

price and cost schedules and assumptions on which the disclosed values are based.

152

Product
A
measure

Instruction to Item 1202: Estimates of oil or gas resources other than reserves,
and any estimated values of such resources, shall not be disclosed in any document
publicly filed with the Commission, unless such information is required to be disclosed in
the document by foreign or state law; provided, however, that where such estimates
previously have been provided to a person (or any of its affiliates) that is offering to
acquire, merge, or consolidate with the registrant or otherwise to acquire the registrant’s
securities, such estimate may be included in documents related to such acquisition.
§ 229.1203 (Item 1203) Proved undeveloped reserves.
(a)

Disclose the total quantity of proved undeveloped reserves at year end.

(b)

Disclose material changes in proved undeveloped reserves that occurred

during the year, including proved undeveloped reserves converted into proved developed
reserves.
(c)

Discuss investments and progress made during the year to convert proved

undeveloped reserves to proved developed reserves, including, but not limited to, capital
expenditures.
(d)

Explain the reasons why material amounts of proved undeveloped reserves

in individual fields or countries remain undeveloped for five years or more after
disclosure as proved undeveloped reserves.
§ 229.1204 (Item 1204) Oil and gas production, production prices and production
costs.
(a)

For each of the last three fiscal years disclose production, by final product

sold, of oil, gas, and other products. Disclosure shall be made by geographical area and
for each country and field that contains 15% or more of the registrant’s total proved

153

reserves expressed on an oil-equivalent-barrels basis unless prohibited by the country in
which the reserves are located.
(b)

For each of the last three fiscal years disclose, by geographical area:

(1)

The average sales price (including transfers) per unit of oil, gas and other

products produced; and
(2)

The average production cost, not including ad valorem and severance

taxes, per unit of production.
Instruction 1 to Item 1204: Generally, net production should include only
production that is owned by the registrant and produced to its interest, less royalties and
production due others. However, in special situations (e.g., foreign production) net
production before any royalties may be provided, if more appropriate. If “net before
royalty” production figures are furnished, the change from the usage of “net production”
should be noted.
Instruction 2 to Item 1204: Production of natural gas should include only
marketable production of natural gas on an “as sold” basis. Production will include dry,
residue, and wet gas, depending on whether liquids have been extracted before the
registrant transfers title. Flared gas, injected gas, and gas consumed in operations should
be omitted. Recovered gas-lift gas and reproduced gas should not be included until sold.
Synthetic gas, when marketed as such, should be included in natural gas sales.
Instruction 3 to Item 1204: If any product, such as bitumen, is sold or custody is
transferred prior to conversion to synthetic oil or gas, the product’s production, transfer
prices, and production costs should be disclosed separately from all other products.

154

Instruction 4 to Item 1204: The transfer price of oil and gas (natural and
synthetic) produced should be determined in accordance with SFAS 69.
Instruction 5 to Item 1204: The average production cost, not including ad
valorem and severance taxes, per unit of production should be computed using
production costs disclosed pursuant to SFAS 69. Units of production should be expressed
in common units of production with oil, gas, and other products converted to a common
unit of measure on the basis used in computing amortization.
§ 229.1205 (Item 1205) Drilling and other exploratory and development activities.
(a)

For each of the last three fiscal years, by geographical area, disclose:

(1)

The number of net productive and dry exploratory wells drilled; and

(2)

The number of net productive and dry development wells drilled.

(b)

Definitions. For purposes of this Item 1205, the following terms shall be

defined as follows:
(1)

A dry well is an exploratory, development, or extension well that proves to

be incapable of producing either oil or gas in sufficient quantities to justify completion as
an oil or gas well.
(2)

A productive well is an exploratory, development, or extension well that is

not a dry well.
(3)

Completion refers to installation of permanent equipment for production

of oil or gas, or, in the case of a dry well, to reporting to the appropriate authority that the
well has been abandoned.
(4)

The number of wells drilled refers to the number of wells completed at

any time during the fiscal year, regardless of when drilling was initiated.

155

(c)

Disclose, by geographic area, for each of the last three years, any other

exploratory or development activities conducted, including implementation of mining
methods for purposes of oil and gas producing activities.
§ 229.1206 (Item 1206) Present activities.
(a)

Disclose, by geographical area, the registrant’s present activities, such as

the number of wells in the process of being drilled (including wells temporarily
suspended), waterfloods in process of being installed, pressure maintenance operations,
and any other related activities of material importance.
(b)

Provide the description of present activities as of a date at the end of the

most recent fiscal year or as close to the date that the registrant files the document as
reasonably possible.
(c)

Include only those wells in the process of being drilled at the “as of” date

and express them in terms of both gross and net wells.
(d)

Do not include wells that the registrant plans to drill, but has not

commenced drilling unless there are factors that make such information material.
§ 229.1207 (Item 1207) Delivery commitments.
(a)

If the registrant is committed to provide a fixed and determinable quantity

of oil or gas in the near future under existing contracts or agreements, disclose material
information concerning the estimated availability of oil and gas from any principal
sources, including the following:
(1)

The principal sources of oil and gas that the registrant will rely upon and

the total amounts that the registrant expects to receive from each principal source and
from all sources combined;

156

(2)

