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9 July 2008
[Federal Register: July 9, 2008 (Volume 73, Number 132)]
[Proposed Rules]
[Page 39525-39568]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09jy08-32]
[[Page 39525]]
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Part IV
Securities and Exchange Commission
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17 CFR Parts 210, 229, and 249
Modernization of the Oil and Gas Reporting Requirements; Proposed Rule
[[Page 39526]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 210, 229, and 249
[Release Nos. 33-8935; 34-58030; File No. S7-15-08]
RIN 3235-AK00
Modernization of the Oil and Gas Reporting Requirements
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Commission is proposing revisions to its oil and gas
reporting requirements 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 requirements,
there have been significant changes in the oil and gas industry. The
proposed amendments are designed to modernize and update the oil and
gas disclosure requirements to align them with current practices and
changes in technology. The proposed amendments would also codify
Industry Guide 2 in Regulation S-K, with several additions to, and
deletions of, current Industry Guide items. They would further
harmonize oil and gas disclosures by foreign private issuers with the
proposed disclosures for domestic issuers.
DATES: Comments should be received on or before September 8, 2008.
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 a.m. and 3
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: Questions on this Proposing Release
should be directed to Ray Be, Special Counsel, Office of Rulemaking at
(202) 551-3430; Mellissa Campbell Duru, Attorney-Advisor, 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, or Jonathan Duersch, Assistant Chief Accountant, Office of
the Chief Accountant at (202) 551-5300; U.S. Securities and Exchange
Commission, 100 F Street, NE., Washington, DC 20549-3628.
SUPPLEMENTARY INFORMATION: We are proposing 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 propose to add new Subpart 1200, including Items 1201
through 1209, to Regulation S-K.
---------------------------------------------------------------------------
\1\ 17 CFR 210.4-10.
\2\ 17 CFR 210.
\3\ 17 CFR 229.102, 17 CFR 229.801, and 17 CFR 229.802.
\4\ 17 CFR 229.
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Table of Contents
I. Introduction
A. Background
B. Issuance of the Concept Release
C. General Overview of the Comment Letters Received on Key
Issues
II. Revisions and Additions to the Definition Section of Rule 4-10
of Regulation S-X
A. Introduction
B. Year-End Pricing
1. 12-month average price
2. Trailing year-end
3. Prices used for accounting purposes
C. Extraction of Bitumen and Other Non-Traditional Resources
D. Reasonable Certainty and Proved Oil and Gas Reserves
1. New technology
2. Probabilistic methods
3. Other revisions related to proved oil and gas reserves
E. Unproved Reserves--``Probable Reserves'' and ``Possible
Reserves''
F. Definition of ``Proved Developed Oil and Gas Reserves''
G. Definition of ``Proved Undeveloped Reserves''
1. Proposed replacement of certainty threshold
2. Proposed definitions for continuous and conventional
accumulations
3. Proposed treatment of improved recovery projects
H. Proposed Definition of Reserves
I. Other Proposed Definitions and Reorganization of Definitions
III. Proposed Amendments To Codify the Oil and Gas Disclosure
Requirements in Regulation S-K
A. Proposed Revisions to Item 102, 801, and 802 of Regulation S-
K
B. Proposed New Subpart 1200 of Regulation S-K Codifying
Industry Guide 2 Regarding Disclosures by Companies Engaged in Oil
and Gas Producing Activities
1. Overview
2. Proposed Item 1201 (General instructions to oil and gas
industry-specific disclosures)
3. Proposed Item 1202 (Disclosure of reserves)
i. Oil and gas reserves tables
ii. Optional reserves sensitivity analysis table
iii. Geographic specificity with respect to reserves disclosures
iv. Separate disclosure of conventional and continuous
accumulations
v. Preparation of reserves estimates or reserves audits
vi. Contents of third party preparer and reserves audit reports
vii. Solicitation of comments on process reviews
4. Proposed Item 1203 (Proved undeveloped reserves)
5. Proposed Item 1204 (Oil and gas production)
6. Proposed Item 1205 (Drilling and other exploratory and
development activities)
7. Proposed Item 1206 (Present activities)
8. Proposed Item 1207 (Delivery commitments)
9. Proposed Item 1208 (Oil and gas properties, wells,
operations, and acreage)
i. Enhanced description of properties disclosure requirement
ii. Wells and acreage
iii. New proposed disclosures regarding extraction techniques
and acreage
10. Proposed Item 1209 (Discussion and analysis for registrants
engaged in oil and gas activities)
IV. Proposed Conforming Changes to Form 20-F
V. Impact of Proposed Amendments on Accounting Literature
[[Page 39527]]
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
D. Price Used to Determine Proved Reserves for Purposes of
Capitalizing Costs
VI. Impact of the Proposed Codification of Industry Guide 2 on Other
Industry Guides
VII. Solicitation of Comment Regarding the Application of
Interactive Data Format to Oil and Gas Disclosures
VIII. Proposed Implementation Date
IX. General Request for Comment
X. Paperwork Reduction Act
A. Background
B. Summary of Information Collections
C. Paperwork Reduction Act Burden Estimates
D. Request for Comment
XI. Cost-Benefit Analysis
A. Background
B. Description of Proposal
C. Benefits
1. Average 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. Average price
4. Consistency with IASB
5. Harmonizing foreign private issuer disclosure
E. Request for Comments
XII. Consideration of Burden on Competition and Promotion of
Efficiency, Competition, and Capital Formation
XIII. Initial Regulatory Flexibility Analysis
A. Reasons for, and Objectives of, the Proposed Action
B. Legal Basis
C. Small Entities Subject to the Proposed Amendments
D. Reporting, Recordkeeping, and Other Compliance Requirements
E. Duplicative, Overlapping, or Conflicting Federal Rules
F. Significant Alternatives
G. Solicitation of Comment
XIV. Small Business Regulatory Enforcement Fairness Act
XV. Statutory Basis and Text of Proposed Amendments
I. Introduction
A. Background
On December 12, 2007, the Commission published a Concept Release on
possible revisions to the disclosure requirements relating to oil and
gas reserves.\5\ The release solicited comment on the oil and gas
reserves disclosure requirements specified in Rule 4-10 of Regulation
S-X \6\ and Item 102 of Regulation S-K.\7\ The Commission adopted these
disclosure requirements in 1978 and 1982, respectively.\8\ 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.\9\
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.\10\
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\5\ See Release No. 33-8870 (Dec. 12, 2007) [72 FR 71610].
\6\ 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).
\7\ 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].
\8\ 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.
\9\ See, for example, Daniel Yergin and David Hobbs: ``The
Search for Reasonable Certainty in Reserves Disclosure,'' Oil and
Gas Journal (July 18, 2005).
\10\ 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).
---------------------------------------------------------------------------
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 measure 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.
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 which addressed all or some of the 15 questions that were
raised by the release.\11\ We received comment letters from a variety
of industry participants such as accounting firms, consultants,
domestic and foreign oil and gas companies, federal government
agencies, individuals, law firms, professional associations, public
interest groups, and rating agencies.
---------------------------------------------------------------------------
\11\ 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.
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C. General Overview of the Comment Letters Received on Key Issues
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 requirements were initially
adopted. Commenters diverged significantly, however, in their views
about the extent and type of revisions that we should make to our
disclosure system. For example, commenters expressed varied opinions
regarding whether we should adopt revisions that would result in a
principles-based disclosure regime rather than a rules-based disclosure
regime. Those who favored a principles-based approach noted that such
an approach would be inherently more flexible than a rules-based
approach and would allow for greater adaptability as technological
advancements and changes occur in the industry.\12\ Other commenters,
however,
[[Page 39528]]
expressed concern that a principles-based model is more subjective than
a rules-based approach and could result in less consistent and
comparable disclosure in the filings made by oil and gas companies.\13\
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\12\ See, for example, letters from BHP Biliton Petroleum
(``BHP''), John R. Etherington (``J. Etherington''), and White &
Case, LLP (``White & Case'').
\13\ See, for example, letters from Apache Corp. (``Apache''),
Moody's Investor's Service (``Moody's) and Oil Change International
and the Center for Corporate Policy (``Oil Change'').
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Virtually all of the commenters supported a revision of the
definition of proved reserves in some form or another. Most remarked
that the definition of proved reserves should be broadened to allow
unconventional resources such as oil shales and bitumen to be
classified as proved reserves.\14\ In addition, while commenters were
split on the use of a single fiscal year-end spot price to value the
reserves held by an oil and gas company, a majority advocated the use
of a different pricing standard to reduce the effects of short-term
price volatility.\15\
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\14\ See letters from American Association of Petroleum
Geologists (``AAPG''), American Clean Skies Foundation (``ACSF''),
Apache, American Petroleum Institute (``API''), Center for Audit
Quality (``Audit Quality''), BP Plc (``BP,'') Brookwood Petroleum
Advisors Ltd. (``Brookwood''), CFA Institute Centre for Financial
Market Integrity (``CFA''), Chesapeake Energy Corporation
(``Chesapeake''), China National Offshore Oil Corporation
(``CNOCC''), CIBC World Markets (``CIBC''), Denbury Resources
(``Denbury''), Department of Energy (``DOE''), Deutsche Bank, Devon
Energy Corporation (``Devon''), EnCana, Energy Information
Administration (of DOE) (``EIA''), Energy Literacy Project (``Energy
Literacy''), Eni S.p.A. (``Eni''), Ernst & Young (``E&Y''), J.
Etherington, ExxonMobil, Grant Thornton, Imperial Oil Ltd.
(``Imperial''), Independent Petroleum Association of America
(``IPAA''), Dan Kelly (``D. Kelly''), McBride, Douglas-Morningstar
Consultants (``D. McBride''), Moody's, Nexen Inc. (``Nexen''), Oil
Change, Dan Olds (``D. Olds''), Petrobras, Petro-Canada,
PriceWaterhouseCoopers (``PWC''), Robert Pinkerton (``R.
Pinkerton''), Robinson Petroleum Consulting (``Robinson''), Ross
Petroleum Ltd. (``Ross''), Derek Ryder (``D. Ryder''), Sasol Ltd
(``Sasol''), Shell International (``Shell''), Society of Petroleum
Engineers (``SPE''), Standard & Poor's (``S&P''), StatoilHydro,
Total, S.A. (``Total''), Ashish Verma (``A. Verma''), Robert Wagner
(``R. Wagner''), White & Case, and Fred Ziehe (``F. Ziehe'').
\15\ See letters from Chesapeake, Devon, and Imperial.
---------------------------------------------------------------------------
There were mixed views on whether the Commission should permit
disclosure of reserves other than proved reserves in Commission
filings. Commenters supporting the inclusion of disclosures about
probable and possible reserves in Commission filings suggested that
such disclosure would allow investors to gain a more comprehensive
understanding of the resources held by an oil and gas company.\16\
Commenters opposing disclosure of probable and possible reserves
thought that disclosure about these reserves categories would be less
reliable than disclosure about proved reserves. Many of these
commenters were concerned about liability issues associated with such
disclosure and the loss of comparability of disclosure between
companies.\17\
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\16\ See, for example, letters from Chesapeake, Oil Change, D.
Olds, Ross, D. Ryder, and R. Wagner.
\17\ See, for example, letters from Hugh Anderson (``H.
Anderson''), Apache, API, ExxonMobil, Imperial, and Shell.
---------------------------------------------------------------------------
Several of the comment letters addressed whether third parties
should be required to independently evaluate the reserves reported by a
company in its filings. There was a divergence in opinion on this
issue. Some commenters suggested that an evaluation requirement is
necessary to ensure the reliability of the reserves disclosure included
in companies' filings.\18\ Other commenters, however, believed that a
company's internal staff is often in the best position to accurately
evaluate the reserves of the company.\19\ Some of the commenters that
opposed a third-party evaluation requirement noted that there likely
would be practical impediments to establishing that type of
requirement, such as the lack of availability of qualified
professionals to perform the evaluations and the lack of a regulatory
or professional body to enforce universal standards that would govern
the activities of third-party reserves evaluators or auditors.\20\
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\18\ See letters from Fitch Ratings (``Fitch'') and White &
Case.
\19\ See letters from API, Denbury, ExxonMobil, Imperial, Nexen,
Shell, and Talisman Energy (``Talisman'').
\20\ See, for example, letters from the AAPG, API, Devon, and R.
Wagner.
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Finally, numerous commenters expressed support for the adoption of
an alternate resource classification system that would allow for
disclosure of a wider range of reserves and resources in Commission
filings. Most of these commenters advocated the use of the Petroleum
Resources Management System (PRMS) for this purpose.\21\ PRMS was
prepared in 2007 by the oil and gas reserves committee of the Society
of Petroleum Engineers and jointly sponsored by the World Petroleum
Council, the American Association of Petroleum Geologists and the
Society of Petroleum Evaluation Engineers.\22\ Other commenters
proposed that we consider the rules adopted by regulators in Canada or
the resource classification framework currently being created under the
auspices of the United Nations Economic Commission for Europe and the
United Nations Economic and Social Council in revising our rules.\23\
We address the public comments on specific issues in more detail in the
relevant sections below.
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\21\ See comment letters from the API, Deloitte & Touche, LLP
(``D&T''), DOE, ExxonMobil and Netherland, Sewell & Associates
(``Netherland''). The Petroleum Resources Management System
classification system defines a broad range of reserves categories,
contingent resources and prospective resources. 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).
\22\ See letters from AAPG, SPE, and the Society of Petroleum
Evaluation Engineers (``SPEE''). See also Petroleum Resources
Management System, SPE/WPC/AAPG/SPEE (2007).
\23\ See letters from Devon, Robinson, and White & Case. The
Canadian system is outlined in National Instrument 51-101,
``Standards of Disclosure for Oil and Gas Activities,'' and the
related ``Canadian Oil and Gas Evaluation Handbook.'' See http://
www.albertasecurities.com/securitieslaw/Regulatory%20Instruments/5/
2232/AMENDED%20NI%2051-101%20_FULL%20VERSION_.pdf. The United
Nations Economic Commission for Europe and the United Nations
Economic and Social Council are working together to establish an
international classification system to classify resources in both
the oil and gas and mining industries. See United Nations Framework
Classification System for Fossil Energy and Mineral Resources,
United Nations Economic Council For Europe (March, 2006) available
at http://www.unece.org/ie/se/pdfs/UNFC/UNFCemr.pdf.
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II. Revisions and Additions to the Definition Section in Rule 4-10 of
Regulation S-X
A. Introduction
The proposed revisions and additions to the definition section in
Rule 4-10 of Regulation S-X would 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. Among other things, the proposed revisions to these
definitions address three issues that have been of particular interest
to companies, investors, and securities analysts:
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.
In addition, the proposed revisions would change the use of single-day
year-end pricing to determine economic producibility of oil and gas
reserves. The proposed revisions of, and
[[Page 39529]]
additions to, the Rule 4-10 definitions attempt to address these issues
without sacrificing clarity and comparability, which provide protection
and transparency to investors.
Many commenters on the Concept Release suggested that we adopt the
PRMS definitions and classification system to the greatest extent
possible.\24\ They noted that PRMS is rapidly becoming the leading
standard for international petroleum resources classifications. Others
suggested that we adopt the definitions and classifications used in
Canadian National Instrument 51-101 (NI 51-101), adopted in 2003,
because they have been tested in practice as part of a regulatory
framework and because they are broadly consistent with PRMS.\25\
---------------------------------------------------------------------------
\24\ See letters from API, BHP, Brookwood, CFA, China National
Offshore Oil Corporation (``CNOOC''), CIBC World Markets (``CIBC''),
D&T, Deutsche Bank, DOE, EIA, EnCana, Energy Literacy, Eni,
ExxonMobil, Netherland, Newfield Exoploration (``Newfield''), D.
Olds, Petrobras, Petro-Canada, Questar Market Resources
(``Questar''), Sasol, Shell, Leigh Ann Smothers (``L. Smothers''),
SPE, SPEE, Talisman, Total, TRACS International (``TRACS''), Ultra
Petroleum Corporation (``Ultra''), White & Case, and Geoff Zakaib
(``G. Zakaib'').
\25\ See letters from Devon, Robinson, and White & Case. NI 51-
101 constitutes the Canadian regulatory system for oil and gas
company disclosures.
---------------------------------------------------------------------------
We have based many of our proposed new and revised definitions
classifications on both PRMS and NI 51-101. The language in NI 51-101
lends itself to a regulatory framework more easily than the language in
PRMS, which is primarily a management tool, and we have been guided by
the language in NI 51-101 in several instances. Although the proposed
definitions are not totally consistent with either PRMS or NI 51-101,
they are significantly more consistent with those standards than our
existing rules.
One important difference between the proposed amendments and PRMS
or NI 51-101 is that the proposed amendments would continue to require
the use of historical prices and costs used to promote comparability.
In contrast, NI 51-101 and PRMS afford a reserves estimator more
flexibility in choosing among alternative pricing schedules. While this
flexibility has its benefits, it impedes comparability of different
companies' disclosures. Another significant difference is that the
proposed amendments, like the current rules, would require reserves to
be ``economically producible,'' meaning that estimated revenues must
exceed costs, whereas other classification systems require an
extractive project to be ``commercial,'' meaning that a company's
investment evaluation guidelines must be met (for example, the
extraction project rate of return must exceed some prescribed minimum).
There are many different investment evaluation guidelines in use today.
However, we believe that our proposed criteria would provide greater
comparability among companies' disclosures so that investors can better
understand the relative merits of their different investment choices.
In addition, NI 51-101 and PRMS provide definitions of various
categories of resources beyond reserves, such as contingent and
prospective resources, whereas our proposed rules do not. Given that we
are not proposing to allow disclosure of resources that do not qualify
as reserves in Commission filings, we are not proposing definitions of
other various classifications of resources.
After considering the comments received on the Concept Release, we
are proposing to revise the definition of proved reserves. Furthermore,
as a result of those changes and also observations made by commenters,
we are proposing to revise associated definitions and the disclosures
made by issuers regarding the extent, characteristics, and location of
their reserves.
B. Year-End Pricing
1. 12-Month Average Price
Most commenters on the Concept Release recommended that we replace
our current use of a single-day, fiscal year-end spot price to
determine whether resources are economically producible based on
current economic conditions with a different test.\26\ Some believed
that reliance on a single-day spot price is subject to significant
volatility and results in frequent adjustment of reserves.\27\ These
commenters expressed the view that variations in single-day prices
provide temporary alterations in reserve quantities that are not
meaningful or may lead investors to incorrect conclusions, do not
represent the general price trend, and do not provide a meaningful
basis for determination of reserve or enterprise value.\28\
---------------------------------------------------------------------------
\26\ See letters from AAPG, American Clean Skies Foundation
(``ACSF''), H. Anderson, Apache, API, BHP, BP, Brookwood, Canadian
Association of Petroleum Producers (``CAPP''), CFA, Chesapeake, CIBC
CNOOC, Davis Family Energy Partners (``Davis''), Denbury, Deutsche
Bank, Devon, EIA, EnCana, Energy Literacy, Eni, Etherington, J.,
ExxonMobil, Grant Thornton, Imperial, IPAA, Robbin Jones (``R.
Jones''), D. Kelly, Long Consultants (``Long''), D. McBride, MIT
Center for Energy and Environmental Policy Research (``MIT''),
Moody's, Netherland, Newfield, Nexen, D. Olds, Oil Change,
Petrobras, Petro-Canada, Robinson, Ross, D. Ryder, S&P, Sasol,
Shell, Southwestern, SPE, StatoilHydro, Total, TRACS, Ultra, Walter
van de Vijver (``W. van DeVijver''), R. Wagner, White & Case, and F.
Ziehe.
\27\ See letters from API, Chesapeake, CIBC, ExxonMobil,
Imperial, R. Jones, S&P, Ultra, and R. Wagner.
\28\ See letters from Chesapeake, Devon, and Imperial.
---------------------------------------------------------------------------
Of those who commented on this issue, most recommended using a 12-
month average price instead of the single-day price.\29\ However,
others recommended using one of the following alternative pricing
options:
---------------------------------------------------------------------------
\29\ See letters from H. Anderson, Apache, API, BHP, BP, CAPP,
Chesapeake, CIBC, CNOOC, Devon, DOE, EnCana, Eni, ExxonMobil
Imperial, IPAA, R. Jones, D. McBride, Moody's, Netherland, Nexen,
Oil Change, D. Olds, Petro-Canada, D. Ryder, Shell, StatoilHydro,
Total, TRACS, R. Wagner, and F. Ziehe.
---------------------------------------------------------------------------
A futures price or the average futures price over a
specified period of time; \30\
---------------------------------------------------------------------------
\30\ See letters from Apache, CFA, Chesapeake, Davis, EIA, IPAA,
Southwestern, StatoilHydro, and TRACS.
---------------------------------------------------------------------------
Management's forecasted price; \31\
---------------------------------------------------------------------------
\31\ See letters from AAPG, J. Etherington, Grant Thornton,
Robinson, Ross, StatoilHydro, and W. van de Vijver.
---------------------------------------------------------------------------
Average price over three months; \32\
---------------------------------------------------------------------------
\32\ See letter from CFA.
---------------------------------------------------------------------------
Average price over two years; \33\ or
---------------------------------------------------------------------------
\33\ See letter from Deutsche Bank.
---------------------------------------------------------------------------
Probabilistic future pricing with ranges and explanations
for the pricing basis.\34\
---------------------------------------------------------------------------
\34\ See letter from Energy Literacy.
---------------------------------------------------------------------------
Each of the options above, involving historical price averages,
futures prices, futures price averages, and price forecasts developed,
or relied on, by management, has advantages and disadvantages. For
example, historical price averages provide a high level of
comparability among oil and gas companies and are relatively easy to
compute because the underlying data is readily available to companies.
However, they may not reflect the prices that a company could
reasonably expect to receive for its production in the future.
Prices based on oil and gas futures are forward-looking, and
therefore may better approximate the economic value of the reserves as
they are ultimately produced and sold. These prices, however, are not
necessarily available for all products in all geographic areas and
would require adjustments. To provide comparability of disclosures
among oil and gas companies, we likely would have to specify certain
private-sector publications for use in such pricing. Price forecasts
developed by management of an oil and gas company would provide
investors with better insight into the prices that management of the
company foresees and, therefore, the prices upon which management
[[Page 39530]]
bases its investment and operating decisions, but may provide limited
comparability between companies.
We propose to revise the definitions in Rule 4-10 of Regulation S-X
to change the price used in calculating reserves from a single-day
closing price measured on the last day of the company's fiscal year to
an average price for the 12 months prior to the end of the company's
fiscal year.\35\ This pricing standard is consistent with the PRMS's
default guidelines for the term ``current economic conditions.'' This
price would be calculated as the unweighted arithmetic average of the
closing price on the last day of each month in that 12-month period.
Using historical pricing maximizes comparability between companies,
which is the primary objective of the oil and gas disclosure. This
proposal is intended to maintain reserves disclosure comparability
while mitigating the risk that an anomalous single pricing date will
distort the proved reserves estimates. It therefore may provide a
better basis for economic producibility than single-day pricing.
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\35\ See proposed Rule 4-10(a)(24)(v).
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We recognize that use of historical pricing may not capture
management's outlook on the future as well as futures prices or
management's planning prices. As noted in detail elsewhere in this
release,\36\ in order to allow for such disclosures, we are proposing
to add a disclosure item that would specifically permit an oil and gas
company, at its option, to include a sensitivity case analysis in its
filings that would show total reserves estimates based on futures
prices, management's planning prices, or other price schedules in
addition to the pricing mechanism specifically required.\37\
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\36\ See Section III.B.3.ii of this release.