The total quantities of oil and gas that are subject to delivery

commitments; and
(3)

The steps that the registrant has taken to ensure that available reserves and

supplies are sufficient to meet such commitments for the next one to three years.
(b)

Disclose the information required by this Item:

(1)

In a form understandable to investors; and

(2)

Based upon the facts and circumstances of the particular situation,

including, but not limited to:
(i)

Disclosure by geographic area;

(ii)

Significant supplies dedicated or contracted to the registrant;

(iii)

Any significant reserves or supplies subject to priorities or curtailments

which may affect quantities delivered to certain classes of customers, such as customers
receiving services under low priority and interruptible contracts;
(iv)

Any priority allocations or price limitations imposed by Federal or State

regulatory agencies, as well as other factors beyond the registrant’s control that may
affect the registrant’s ability to meet its contractual obligations (the registrant need not
provide detailed discussions of price regulation);
(v)

Any other factors beyond the registrant’s control, such as other parties

having control over drilling new wells, competition for the acquisition of reserves and
supplies, and the availability of foreign reserves and supplies, which may affect the
registrant’s ability to acquire additional reserves and supplies or to maintain or increase
the availability of reserves and supplies; and

157

(vi)

Any impact on the registrant’s earnings and financing needs resulting from

its inability to meet short-term or long-term contractual obligations. (See Items 303 and
1209 of Regulation S-K (§§ 229.303 and 229.1209).)
(c)

If the registrant has been unable to meet any significant delivery

commitments in the last three years, describe the circumstances concerning such events
and their impact on the registrant.
(d)

For purposes of this Item, available reserves are estimates of the amounts

of oil and gas which the registrant can produce from current proved developed reserves
using presently installed equipment under existing economic and operating conditions
and an estimate of amounts that others can deliver to the registrant under long-term
contracts or agreements on a per-day, per-month, or per-year basis.
§ 229.1208 (Item 1208) Oil and gas properties, wells, operations, and acreage.
(a)

Disclose, as of a reasonably current date or as of the end of the fiscal year,

the total gross and net productive wells, expressed separately for oil and gas (including
synthetic oil and gas produced through wells) and the total gross and net developed
acreage (i.e., acreage assignable to productive wells) by geographic area.
(b)

Disclose, as of a reasonably current date or as of the end of the fiscal year,

the amount of undeveloped acreage, both leases and concessions, if any, expressed in
both gross and net acres by geographic area, together with an indication of acreage
concentrations, and, if material, the minimum remaining terms of leases and concessions.
(c)

Definitions. For purposes of this Item 1208, the following terms shall be

defined as indicated:

158

(1)

A gross well or acre is a well or acre in which the registrant owns a

working interest. The number of gross wells is the total number of wells in which the
registrant owns a working interest. Count one or more completions in the same bore hole
as one well. In a footnote, disclose the number of wells with multiple completions. If
one of the multiple completions in a well is an oil completion, classify the well as an oil
well.
(2)

A net well or acre is deemed to exist when the sum of fractional ownership

working interests in gross wells or acres equals one. The number of net wells or acres is
the sum of the fractional working interests owned in gross wells or acres expressed as
whole numbers and fractions of whole numbers.
(3)

Productive wells include producing wells and wells mechanically capable

of production.
(4)

Undeveloped acreage encompasses those leased acres on which wells have

not been drilled or completed to a point that would permit the production of economic
quantities of oil or gas regardless of whether such acreage contains proved reserves. Do
not confuse undeveloped acreage with undrilled acreage held by production under the
terms of the lease.
PART 249—FORMS, SECURITIES EXCHANGE ACT OF 1934
9.

The authority citation for part 249 continues to read in part as follows:

Authority: 15 U.S.C. 78a et seq. and 7201; and 18 U.S.C. 1350, unless otherwise
noted.
*
10.

Amend Form 20-F (referenced in §249.220f) by:

159

Revising “Instruction to Item 4” and the introductory text and paragraph

(b) of “Instructions to Item 4.D”; and
b.

Removing paragraph (c) of “Instructions to Item 4.D” and “Appendix A to

Item 4.D—Oil and Gas.”
The revisions read as follows:
[Note: The text of Form 20-F does not, and this amendment will not,
appear in the Code of Federal Regulations.]
FORM 20-F
*

Item 4. Information on the Company
*
Instructions to Item 4:
1.

Furnish the information specified in any industry guide listed in Subpart

229.800 of Regulation S-K (§229.801 et seq. of this chapter) that applies to you.
2.

If oil and gas operations are material to you or your subsidiaries’ business

operations or financial position, provide the information specified in Subpart 1200 of
Regulation S-K (§229.1200 et seq. of this chapter).
*

Instruction to Item 4.D: In the case of an extractive enterprise, other than an oil and gas
producing activity:
*
(b)

In documents that you file publicly with the Commission, do not disclose

estimates of reserves unless the reserves are proven or probable and do not give estimated

160

values of those reserves, unless foreign law requires you to disclose the information. If
these types of estimates have already been provided to any person that is offering to
acquire you, however, you may include the estimates in documents relating to the
acquisition.
*

By the Commission.
Florence E. Harmon
Acting Secretary
December 31, 2008

161

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SEC Rule 8995 33

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