\37\ See proposed Item 1202(c).
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Request for Comment
Should the economic producibility of a company's oil and
gas reserves be based on a 12-month historical average price? Should we
consider an historical average price over a shorter period of time,
such as three, six, or nine months? Should we consider a longer period
of time, such as two years? If so, why?
Should we require a different pricing method? Should we
require the use of futures prices instead of historical prices? Is
there enough information on futures prices and appropriate
differentials for all products in all geographic areas to provide
sufficient reporting consistency and comparability?
Should the average price be calculated based on the prices
on the last day of each month during the 12-month period, as proposed?
Is there another method to calculate the price that would be more
representative of the 12-month average, such as prices on the first day
of each month? Why would such a method be preferable?
Should we require, rather than merely permit, disclosure
based on several different pricing methods? If so, which different
methods should we require?
Should we require a different price, or supplemental
disclosure, if circumstances indicate a consistent trend in prices,
such as if prices at year-end are materially above or below the average
price for that year? If so, should we specify the particular
circumstances that would trigger such disclosure, such as a 10%, 20%,
or 30% differential between the average price and the year-end price?
If so, what circumstances should we specify?
2. Trailing Year-End
Numerous commenters recommended the use of an average price over a
period ending some time before the company's fiscal year end.\38\ They
noted that, with accelerated filing deadlines, it becomes difficult for
the larger companies subject to those deadlines to make the required
calculations accurately and with the best available data.\39\ Most of
these commenters recommended that the pricing period end three months
prior to the end of the company's fiscal year (for example, a company
with a December 31, 2007 fiscal year end, would use the average
historical price for the period between October 1, 2006 and September
30, 2007 to calculate its reserves estimates).\40\ We are not proposing
such a lag in the time between the close of the pricing period and the
end of the fiscal year. However, we solicit comment on this issue.
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\38\ See letters from AAPG, API, BP, CAPP, CIBC, Deutsche Bank,
EnCana, Eni, ExxonMobil, Imperial, D. McBride, Moody's Netherland,
Nexen, D. Ryder, Shell, Total, R. Wagner, and F. Ziehe.
\39\ See letters from CAPP and Shell.
\40\ See letters from AAPG, API, BP, CAPP, CIBC, Deutsche Bank,
EnCana, Eni, ExxonMobil, Imperial, D. McBride, Moody's, Netherland,
Nexen, D. Ryder, Shell, Total, R. Wagner, and F. Ziehe.
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Request for Comment
Should the price used to determine the economic
producibility of oil and gas reserves be based on a time period other
than the fiscal year, as some commenters have suggested? If so, how
would such pricing be useful? Would the use of a pricing period other
than the fiscal year be misleading to investors?
Is a lag time between the close of the pricing period and
the end of the company's fiscal year necessary? If so, should the
pricing period close one month, two months, three months, or more
before the end of the fiscal year? Explain why a particular lag time is
preferable or necessary. Do accelerated filing deadlines for the
periodic reports of larger companies justify using a pricing period
ending before the fiscal year end?
3. Prices Used for Accounting Purposes
Notwithstanding our proposal to change the single-day, year-end
pricing for the estimation of reserves, we are not proposing to change
the prices that are used for accounting purposes. Specifically,
companies using either the successful efforts accounting method
described in Statement of Financial Accounting Standard No. 19 (SFAS
19) prescribed by the Financial Accounting Standards Board (FASB) or
the full cost accounting method, set forth in Rule 4-10(c) \41\ of
Regulation S-X, would continue to depreciate property, plant, and
equipment related to oil and gas producing activities using a units-of-
production basis over proved developed reserves or proved reserves, as
applicable, using single-day, year-end rates. In addition, companies
using the full cost accounting method would continue to use the single-
day, year-end rate for purposes of determining the limitation on
capitalized costs (i.e., the ceiling test).
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\41\ 17 CFR 210.4-10(c).
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However, to provide consistency between the reserves disclosures
required by proposed new Subpart 1200 and SFAS 69, we believe that the
information required by SFAS 69 should be prepared using the average
price as described above. This would result in two different
presentations of proved reserves using two different economic
producibility assumptions. For purposes of Subpart 1200, a company
would use a value for proved reserves based on average prices.
Conversely, for purposes of applying the successful efforts method and
the full cost accounting method, a company would use a value of proved
reserves based on a single-day, year-end price. We intend to discuss
such possible changes with FASB.
Request for Comment
Should we require companies to use the same prices for
accounting purposes as for disclosure outside of the financial
statements?
[[Page 39531]]
Is there a basis to continue to treat companies using the
full cost accounting method differently from companies using the
successful efforts accounting method? For example, should we require,
or allow, a company using the successful efforts accounting method to
use an average price but require companies using the full cost
accounting method to use a single-day, year-end price?
Should we require companies using the full cost accounting
method to use a single-day, year-end price to calculate the limitation
on capitalized costs under that accounting method, as proposed? If such
a company were to use an average price and prices are higher than the
average at year end or at the time the company issues its financial
statements, should that company be required to record an impairment
charge?
Should the disclosures required by SFAS 69 be prepared
based on different prices than the disclosures required by proposed
Section 1200?
If proved reserves, for purposes of disclosure outside of
the financial statements, other than supplemental information provided
pursuant to SFAS 69, are defined differently from reserves for purposes
of determining depreciation, should we require disclosure of that fact,
including quantification of the difference, if the effect on
depreciation is material?
What concerns would be raised by rules that require the
use of different prices for accounting and disclosure purposes? For
example, is it consistent to use an average price to estimate the
amount of reserves, but then apply a single-day price to calculate the
ceiling test under the full cost accounting method? Would companies
have sufficient time to prepare separate reserves estimates for
purposes of reserves disclosure on one hand, and calculation of
depreciation on the other? Would such a requirement impose an
unnecessary burden on companies?
Will our proposed change to the definitions of proved
reserves and proved developed reserves for accounting purposes have an
impact on current depreciation amounts or net income and to what
degree?
If we change the definitions of proved reserves and proved
developed reserves to use average pricing for accounting purposes, what
would be the impact of that change on current depreciation amounts and
on the ceiling test? Would the differences be significant?
C. Extraction of Bitumen and Other Non-Traditional Resources
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.\42\ These other
sources include bitumen extracted from oil sands, as well as oil and
gas extracted from coalbeds 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.\43\ As noted earlier, many
commenters supported such disclosure.\44\
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\42\ See 17 CFR 210.4-10(a)(1)(ii)(D).
\43\ According to one commenter, some estimates indicate that
such resources already provide 40% of the natural gas produced in
the United States. See letter from Chesapeake Energy.
\44\ See letters from AAPG, ACSF, Apache, API, Audit Quality,
BP, Brookwood, CFA, Chesapeake, CIBC, CNOOC, Denbury, Deutsche Bank,
Devon, DOE, EIA, EnCana, Energy Literacy, Eni, J. Etherington,
ExxonMobil, E&Y, Grant Thornton, Imperial, IPAA, D. Kelly, D.
McBride, Moody's, Nexen, Oil Change, D. Olds, Petrobras, Petro-
Canada, R. Pinkerton, PWC, Robinson, Ross, D. Ryder, S&P, Sasol,
Shell, SPE, StatoilHydro, Total, A. Verma, R. Wagner, White & Case,
and F. Ziehe.
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The proposed revised definition of ``oil and gas producing
activities'' would include the extraction of the non-traditional
resources described above.\45\ The proposal 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 proposed definition would state specifically that
oil and gas producing activities include the extraction of marketable
hydrocarbons, in the solid, liquid, or gaseous state, from oil sands,
shale, coalbeds \46\ or other nonrenewable natural resources which can
be upgraded into natural or synthetic oil or gas, and activities
undertaken with a view to such extraction.
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\45\ See proposed Rule 4-10(a)(16).
\46\ Although the proposed definition would encompass activities
such as extracting coalbed methane from a deposit of coal, it would
not include the extraction of the coal itself, even if the company
intends to use that coal as feedstock into processing activities
that result in oil and gas products, such as coal gasification. We
recognize that as technologies progress, it may become appropriate
to include such processes as oil and gas producing activities.
---------------------------------------------------------------------------
However, the proposed definition would continue to exclude
activities relating to:
Transporting, refining, processing (other than field
processing of gas to extract liquid hydrocarbons), or marketing oil and
gas;
The production of natural resources other than oil, gas,
or natural resources from which natural or synthetic oil and gas can be
extracted; and
The production of geothermal steam.
Consistent with historical treatment, we continue to believe that,
once a resource is extracted from the ground, it should not be
considered oil and gas reserves. Thus, the current definition of the
term ``oil and gas producing activities'' does not, and the proposed
definition would not, permit companies that only transport, process,
and/or market oil or gas to disclose, as reserves, amounts of oil or
gas received from, and extracted from the ground by, another company.
In addition, if a company extracting the resources also builds its own
processing plant on-site or near the extraction location (other than
field processing of gas to extract liquid hydrocarbons), we do not
believe it would be appropriate for that company to use the price of
its processed product to determine the economic producibility of the
unprocessed product. For example, if a company builds a bitumen
processing plant to convert raw bitumen into synthetic crude oil, its
calculation for the economic producibility of reserves from that
location should be based on the prices for the raw bitumen, as though
it were providing the bitumen to a third party processor. This will
facilitate comparability among companies.
We recognize, however, that excluding the listed activities from
the definition of ``oil and gas producing activities'' would not permit
a company to reflect the result of building its own processing plant on
the price estimates and other considerations that may be used in making
the company's business decisions. Such a processing plant can
significantly enhance the value of the upgraded product, enabling the
company to use lower costs (or higher prices) in its internal decision-
making. As noted elsewhere in this release, we are proposing to allow
companies to voluntarily present an analysis of the sensitivity of
reserves estimates based on varying prices, including the expected
product prices used by management for its own planning purposes.\47\
Such supplemental disclosure would permit companies to disclose other
pricing and cost considerations, including advantages gained by
internal processing of raw
[[Page 39532]]
products that may add value to the final product sold by the company.
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\47\ See proposed Item 1202(c).
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Request for Comment
Should we consider the extraction of bitumen from oil
sands, extraction of synthetic oil from oil shales, and production of
natural gas and synthetic oil and gas from coalbeds to be considered
oil and gas producing activities, as proposed? Are there other non-
traditional resources whose extraction should be considered oil and gas
producing activities? If so, why?
The extraction of coal raises issues because it is most
often used directly as mined fuel, although hydrocarbons can be
extracted from it. As noted above, we propose to include the extraction
of coalbed methane as an oil and gas producing activity. However, the
actual mining of coal has traditionally been viewed as a mining
activity. In most cases, extracted coal is used as feedstock for energy
production rather than refined further to extract hydrocarbons.
However, as technologies progress, certain processes to extract
hydrocarbons from extracted coal, such as coal gasification, may become
more prevalent. Applying rules to coal based on the ultimate use of the
resource could lead to different disclosure and accounting implications
for similar coal mining companies based solely on the coal's end use.
How should we address these concerns? Should all coal extraction be
considered an oil and gas producing activity? Should it all be
considered mining activity? Should the treatment be based on the end
use of the coal? Please provide a detailed explanation for your
comments.
Similar issues could arise regarding oil shales, although
to a significantly less extent, because those resources currently are
used as direct fuel only in limited applications. How should we treat
the extraction of oil shales?
If adopted, how would the proposed changes affect the
financial statements of producers of non-traditional resources and
mining producers?
D. Reasonable Certainty and Proved Oil and Gas Reserves
The current definition of the term ``proved reserves'' states that
these reserves are ``the estimated quantities of crude oil, natural
gas, and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and operating
conditions.'' \48\ Although ``reasonable certainty'' is, and has been,
the standard used in the definition of proved oil and gas reserves, the
current rules do not define that term. As a result, the meaning of the
term ``reasonable certainty'' has been the subject of significant
disagreement within the industry relating to the level of probability
necessary to meet this standard. Although some believe that this
standard is clear and has established a consistent guideline for
establishing proved reserves,\49\ others do not believe that this has
been the case.\50\ To avoid ambiguity, we propose to add a definition
of the term ``reasonable certainty'' to Rule 4-10 of Regulation S-
X.\51\
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\48\ See Rule 4-10(a)(2) of Regulation S-X [17 CFR 210.4-
10(a)(2)].
\49\ See letters from R. Jones and Moody's.
\50\ See letters from D. Olds, Raymond Schutte (``R. Schutte''),
L. Smothers, R. Wagner, and Sir Philip Watts (``P. Watts'').
\51\ See proposed Rule 4-10(a)(26).
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We propose to define the term ``reasonable certainty'' as ``much
more likely to be achieved than not.'' In addition, we would clarify
that, when deterministic methods \52\ are used to estimate oil and gas
reserves, as changes due to increased availability of geoscience
(geological, geophysical, and geochemical), engineering, and economic
data are made to estimated ultimate recovery (EUR) \53\ with time,
reasonably certain EUR is much more likely to increase than to either
decrease or remain constant. The proposed definition also would explain
that, when probabilistic methods are used to estimate reserves,
reasonable certainty means that there is at least a 90% probability
that the quantities actually recovered will equal or exceed the stated
volume.\54\
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\52\ See Section II.D.2 of this release for a discussion
regarding deterministic methods and probabilistic methods.
\53\ We propose to define the term ``estimated ultimate
recovery'' as the sum of reserves remaining as of a given date plus
the cumulative production as of that date. See proposed Rule 4-
10(a)(11).
\54\ This is consistent with the PRMS definition of ``proved
reserves.''
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Request for Comment
Is the proposed definition of ``reasonable certainty'' as
``much more likely to be achieved than not'' a clear standard? Is the
standard in the proposed definition appropriate? Would a different
standard be more appropriate?
Is the proposed 90% threshold appropriate for defining
reasonable certainty when probabilistic methods are used? Should we use
another percentage value? If so, what value?
1. New Technology
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 generally must use actual production
or flow tests to meet the ``reasonable certainty'' standard necessary
to establish the proved status of its reserves. 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. Some commenters
noted that a case-by-case exemption from the flow test requirement
imposes unequal standards for establishing reasonable certainty based
on geographic location.\55\
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\55\ See letters from Petrobras, D. Ryder, and White & Case.
---------------------------------------------------------------------------
In addition, we recognize that technology 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. We
propose to add a definition of the term ``reliable technology'' to Rule
4-10 of Regulation S-X to clarify the types of technology that can be
used to establish reasonable certainty. We propose to define ``reliable
technology'' as ``technology (including computational methods) that,
when applied using high quality geoscience and engineering data, is
widely accepted within the oil and gas industry, has been field tested
and has demonstrated consistency and repeatability in the formation
being evaluated or in an analogous formation. Consistent with current
industry practice, expressed in probabilistic terms, reliable
technology has been proved empirically to lead to correct conclusions
in 90% or more of its applications.'' \56\
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\56\ See proposed Rule 4-10(a)(27).
---------------------------------------------------------------------------
The proposed definition is intended to permit broader use of new
technologies to establish the proper classification for reserves and to
lessen the need for frequent updates to our reserves definitions as
technology continues to evolve. Because companies would now be able to
select the technology that it uses, we are proposing to require a
company to disclose the technology used to establish the appropriate
level of certainty for material properties in a company's first filing
with the Commission and for material additions
[[Page 39533]]
to reserves estimates in subsequent filings.\57\ Such disclosure should
identify the particular portion of the reserves estimates for which a
particular technology was used, including identification of the
geographic area, country, field or basin to the extent necessary for
investors to determine whether use of that technology was appropriate
under the circumstances.
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\57\ See proposed Item 1202(a)(4) and proposed Item 1209(a)(2).
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Request for Comment
Is our proposed definition of ``reliable technology''
appropriate? Should we change any of its proposed criteria, such as
widespread acceptance, consistency, or 90% reliability?
Is the open-ended type of definition of ``reliable
technology'' that we propose appropriate? Would permitting the company
to determine which technologies to use to determine their reserves
estimates be subject to abuse? Do investors have the capacity to
distinguish whether a particular technology is reasonable for use in a
particular situation? What are the risks associated with adoption of
such a definition?
Is the proposed disclosure of the technology used to
establish the appropriate level of certainty for material properties in
a company's first filing with the Commission and for material additions
to reserves estimates in subsequent filings appropriate? Should we
require disclosure of the technology used for all properties? Should we
require companies currently filing reports with the Commission to
disclose the technology used to establish appropriate levels of
certainty regarding their currently disclosed reserves estimates?
2. Probabilistic Methods
We propose to add definitions of the terms ``deterministic
estimate'' and ``probabilistic estimate.'' \58\ These two terms relate
to the two alternative methods by which a company may estimate its
reserves amounts. We understand that both methods are, to varying
degrees, currently used by the industry. Our proposed definitions are
consistent with industry practice. We propose to define the term
``deterministic estimate'' to mean an estimate that is based on using a
single ``most appropriate'' value for each variable in the estimation
of reserves, such as the company's determination of the oil or gas in
place in a reservoir, multiplied by the fraction of that oil or gas
that can be recovered. In addition, we propose to define the term
``probabilistic estimate'' as an estimate that is obtained when the
full range of values that could reasonably occur from each unknown
parameter (from the geoscience, engineering, and economic data) is used
to generate a full range of possible outcomes and their associated
probabilities of occurrence. Although companies currently can use
either method to produce reserves estimates, we believe that these
proposed definitions will promote consistent usage of the terms
``probabilistic estimate'' and ``deterministic estimate.''
---------------------------------------------------------------------------
\58\ See proposed Rules 4-10(a)(6) 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.
---------------------------------------------------------------------------
Some of the commenters suggested that we require the use of
probabilistic estimates to establish proved reserves because these
methods are derived through extensive statistical computer calculations
using a wide range of potential values for parameters that affect the
reserves estimate, such as possible recovery factors for a particular
field or type of field, and so would be more rigorous than
deterministic methods.\59\ Conversely, the quality of an estimate
derived through deterministic methods depends more heavily on the
experience and judgment of the reserves estimator to select the most
appropriate value for those parameters. Although we recognize that
probabilistic methods can be useful in certain circumstances, requiring
the use of probabilistic estimates could significantly increase the
costs of reserves estimate preparation, without significant increases
in reliability of the results in many cases. One commenter was
concerned that companies may not have sufficient staff to calculate all
reserves estimates through probabilistic methods.\60\ Thus, the
proposed definition of ``reasonable certainty'' would continue to allow
companies to estimate reserves amounts using either deterministic or
probabilistic methods, leaving companies to determine which method is
more appropriate for their particular situations.\61\
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\59\ See letters from AAPG, EIA, Long, D. Olds, Rose, and SPE.
\60\ See letter from D. Olds.
\61\ See proposed Rule 4-10(a)(26).
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Request for Comment
Are the proposed definitions of ``deterministic estimate''
and ``probabilistic estimate'' appropriate? Should we revise either of
these definitions in any way? If so, how?
Are the statements regarding the use of deterministic and
probabilistic estimates in the proposed definition of ``reasonable
certainty'' appropriate? Should we change them in any way? If so, how?
Should an oil and gas company have the choice of using
deterministic or probabilistic methods for reserves estimation, or
should we require one method? If we were to require a single method,
which one should it be? Why? Would there be greater comparability
between companies if only one method was used?
Should we require companies to disclose whether they use
deterministic or probabilistic methods for their reserves estimates?
3. Other Revisions Related to Proved Oil and Gas Reserves
The current definition of the term ``proved oil and gas reserves''
also 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,\62\ notwithstanding the existence of other engineering and
geoscientific evidence.\63\ Consistent with our proposal to permit the
use of new technologies to establish the reasonable certainty of proved
reserves, the proposed revisions to the definition of ``proved oil and
gas reserves'' also include provisions for establishing levels of
lowest known hydrocarbons and highest known oil through reliable
technology other than well penetrations.
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\62\ 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.
\63\ See Rule 4-10(a)(2)(i) [17 CFR 210.4-10(a)(2)(i)].
---------------------------------------------------------------------------
Similarly, the proposed definition would permit a company to claim
proved reserves beyond drilling units that immediately offset developed
drilling locations if the company can establish with reasonable
certainty that these reserves are economically producible.\64\ 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 would establish a uniform standard of
reasonable certainty that could be applied to all proved reserves,
regardless of location or distance from producing wells.
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\64\ See proposed Rule 4-10(a)(24)(ii). See Section II.G for a
more detailed discussion regarding this proposed revision.
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[[Page 39534]]
Finally, we propose adding a sentence to the definition that would
state that, in order for reserves to be proved, the project to extract
the hydrocarbons must have commenced or it must be reasonably certain
that the operator will commence the project within a reasonable time.
This revision is designed to prevent a company from including, in
proved reserves, projects in undeveloped areas for which it does not
have the intent to develop.
Request for Comment
Should we permit the use of technologies that do not
provide direct information on fluid contacts to establish reservoir
fluid contacts, provided that they meet the definition of ``reliable
technology,'' as proposed?
Should there be other requirements to establish that
reserves are proved? For example, for a project to be reasonably
certain of implementation, is it necessary for the issuer to
demonstrate either that it will be able to finance the project from
internal cash flow or that it has secured external financing?
E. Unproved Reserves--``Probable Reserves'' and ``Possible Reserves''
We propose to define the terms ``probable reserves'' and ``possible
reserves'' because we are proposing to permit companies to disclose
these categories of reserves estimates.\65\ 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:
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\65\ See proposed Rule 4-10(a)(18) and (17), respectively.
---------------------------------------------------------------------------
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 proved,
probable, and possible reserves estimates. By proposing to permit
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.
Some commenters on the Concept Release were concerned that
disclosing reserves categories that are less certain than proved
reserves could increase the risk of confusion and litigation.\66\
Therefore, we are proposing to make these disclosures voluntary.\67\
Numerous oil and gas companies currently 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 create increased
litigation risk. By making these disclosures voluntary, a company could
decide on its own whether to provide the market with this disclosure,
despite possible increased litigation risk. In addition, to address the
concerns regarding the uncertainty of estimates of unproved reserves,
we also are proposing to require disclosure about the person primarily
responsible for preparing the company's reserves estimates and, if
applicable, about the person primarily responsible for conducting a
reserves audit.\68\ The proposal would clarify that a ``person'' may be
a business entity or an individual. We address this proposed disclosure
in more detail in Section III.B.3.v of this release.
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\66\ See letters from Devon and Imperial.
\67\ See proposed Item 1202.
\68\ See proposed Item 1202(a)(6).
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We propose to define the term ``probable reserves'' as 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.\69\ The proposed definition would provide guidance for
the use of both deterministic and probabilistic methods. The proposed
definition would clarify 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 should be at
least a 50% probability that the actual quantities recovered will equal
or exceed the proved plus probable reserves estimates. This proposed
definition was derived from the PRMS definition of the term ``probable
reserves.''
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\69\ See proposed Rule 4-10(a)(18).
---------------------------------------------------------------------------
Our proposed definition of ``possible reserves'' would include
those additional reserves that are less certain to be recovered than
probable reserves.\70\ It would clarify 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
should be at least a 10% probability that the actual quantities
recovered will equal or exceed the sum of proved, probable, and
possible estimates. As with the proposed definition of probable
reserves, the proposed definition of possible reserves is based on the
PRMS definition of the term ``possible reserves.''
---------------------------------------------------------------------------
\70\ See proposed Rule 4-10(a)(17).
---------------------------------------------------------------------------
Request for Comment
Should we permit a company to disclose its probable or
possible reserves, as proposed? If so, why?
Should we require, rather than permit, disclosure of
probable or possible reserves? If so why?
Should we adopt the proposed definitions of probable
reserves and possible reserves? Should we make any revisions to those
proposed definitions? If so, how should we revise them?
Are the proposed 50% and 10% probability thresholds
appropriate for estimating probable and possible reserves quantities
when a company uses probabilistic methods? Should probable reserves
have a 60% or 70% probability threshold? Should possible reserves have
a 15% or 20% probability threshold? If not, how should we modify them?
F. Definition of ``Proved Developed Oil and Gas Reserves''
As noted above, we are proposing to expand the scope of oil and gas
producing activities to include resources extracted by technologies
other than traditional oil and gas wells, such as mining processes.
Similarly, we propose to expand the definition of the term ``proved
developed oil and gas reserves'' to include extraction of resources
using technologies other than production through wells.\71\ The
proposed new definition would state that ``proved developed oil and gas
reserves'' are proved reserves that:
---------------------------------------------------------------------------
\71\ See proposed Rule 4-10(a)(22).
---------------------------------------------------------------------------
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.
Request for Comment
Should we revise the definition of proved developed oil
and gas reserves, as proposed? Should we make any other revisions to
that definition? If so, how should we revise it?
[[Page 39535]]
G. Definition of ``Proved Undeveloped Reserves''
1. Proposed Replacement of Certainty Threshold
We propose to amend the definition of the term ``proved undeveloped
reserves'' (PUDs) by replacing the requirement that productivity be
``certain'' for areas beyond the immediate area of known proved
reserves with a ``reasonably certain'' requirement.\72\ 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.\73\
---------------------------------------------------------------------------
\72\ See proposed Rule 4-10(a)(25).
\73\ See 17 CFR 210.4-10(a)(4). A drilling unit refers to the
spacing required between wells to prevent wasting resources and
optimize recovery. These units are typically determined by the local
jurisdiction.
---------------------------------------------------------------------------
Some commenters believed that requiring ``certainty'' beyond
offsetting, or adjacent, units is not appropriate.\74\ They believed
that there should be a single criterion--reasonable certainty--to
characterize all proved reserves, including proved undeveloped
reserves. Two commenters noted that the offsetting unit requirement is
a purely mathematical and arbitrary standard for ease of calculation
and does not reflect the actual geological characteristics of the
reservoir.\75\ Other commenters argued that PUDs should be determined
by the totality of the engineering and geoscience data available,
including seismic data, appropriate analogs, and assessment of
reservoir characteristics.\76\ One commenter believed that the ``one
offsetting unit'' rule is outdated and does not acknowledge new
technology.\77\
---------------------------------------------------------------------------
\74\ See letters from AAPG, API, Denbury, Devon, and DOE.
\75\ See letters from CNOOC and Ultra.
\76\ See letters from API, Devon, DOE, and ExxonMobil.
\77\ See letter from Ultra.
---------------------------------------------------------------------------
The proposed definition would permit the use of evidence gathered
from reliable technology that establishes reasonable certainty of
economic producibility at any distance from productive units (that is,
in units adjacent to the productive units as well as units beyond those
adjacent units).\78\ It would further clarify that proved reserves can
be claimed in a conventional accumulation \79\ or a continuous
accumulation in a given area beyond immediately offset drilling units
where economic producibility is reasonably certain, based on
engineering, geoscience, and economic data and reliable technology,
including actual drilling statistics in the area.\80\ However, the
proposed definition would prohibit a company from assigning proved
status to undrilled locations if a development plan has not been
adopted indicating that the locations are scheduled to be drilled
within five years, unless it discloses unusual circumstances that
justify a longer time, such as particularly complex projects in remote
areas that require more time to develop.\81\
---------------------------------------------------------------------------
\78\ See proposed Rule 4-10(a)(25)(i).
\79\ See Section II.G.2 for a discussion of continuous
accumulations and conventional accumulations.
\80\ See proposed Rule 4-10(a)(25)(i)(B).
\81\ See proposed Rule 4-10(a)(25)(ii).
---------------------------------------------------------------------------
Request for Comment
Are the proposed revisions appropriate? Would the proposed
expansion of the PUDs definition create potential for abuses?
Should we replace the current ``certainty'' threshold for
reserves in drilling units beyond immediately adjacent drilling units
with a ``reasonable certainty'' threshold as proposed?
Is it appropriate to prohibit a company from assigning
proved status to undrilled locations if the locations are not scheduled
to be drilled more than five years, absent unusual circumstances, as
proposed? Should the proposed time period be shorter or longer than
five years? Should it be three years? Should it be longer, such as
seven or ten years?
Should the proposed definition specify the types of
unusual circumstances that would justify a development schedule longer
than five years for reserves that are classified as proved undeveloped
reserves?
2. Proposed Definitions for Continuous and Conventional Accumulations
We propose to adopt definitions for the terms ``continuous
accumulations'' and ``conventional accumulations'' to assist companies
in determining the extent of PUDs associated with these two types of
accumulations.\82\ PUDs have caused estimation difficulties in the
past. The fundamental difficulty in making these estimates is
calculating the volume of a resource beyond the immediate area in which
wells have been drilled (or beyond the immediate area in which other
extraction technology has been installed and is operational) that
should be included in the proved category. The answer can be vastly
different for continuous accumulations, as opposed to conventional
accumulations. Because of this potential difference, we believe that it
is important to define these two distinct categories of accumulations
in the proposed rules.
---------------------------------------------------------------------------
\82\ See proposed Rule 4-10(a)(4) and (a)(5).
---------------------------------------------------------------------------
The proposed definition of ``continuous accumulations'' would
encompass resources that are pervasive throughout large areas, have
ill-defined boundaries, and typically lack or are unaffected by
hydrocarbon-water contacts near the base of the accumulation.\83\
Examples include, but are not limited to, accumulations of natural
bitumen (oil sands), gas hydrates, and self-sourced accumulations such
as coalbed methane, shale gas, and oil shale deposits. Typically, such
accumulations require specialized extraction technology (e.g., removal
of water from coalbed methane accumulations, large fracturing programs
for shale gas, steam, or solvents to mobilize bitumen for in-situ
recovery, and, in some cases, mining activities). Moreover, the
extracted petroleum may require significant processing prior to sale
(e.g., bitumen upgraders). This proposed definition is based on the
PRMS definition of the term ``unconventional resources.''
---------------------------------------------------------------------------
\83\ See proposed Rule 4-10(a)(4).
---------------------------------------------------------------------------
Conversely, we propose to define ``conventional accumulations'' as
discrete oil and gas resources related to localized geological
structural features or stratigraphic conditions, with the accumulation
typically bounded by a hydrocarbon-water contact near its base, and
which are significantly affected by the tendency of lighter
hydrocarbons to ``float'' or accumulate above the heavier water.\84\
This proposed definition is based on the PRMS definition of the term
``conventional resources.''
---------------------------------------------------------------------------
\84\ See proposed Rule 4-10(a)(5).
---------------------------------------------------------------------------
Request for Comment
Should we provide separate definitions of conventional and
continuous accumulations, as proposed? Would separate disclosure of
these accumulations be helpful to investors?
Should we revise our proposed definition of ``continuous
accumulations'' in any way? For example, should the proposed definition
provide examples of such accumulations? If so, how should we revise it?
Should we revise our proposed definition of ``conventional
accumulations'' in any way? If so, how should we revise it?
[[Page 39536]]
3. Proposed Treatment of Improved Recovery Projects
The proposed definition of proved undeveloped reserves also would
be broadened to permit a company to include quantities of oil that can
be recovered through improved recovery projects in its proved
undeveloped reserves estimates. Currently, a company can include such
quantities only where techniques have been proved effective by actual
production from projects in the area and in the same reservoir. The
proposed amendments would expand this definition to permit the use of
techniques that have been proved effective by actual production from
projects in an analogous reservoir in the same geologic formation in
the immediate area or by other evidence using reliable technology that
establishes reasonable certainty.\85\
---------------------------------------------------------------------------
\85\ See proposed Rule 4-10(a)(25)(iii).
---------------------------------------------------------------------------
Request for Comment
Should we expand the definition of proved undeveloped
reserves to permit the use of techniques that have been proven
effective by actual production from projects in an analogous reservoir
in the same geologic formation in the immediate area or by other
evidence using reliable technology that establishes reasonable
certainty?
H. Proposed Definition of Reserves
To add clarity to the definition of the term ``proved reserves,''
we also propose to add a definition of the term ``reserves.'' \86\ We
propose to describe more completely the criteria that an accumulation
of oil, gas, or related substances must satisfy to be considered
reserves (of any classification), including non-technical criteria such
as legal rights. We propose 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:
---------------------------------------------------------------------------
\86\ See proposed Rule 4-10(a)(28).
---------------------------------------------------------------------------
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 definition would clarify that reserves are classified as
proved, probable, and possible according to the degree of uncertainty
associated with the estimates. This proposed definition is based on the
PRMS definition of the term ``reserves.''
Request for Comment
Is the proposed definition of ``reserves'' appropriate?
Should we change it in any way? If so, how?
I. Other Proposed Definitions and Reorganization of Definitions
We are proposing additional definitions primarily to support and
clarify the proposed definitions of the key terms discussed above.
These supplementary definitions include:
``Analogous formation in the immediate area,'' which
appears in the definition of proved reserves; \87\
---------------------------------------------------------------------------
\87\ See proposed Rule 4-10(a)(2).
---------------------------------------------------------------------------
``Condensate'' \88\
---------------------------------------------------------------------------
\88\ See proposed Rule 4-10(a)(3).
---------------------------------------------------------------------------
``Development project'' \89\
---------------------------------------------------------------------------
\89\ See proposed Rule 4-10(a)(8).
---------------------------------------------------------------------------
``Estimated ultimate recovery,'' which appears in the
definition of proved reserves; \90\ and
---------------------------------------------------------------------------
\90\ See proposed Rule 4-10(a)(11).
---------------------------------------------------------------------------
``Resources,'' which are often confused with reserves.\91\
---------------------------------------------------------------------------
\91\ See proposed Rule 4-10(a)(30).
---------------------------------------------------------------------------
Most of these supporting terms and their proposed definitions are
based on similar terms in the PRMS. The proposed definition of
``resources'' is based on the Canadian Oil and Gas Evaluation Handbook
(COGEH).
We also are proposing to alphabetize the definitional terms in Rule
4-10(a), including existing and proposed definitions. Currently, the
terms defined in Rule 4-10(a) are organized by placing the key terms
ahead of supporting terms. The proposals would significantly increase
the number of terms defined in this section. With the proposed addition
of numerous new definitions, we believe that alphabetizing these
definitions would make specific definitions easier to find.
Request for Comment
Are these additional proposed definitions appropriate?
Should we revise them in any way?
Are there other terms that we have used in the proposal
that need to be defined? If so, which terms and how should we define
them?
Should we alphabetize the definitions, as proposed? Would
any undue confusion result from the re-ordering of existing
definitions?
III. Proposed Amendments To Codify the Oil and Gas Disclosure
Requirements in Regulation S-K
The Concept Release primarily solicited comment on certain key
definitions in the oil and gas disclosure regime, and whether oil and
gas companies should be permitted to disclose probable and possible
reserves. In this release, we are proposing, and soliciting comment on,
a broader scope of amendments. In particular, we are proposing to
update and codify Securities Act and Exchange Act Industry Guide 2:
Disclosure of Oil and Gas Operations (Industry Guide 2).\92\ Industry
Guide 2 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 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. We propose to codify the contents of Industry Guide 2 in
Regulation S-K.
---------------------------------------------------------------------------
\92\ Exchange Act Industry Guide 2 merely references, and
therefore is identifical to, Securities Act Industry Guide 2.
---------------------------------------------------------------------------
Included in the proposals are several new disclosure items that we
believe are necessary in light of the proposed amendments to the
definitions in Rule 4-10, such as disclosure of technology used to
determine levels of certainty because we propose to permit companies to
choose the appropriate technology for that purpose. We also are
proposing to eliminate several disclosures in Industry Guide 2 because
we believe that they are no longer necessary, such as reporting of
production through processing plant ownership. We address these
proposals in detail below.
A. Proposed Revisions to Items 102, 801, and 802 of Regulation S-K
The instructions to Item 102 of Regulation S-K, in conjunction with
Items 801 and 802 of Regulation S-K, currently reference the industry
guides. Because we are proposing to move the disclosures from Industry
Guide 2 into a new Subpart 1200 of Regulation S-K, we propose to revise
the instructions to Item 102 to reflect this change.\93\ We also
propose eliminating the references in Items 801 and 802 to Industry
Guide 2 because that industry guide will cease to exist if the
proposals described in this release are adopted.\94\
---------------------------------------------------------------------------
\93\ See proposed Instructions 4 and 8 to Item 102.
\94\ See proposed Item 801 and 802.
---------------------------------------------------------------------------
[[Page 39537]]
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 proposing to permit disclosure of probable and
possible oil and gas reserves, we would revise Instruction 5 to limit
its applicability to extractive enterprises other than oil and gas
producing activities, such as mining activities.\95\ Similarly,
Instruction 3 of Item 102, regarding production, reserves, locations,
development and the nature of the company's interests, would no longer
need to apply to oil and gas producing activities if the proposals are
adopted, so we also propose to limit that instruction to mining
activities.\96\
---------------------------------------------------------------------------
\95\ See proposed Instruction 5 to Item 102. Extractive
enterprises include enterprises such as mining companies that
extract resources from the ground.
\96\ See proposed Instruction 3 to Item 102.
---------------------------------------------------------------------------
Finally, we propose to eliminate 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 \97\ and Exchange Act 12b-4,\98\
regarding the staff's general ability to request supplemental
information.
---------------------------------------------------------------------------
\97\17 CFR 230.418.
\98\17 CFR 240.12b-4.
---------------------------------------------------------------------------
Request for Comment
Is the proposed amendment to Instruction 3, limiting it to
extractive activities other than oil and gas activities, appropriate?
Should we simply call them mining activities?
Are there any other aspects of Item 102 that we should
revise? If so, what are they and how should they be revised?
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
We are proposing to add a new Subpart 1200 to Regulation S-K that
would codify the disclosure requirements related to companies engaged
in oil and gas producing activities. This proposed subpart would
largely include 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, the proposed Subpart 1200 would contain the
following new disclosure requirements, many of which have been
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 development of proved undeveloped
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 additions to
reserves estimates;
Disclosure regarding material changes due to technology,
prices, and concession conditions;
Disclosure of the objectivity and qualifications of the
business entity or individual preparing or auditing the reserves
estimates;
Filing a report prepared by the third party if a company
represents that it is relying on a third party to prepare the reserves
estimates or conduct a reserves audit; and
Disclosure based on a new definition for the term ``by
geographic area.''
We discuss each of these proposed new Items below.
2. Proposed Item 1201 (General Instructions to Oil and Gas Industry-
Specific Disclosures)
We propose to add new Item 1201 to Regulation S-K. This item would
set forth the general instructions to Subpart 1200. The proposed item
would contain three paragraphs that would:
Instruct companies for which oil and gas producing
activities are material to provide the disclosures specified in Subpart
1200;\99\
---------------------------------------------------------------------------
\99\ 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.
---------------------------------------------------------------------------
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; and
State that the definitions in Rule 4-10(a) of Regulation
S-X apply to Subpart 1200.
Request for Comment
Are the proposed general instructions to Subpart 1200
clear and appropriate? Are there any other general instructions that we
should include in this proposed Item?
For disclosure items requiring tabulated information,
should we require companies to adhere to a specified tabular format,
instead of permitting companies to reorganize, supplement, or combine
the tables?
In particular, should we permit a company to disclose
reserves estimates from conventional accumulations in the same table as
it discloses its reserves estimates from continuous accumulations?
3. Proposed 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, we are proposing to replace this
Instruction by adding a new Item 1202 to Regulation S-K that would
contain a similar disclosure requirement regarding a company's proved
reserves.\100\ However, the proposed new Item would expand on the
requirements of Item 102 by specifically permitting the disclosure of
probable and possible reserves and permitting the disclosure of
reserves from continuous accumulations. Proposed Item 1202 would
organize reserves disclosure into the following three tables:
---------------------------------------------------------------------------
\100\ See proposed Item 1202.
---------------------------------------------------------------------------
An oil and gas reserves from conventional accumulations
table;
An oil and gas reserves from continuous accumulations
table; and
An optional sensitivity analysis table.
i. Oil and Gas Reserves Tables
Proposed Item 1202 would require disclosure, in the aggregate and
by geographic area,\101\ of reserves estimated using prices and costs
under existing economic conditions, for each product type, in the
following categories:
---------------------------------------------------------------------------
\101\ See Section II.B.3.iv for a discussion about geographic
area specificity.
---------------------------------------------------------------------------
Proved developed reserves;
Proved undeveloped reserves;
Total proved reserves;
Probable reserves (optional); and
Possible reserves (optional).
The proposed Item would provide for separate tables for reserves in
conventional accumulations \102\ and continuous accumulations.\103\
However,
[[Page 39538]]
a company may combine these two tables.\104\ If a company does so, it
must present different products in different columns. For example,
because refining and processing, other than field processing of gas to
extract liquid hydrocarbons, are not oil and gas producing activities,
we believe that a company that extracts and processes oil sands into
synthetic crude oil should report the first salable product, bitumen,
as its reserves. The activity of processing bitumen into synthetic
crude oil at a plant, even if on or near the extraction location, is a
refining process. Forms of these two proposed tables are set forth
below:
---------------------------------------------------------------------------
\102\ See proposed Item 1202(a).
\103\ See proposed Item 1202(b).
\104\ See proposed Item 1201(b).
Summary of Oil and Gas Reserves in Conventional Accumulations as of
Fiscal-Year End Based on Average Fiscal-Year Prices
------------------------------------------------------------------------
Reserves
--------------------------------------
Reserves category Natural gas
Oil (mbbls) (mmcf)
------------------------------------------------------------------------
PROVED........................... .................. .................
Developed:
Continent A.............. .................. .................
Continent B.............. .................. .................
15% Country A........ .................. .................
15% Country B........ .................. .................
10% Field A in .................. .................
Country B.
Other Fields in .................. .................
Country B.
Other Countries in .................. .................
Continent B.
Undeveloped:
Continent A.............. .................. .................
Continent B.............. .................. .................
15% Country A........ .................. .................
15% Country B........ .................. .................
10% Field A in .................. .................
Country B.
Other Fields in .................. .................
Country B.
Other Countries in
Continent B
--------------------------------------
TOTAL PROVED.........
PROBABLE.............
POSSIBLE.............
------------------------------------------------------------------------
Summary of Oil and Gas Reserves From Continuous Accumulations as of Fiscal-Year End Based on Average Fiscal-Year
Prices
----------------------------------------------------------------------------------------------------------------
Reserves
-------------------------------------------------------------------------
Reserves category Product A \105\
(measure) Product B (measure) Product C (measure)
----------------------------------------------------------------------------------------------------------------
PROVED................................
Developed:
Country A..................... ....................... .......................
Country B..................... ....................... .......................
10% Field A in Country B.. ....................... .......................
Other Fields in Country B. ....................... .......................
Undeveloped:
Country A..................... ....................... .......................
Country B..................... ....................... .......................
10% Field A in Country B.. ....................... .......................
Other Fields in Country B. ....................... .......................
TOTAL PROVED..........
PROBABLE..............
POSSIBLE..............
----------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------
\105\ The product should be based on the product that is the
result of the oil and gas producing activity, such as bitumen, which
is extracted from oil sands.
---------------------------------------------------------------------------
A company may, but would not be 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 with proved reserves. The proposal would require a company to update
such reserves tables as of the close of each fiscal year. The table
would be categorized by the products (Product A, Product B, etc.) that
are the result of oil and gas producing activities. Thus, an oil and
gas company should not disclose, as reserves, products that are not the
result of oil and gas producing activities, including refined or
processed products
[[Page 39539]]
such as synthetic crude oil.\106\ Of course, a company may provide
supplemental disclosure regarding the amount of synthetic crude oil or
other refined or processed product that may be extracted ultimately
from the product of oil and gas producing activities. The proposal
would also clarify that, if the company discloses amounts of a product
in barrels of oil equivalent, it must disclose the basis for such
equivalency.
---------------------------------------------------------------------------
\106\ Rule 4-10(a)(16)(ii) specifically excludes from oil and
gas producing activities refining and processing (other than field
processing of gas to extract liquid hydrocarbons) of oil and gas.
---------------------------------------------------------------------------
The reserves to be reported in these proposed 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.
The proposed items would require companies that previously have not
disclosed reserves estimates in a filing with the Commission to
disclose the technologies used to establish the appropriate level of
certainty for reserves estimates from material properties included in
the total reserves disclosed. However, the particular properties would
not need to be identified. Similarly, proposed Item 1209 would note
that companies should discuss the technologies used to establish the
appropriate level of certainty for material additions to, or increases
in, reserves estimates.\107\ The proposal would not require a company
to disclose the technologies used to determine levels of certainty for
reserves disclosed prior to effectiveness of the proposed amendments,
if adopted, because the current definitions limit technologies to
prescribed types, such as production or flow tests or actual
observation of oil-water contacts in the wellbore.
---------------------------------------------------------------------------
\107\ See proposed Item 1209.
---------------------------------------------------------------------------
If probable or possible reserves are disclosed, the proposed item
would also require the company to disclose the relative risks related
to such reserves estimations. Because we are proposing to permit
disclosure of probable and possible reserves, an instruction to this
proposed Item would revise 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.\108\ We continue to believe that such resources are too
speculative and may lead investors to incorrect conclusions. However,
consistent with Instruction 5, a company could disclose such estimates
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.\109\
---------------------------------------------------------------------------
\108\ See proposed Instruction 5 to Item 102.
\109\ Id.
---------------------------------------------------------------------------
Request for Comment
Should we permit companies to disclose their probable
reserves or possible reserves? Is the probable reserves category, the
possible reserves category (or both categories) too uncertain to be
included as disclosure in a company's public filings? Should we only
permit disclosure of probable reserves? What are the advantages and
disadvantages of permitting disclosure of probable and possible
reserves, from the perspective of both an oil and gas company and an
investor in an oil and gas company that chooses to provide such
disclosure? Would investors be concerned by such disclosure? Would they
understand the risks involved with probable or possible reserves?
Would the proposed disclosure requirements provide
sufficient disclosure for investors to understand how companies
classified their reserves? Should the proposed Item require more
disclosure regarding the technologies used to establish certainty
levels and assumptions made to determine the reserves estimates for
each classification?
Should companies be required to provide risk factor
disclosure regarding the relative uncertainty associated with the
estimation of probable and possible reserves?
Should we allow filers to report sums of proved and
probable reserves or sums of proved, probable, and possible reserves?
Or, to avoid misleading investors, should we allow only disclosure of
each category of reserves by itself and not in sum with others, as
proposed?
Should we require disclosure of probable or possible
reserves estimates in a company's public filings if that company
otherwise discloses such estimates outside of its filings?
Should we require all reported reserves to be simple
arithmetic sums of all estimates, as proposed? Alternatively, should we
allow probabilistic aggregation of reserves estimated probabilistically
up to the company level? If we do so, will company reserves estimated
and aggregated deterministically be comparable to company reserves
estimated and aggregated probabilistically?
Should we revise the proposed form and content of the
table? If so, how should we revise the table's form or content?
Should we eliminate the current exception regarding the
disclosure of estimates of resources in the context of 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? If so, would this create a significant imbalance in the
disclosures being made to the possible acquirer, as opposed to the
company's shareholders?
ii. Optional Reserves Sensitivity Analysis Table
Our current rules require determining whether oil or gas is
economically producible based on the price on the last day of the
fiscal year. As discussed in Section II.B.1 above, this single-day
price has been the subject of some criticism from commenters in the
past because it is sensitive to short-term price volatility and does
not account for seasonal variations in the prices of different
products. Although we are proposing to require that reserves estimates
be based on a 12-month average of historical prices, we are proposing
to permit companies to include an optional reserves sensitivity
analysis table in their filings that would show what the reserves
estimates would be if 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.
The company would be free to choose the different scenario or
scenarios, if any, that it wishes to disclose in the table. If the
company chooses to provide such disclosure, it would be required to
disclose the price and cost schedules and assumptions on which the
alternate reserves estimates are based. Similarly, companies should
remember that Item 303 of Regulation S-K (Management's Discussion and
Analysis of Financial Condition and Results of Operations) \110\
[[Page 39540]]
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.
---------------------------------------------------------------------------
\110\ See Item 303 of Regulation S-K [17 CFR 229.303].
Sensitivity of Reserves to Prices by Principal Product Type and Price Scenario
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Proved reserves Probable reserves Possible reserves
----------------------------------------------------------------------------------------------------------------------------------------------------------------
Price case Product A Product A Product A
Oil (mbbls) Gas (mmcf) (measure) Oil (mbbls) Gas (mmcf) (measure) Oil (mbbls) Gas (mmcf) (measure)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Scenario 1..................... ................ ................ ................ ................ ................ ................ ................ ................ ...............
Scenario 2..................... ................ ................ ................ ................ ................ ................ ................ ................ ...............
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Request for Comments
Should we adopt such an optional reserves sensitivity
analysis table? Would such a table be beneficial to investors? Is such
a table necessary or appropriate?
Should we require a sensitivity analysis if there has been
a significant decline in prices at the end of the year? If so, should
we specify a certain percentage decline that would trigger such
disclosure?
Should we revise the proposed form and content of the
table? If so, how should we revise the table's form or content?
As noted above in this release, SFAS 69 currently uses
single-day, year-end prices to estimate reserves, while the reserves
estimates in the proposed tables would be based on 12-month average
year-end prices. If the FASB elects not to change its SFAS 69
disclosures to be based on 12-month average year-end prices, should we
require reconciliation between the proposed Item 1202 disclosures and
the SFAS 69 disclosures? What other means should we adopt to promote
comparability between these disclosures?
iii. Geographic Specificity With Respect to Reserves Disclosures
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.\111\ 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. We think that greater specificity than
simply disclosing reserves within ``groups of countries'' would benefit
investors and currently are necessary to meet the requirements of Item
102 of Regulation S-K, in cases where a particular country, sedimentary
basin, or field constitutes a significant portion of a company's
reserves, particularly if that country, sedimentary basin, or field is
subject to unique risks, such as political instability. Thus,
instructions to proposed Item 1202 would state that, in general,
disclosures need only be broken out by continent, except where:
---------------------------------------------------------------------------
\111\ 17 CFR 229.102.
---------------------------------------------------------------------------
A particular country contains 15% or more of the company's
global oil reserves or gas reserves, or
A particular sedimentary basin or field contains 10% or
more of the company's global oil reserves or gas reserves.\112\
---------------------------------------------------------------------------
\112\ See proposed Instruction to Item 1202.
---------------------------------------------------------------------------
This proposed amendment would differ from the existing guidance in SFAS
69, which would permit disclosure based on broader geographic areas. In
addition, under the proposals, a company would be permitted, but not
required, to provide more detailed disclosure, such as countries or
fields containing less than the specified percentages.
Request for Comment
Should we provide the proposed guidance about the level of
specificity required when a company discloses its oil and gas reserves
by ``geographic area''?
Are the proposed 15% and 10% thresholds appropriate?
Should either, or both, of these percentages be different? For example,
should both be 15%? Should both be 10%? Would 5% or 20% be a more
appropriate threshold for either or both?
What would be the impact to investors if companies are
permitted to omit disclosures based on the individual field or basin
due to concerns related to competitive sensitivities? Would investors
be harmed if disclosure based on the individual field or basin is
omitted due to concerns related to competitive sensitivities? Is there
a better way to provide disclosure that a company heavily dependent on
a particular field or basin may be subject to risks related to the
concentration of its reserves?
Would greater specificity cause competitive harm? Is so,
how can the rules mitigate the risk of harm?
In the event that the FASB does not amend SFAS 69, should
we require companies to supplement their SFAS 69 disclosure with
greater geographic specificity? If the FASB does not amend SFAS 69,
should we require that companies reconcile the differences between the
reserves estimates shown in the SFAS 69 disclosure with the estimates
presented in the proposed tables?
iv. Separate Disclosure of Conventional and Continuous Accumulations
Under proposed Item 1202, companies would be required to disclose
reserves from conventional accumulations separately from reserves in
continuous accumulations. Several commenters on the Concept Release
believed that it is important to disclose such reserves
separately.\113\ Although proposed Item 1201 would permit a company to
combine these two tables, it would not permit a company to combine
columns of different tables. Thus, for example, if a company decided to
combine the two tables, it would have to represent reserves in
conventional natural gas reservoirs separately from gas reserves in
coalbeds or gas shales.
---------------------------------------------------------------------------
\113\ See letters from Brookwood, D. McBride, Moody's, and Oil
Change.
---------------------------------------------------------------------------
[[Page 39541]]
Request for Comment
Should we require separate disclosure of conventional
accumulations and continuous accumulations, as proposed?
Should we permit combining of columns if the product of
the oil and gas producing activity is the same, such as natural gas,
regardless of whether the reserves are in conventional or continuous
accumulations?
v. Preparation of Reserves Estimates or Reserves Audits
In the Concept Release, we sought comment on whether the rules
should require a company to retain an independent third party to
prepare, or conduct a reserves audit on, the company's reserves
estimates. Most commenters urged the Commission not to adopt such a
requirement.\114\ Some believed that a company's internal staff,
particularly at larger companies, is in a better position to prepare
those estimates.\115\ In addition, commenters pointed out a potential
lack of qualified third party engineers and other professionals to
conduct the increase in work that would need to be accomplished if we
adopted such a requirement.\116\ Others were concerned about the added
costs that would be associated with such a requirement.\117\ However,
some commenters believed that the participation of an independent third
party would provide heightened assurance regarding the accuracy of the
reserves estimates.\118\
---------------------------------------------------------------------------
\114\ 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.
\115\ See letters from API, Denbury, ExxonMobil, Imperial,
Nexen, Shell, and Talisman.
\116\ See letters from AAPG, API, BP, Devon, ExxonMobil,
Imperial, D. McBride, Newfield, D. Ryder, and Sasol.
\117\ See letters from Sasol and Nexen.
\118\ See letters from CIBC, EnCana, Fitch, D. Kelly, Petrobras,
Robinson, Ultra, and White & Case.
---------------------------------------------------------------------------
In light of the commenters' concerns, we are not proposing to
require an independent third party to prepare the reserves estimates or
conduct a reserves audit. However, several commenters noted that it is
important that persons preparing or auditing the reserves estimates be
objective and qualified to perform the work that they are doing.\119\
In addition, because we are proposing to broaden permissible
technologies for establishing levels of certainty of reserves, we
believe that the proper application of such technologies in particular
situations requires a heightened level of judgment. Therefore, we
propose to require disclosure regarding the qualifications of the
person primarily responsible for preparing the reserves estimates or,
if the company represents that a reserves audit was conducted,
conducting a reserves audit.\120\ In addition, we propose to require
disclosure regarding the objectivity of third parties that conduct such
service for an oil and gas company and measures taken to assure the
independence and objectivity of employees. We based these
qualifications largely on the reserves audit guidance of the Society of
Petroleum Engineers (SPE).\121\ In particular, we propose to require
the company to disclose the following information about the technical
person \122\ primarily responsible for preparing the reserves estimate
or, if the company represents that such a reserves audit was conducted,
conducting the reserves audit:
---------------------------------------------------------------------------
\119\ See letters from Brookwood, Denbury, D. McBride, Petro-
Canada, Robinson, and Total.
\120\ See proposed Item 1202(a)(6).
\121\ See Standards Pertaining to the Estimating and Auditing of
Oil and Gas Reserves Information of the SPE (SPE Reserves Auditing
Standards).
\122\ 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.
---------------------------------------------------------------------------
(1) If the person is an employee of the company,
[cir] The fact that an employee of the company had primary
responsibility for preparing the reserves estimate (but the employee
would not have to be identified); and
[cir] Measures taken to assure the independence and objectivity of
the estimate;
(2) If the person is not an employee of the company,
[cir] The identity of the person;
[cir] The nature and amount of all work that the person has
performed for the company during the past three fiscal years, other
than preparing the reserves estimate or conducting the reserves audit,
as well as all compensation and fees (in any form) paid to that person
for all such services; and
[cir] Whether the person has any other interests in the company or
other conflict of interests;
(3) Whether the person (regardless of whether an employee or third
party) primarily responsible for the estimating or auditing of
reserves:
[cir] Has a minimum of three years of practical experience in
petroleum engineering or petroleum production geology, with at least
one full year of this experience being in the estimation and evaluation
of reserves if the person was in charge of preparing the reserves
estimates;
[cir] Has a minimum of ten years of practical experience in
petroleum engineering or petroleum production geology, with at least
five years of this experience being in the estimation and evaluation of
reserves and the conducting of reserves audits if that person conducted
a reserves audit of the registrant's reserves estimates;
[cir] Has received, and is maintaining in good standing, a
registered or certified professional engineer's license or a registered
or certified professional geologist's license, or the equivalent
thereof, from an appropriate governmental authority or a recognized
self-regulating professional organization; and
[cir] Has a bachelor's or advanced degree in petroleum engineering,
geology, or other discipline of engineering or physical science, and if
so, the specific degree earned by the person; and
(4) Any memberships, in good standing, of the person (regardless of
whether an employee or third party) with a self-regulatory organization
of engineers, geologists, other geoscientists, or other professionals
whose professional practice includes reserves evaluations or reserves
audits, that:
[cir] Admits members primarily on the basis of their educational
qualifications;
[cir] Requires its members to comply with the professional
standards of competence and ethics prescribed by the organization that
are relevant to the estimation, evaluation, review, or audit of
reserves data; and
[cir] Has disciplinary powers, including the power to suspend or
expel a member.
For purposes of the proposed disclosure, the ``person'' could be
either an individual or an entity. If the person is an entity, then the
disclosures regarding technical qualifications in the paragraphs (3)
and (4) would apply to the individual within the entity who is
responsible for the technical aspects of the reserves estimation or
audit. To the extent that the person does not have all of the technical
qualifications above, the company would be required to discuss the
reasons why it believes that the person is otherwise qualified to
prepare the estimates or conduct the reserves audit, as applicable, and
any risks associated with reserves estimates not
[[Page 39542]]
prepared or audited by persons with such qualifications.\123\
---------------------------------------------------------------------------
\123\ See proposed Item 1202(a)(6)(v).
---------------------------------------------------------------------------
Request for Comments
Should we require companies to disclose whether the person
primarily responsible for preparing reserves estimates or conducting
reserves audits meets the specified qualification standards, as
proposed? Should we, instead, simply require companies to disclose such
a person's qualifications?
Should we require disclosure regarding a person's
objectivity when a company prepares its reserves estimates in-house?
Should the proposed disclosures regarding objectivity be required only
if a company hires a third party to prepare its reserve estimates or
conduct a reserves audit, as proposed?
If a company prepares its reserves estimates in-house,
should we require disclosure of any procedures that the company has
taken to preserve that person's objectivity? Should we require
disclosure of whether the internal person meets specified objectivity
criteria? For example, should we apply the some of the same criteria
that we propose to apply to third party preparers? If so, which ones?
Consistent with the SPE's auditing guidance regarding
internal auditors, should we require companies to disclose whether that
person (1) is assigned to an internal-audit group which is (a)
accountable to senior level management or the board of directors of the
company and (b) separate and independent from the operating and
investment decision making process of the company and (2) is granted
complete and unrestricted freedom to report, to one or more principal
executives or the board of directors, any substantive or procedural
irregularities of which that person becomes aware?
Should we require disclosure with other specific
independence or objectivity standards and, if so, what?
Should we revise any of the proposed provisions regarding
a person's objectivity or technical qualifications? Should the proposal
require disclosure of other criteria that would have bearing on
determining whether the person is objective or qualified?
Should a company be required to present risk factor
disclosure if its reserves estimates were not prepared by a person
meeting the objectivity and technical qualifications?
Because of the inherent uncertainty regarding estimates of
probable and possible reserves, should we require the proposed
disclosure only if a company chooses to disclose probable or possible
reserves?
Should we require that a third party prepare reserves
estimates or conduct a reserves audit if a company chooses to disclose
probable or possible reserves estimates?
Should we require the proposed disclosure only if the
company is using technologies other than those which are allowed in our
current definitions to establish levels of certainty?
vi. Contents of Third Party Preparer and Reserves Audit Reports
Currently, if the company represents that it relied on a third
party for a portion of its filing, it must obtain consent from that
third party.\124\ In order to clarify which portion of the disclosures
the third party is expertising, we propose that, if a company
represents that its estimates of reserves are based on estimates
prepared by a third party, the company must file a report of the third
party as an exhibit to the relevant registration statement or
report.\125\ The proposal would require that report to include the
following disclosure:
---------------------------------------------------------------------------
\124\ See 17 CFR 229.601(b)(23).
\125\ See proposed Item 1202(a)(7).
---------------------------------------------------------------------------
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;
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.
Similarly, if the company represents that a third party conducted a
reserves audit of the reserves estimates, the company would be required
to file a report of the third party as an exhibit to the relevant
registration statement or report. We are not proposing that these
reports be the full ``reserves report'' that is often very detailed and
voluminous. Rather these proposed reports would summarize the scope of
work performed by, and conclusions of, the third party. The proposed
contents of these reports mirror the guidance issued by the Society of
Petroleum Evaluation Engineers regarding the preparation of such
reports.
We propose 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 thoroughness of the reserves estimation process, the
classification of reserves appropriate to the relevant definitions
used, and the reasonableness of the estimated reserves quantities.\126\
The proposed definition would state that, 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 company's reserves covered by the reserves audit. This definition
is largely derived from the SPE's reserves auditing guidelines.\127\
---------------------------------------------------------------------------
\126\ See proposed Item 1202(a)(9).
\127\ Consistent with the SPE's auditing guidelines, we note
that a ``reserves audit'' is significantly different from a
financial audit. See SPE Reserves Auditing Standards.
---------------------------------------------------------------------------
We propose to require that the report associated with such a
reserves audit 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;
[[Page 39543]]
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;
A statement that the third party has used all methods and
procedures as it considered necessary under the circumstances to
prepare the report;
A brief summary of the third party's conclusions with
respect to the reserves estimates; and
The signature of the third party.
Request for Comment
Should we require a company to file reports from third
party reserves preparers and reserves auditors containing the proposed
disclosure when the company represents that a third party prepared its
reserves estimates or conducted a reserves audit? As an alternative,
should we not require that the third party's report be filed, but that
the company must provide a description of the third party's report? If
so, should we specify that the company's description of the third
party's report should contain the information that we propose to
require in the third party's report?
Should we specify the disclosures that need to be included
in third party reports? If so, is the disclosure that we have proposed
for the reserves estimate preparer's and reserves auditor's reports
appropriate? Should these reports contain more or less information? If
they should include more information, what other information should
they include? If less, what proposed information is not necessary?
In an audit, should we specify the minimum percentage of
reserves that should be examined and determined to be reasonable? If
so, what should that percentage be? Should it be 50%, 75%, 90% or some
other percentage? If so, why?
If the company engages multiple third parties to conduct
reserves audits on different portions of its reserves, should the
definition of reserves audit be conditioned on each third party
evaluating at least 80% of the reserves covered by its reserves audit,
as proposed? Is the scope of a reserves audit defined by geographic
areas? If so, should the definition of a reserves audit be based on the
third party's evaluation of 80% of the reserves located in the
geographic areas covered by the reserves audit?
Would disclosure that a company has hired a third party to
audit only a portion of its reserves be confusing to investors? Is
there a danger that investors will not be able to ascertain the extent
of the reserves audit? Should we require that a company could not
disclose that it has conducted a reserves audit unless 80% of all of
its reserves have been evaluated by a third party or, if the company
hires multiple third parties, by all of the third parties collectively?
Is the proposed definition of ``reserves audit''
appropriate? Should we revise this proposed definition in any way?
vii. Solicitation of Comments on Process Reviews
The Society of Petroleum Engineer's reserves auditing standards
reference a third type of review, which it calls a ``process review.''
\128\ It defines 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, it notes 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 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 an audit of reserves. We are not proposing requiring
disclosure of whether a company has conducted a process review, as
defined by the SPE. In so doing, we note the SPE's admonition that such
reviews are not as rigorous as a reserves audit. We are not proposing
to prohibit disclosure of such process reviews because we believe that
they may be beneficial to companies and shareholders. However, in order
to help prevent confusion between the different levels of third-party
participation, companies should clearly disclose the level and scope of
work that was performed. In addition, a company should avoid using
language which may lead investors to erroneously believe that a higher
level of third-party review was performed.
---------------------------------------------------------------------------
\128\ See SPE Reserves Auditing Standards.
---------------------------------------------------------------------------
Request for Comment
Should we require disclosure of whether a company has
conducted a process review? Notwithstanding the relative lack of rigor
of a process review compared to a reserves audit, would investors find
such information useful?
The proposal does not prohibit disclosure of process
reviews. Is there a danger that the public may be confused by such
disclosure? Should we prohibit disclosure of any type of reserves-
related activity other than the preparation of the reserves estimates
or a reserves audit?
4. Proposed Item 1203 (Proved Undeveloped Reserves)
We are proposing to require disclosure of the aging of proved
undeveloped reserves (PUDs). Some of the commenters responding to the
Concept Release expressed concerns regarding companies that carry
alleged PUDs for lengthy time periods.\129\ Long holding periods of
such reserves raise the question whether the company has a bona fide
intention or the capability to develop those reserves, even though the
company has determined them to be economically producible. Several
commenters recommended that we require a company to remove PUDs that
have remained so classified for five years or longer.\130\ PRMS
guidelines indicate that five years is a benchmark for a reasonable
timeframe to initiate the development of reserves, although they
recognize that this timeframe depends on the specific circumstances.
However, others suggested that a company should be able to characterize
PUDs as such for longer than a five-year period if there are
exceptional circumstances (such as extensive offshore projects) that
justify continued inclusion of such reserves in the proved
category.\131\
---------------------------------------------------------------------------
\129\ See letters from CIBC, Devon, EIA, D. McBride, Robinson,
D. Ryder, and SPE.
\130\ See letters from Devon, EIA, D. McBride, D. Olds, SPE, and
Ultra. This is consistent with PRMS guidance. See Section 2.1.3.2 of
PRMS.
\131\ See letters from Denbury, Devon, EIA, D. McBride, D. Olds,
Robinson, SPE, and StatoilHydro.
---------------------------------------------------------------------------
We propose to address these concerns through disclosure. We believe
that the need for such disclosure is heightened as a result of our
proposed amendments that would ease the requirements for recognizing
PUDs and thereby 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.
Proposed Item 1203 would require 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
[[Page 39544]]
Net investment required to convert proved undeveloped
reserves to proved developed reserves during the year.\132\
---------------------------------------------------------------------------
\132\ See proposed Item 1204.
---------------------------------------------------------------------------
A form of the proposed PUDs development table is set forth below:
Conversion of Proved Undeveloped Reserves
----------------------------------------------------------------------------------------------------------------
Proved undeveloped reserves converted to
proved developed reserves Investment in conversion of
Fiscal year ------------------------------------------------ proved undeveloped reserves to
Product A proved developed reserves ($)
Oil (mbbls) Gas (mmcf) (measure)
----------------------------------------------------------------------------------------------------------------
2004......................... ..............
2005......................... ..............
2006......................... ..............
2007......................... ..............
2008......................... ..............
----------------------------------------------------------------------------------------------------------------
This table would allow investors to assess how a company is
managing its PUDs. In addition, proposed Item 1203 would require
disclosure, by product type, of any PUDs which have remained
undeveloped for five years or more and the reasons for the lack of
development. The proposed item would also require a company to disclose
its plans to develop PUDs and to further develop proved oil and gas
reserves. Finally, the company would be required to discuss any
material changes to PUDs.
Request for Comment
Should we adopt the proposed table? Alternatively, should
we simply require companies to reclassify their PUDs after five years?
Should the table require disclosure of other categories of
changes to the status of PUDs, such as acquisitions, removals, and
production? Should we add any categories?
Some of the abuse related to PUD disclosure may be related
to companies' desire to show proved reserves in light of our
prohibition on disclosure of probable reserves. Would the proposed
rules permitting disclosure of probable reserves reduce the incentive
to categorize reserves as PUDs? If so, is the proposed table necessary?
Should we require disclosure of the reasons for
maintaining PUDs that have been classified as PUDs for more than five
years, as proposed? If not, why not?
Should we require a company to disclose its plans to
develop PUDs and to further develop proved oil and gas reserves, as
proposed? If not, why not?
Should we require the company to discuss any material
changes to PUDs that are disclosed in the table? If not, why not?
5. Proposed Item 1204 (Oil and gas production)
Item 3 of Industry Guide 2 currently requires disclosure, by
geographic area, of oil and gas production. We propose codifying that
requirement in proposed Item 1204 of Regulation S-K.\133\ In addition,
the proposed Item would require such disclosure to be made in tabular
form for ease of presentation. As a practical matter, it appears that
most companies already provide this disclosure in tabular form. A form
of the proposed table is set forth below:
---------------------------------------------------------------------------
\133\ See proposed Item 1204.
Oil and Gas Production, Sales Prices, and Production Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
Oil Gas Product A
--------------------------------------------------------------------------------------------------------------------
Location Production Production Sales price Production
Production Sales price cost ($US/ Production Sales price cost ($US/ Production ($US/ cost ($US/
(mbbls) ($US/bbl) boe) (mmcf) ($US/mcf) mcfe) (measure) measure) measure)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Geographic Area A.................. ........... ........... ........... ........... ........... ........... ........... ........... ...........
2005........................... ........... ........... ........... ........... ........... ........... ........... ........... ...........
2006........................... ........... ........... ........... ........... ........... ........... ........... ........... ...........
2007........................... ........... ........... ........... ........... ........... ........... ........... ........... ...........
Geographic Area B.................. ........... ........... ........... ........... ........... ........... ........... ........... ...........
Geographic Area C.................. ........... ........... ........... ........... ........... ........... ........... ........... ...........
--------------------------------------------------------------------------------------------------------------------------------------------------------
The disclosure that proposed Item 1204 would require is very
similar to the disclosure called for by existing Industry Guide 2, but
would be modified in two respects. First, proposed Item 1204 would use
the definition of the term ``geographic area'' in proposed Item
1201(d), rather than use the current reference to SFAS 69, which only
requires disclosure by country or, if appropriate, groups of
countries.\134\
---------------------------------------------------------------------------
\134\ See SFAS 69.
---------------------------------------------------------------------------
In addition, we propose to eliminate existing instructions to Item
3 of Industry Guide 2 that we believe are no longer necessary. These
instructions relate to the following topics:
Separate reporting of production through processing plant
ownership;
Inclusion of only marketable production of gas on an ``as
sold'' basis, including the exclusion of flared gas, injected gas, and
gas consumed in operations;
Determination of transfer price of oil and gas; and
Means to calculate average production costs.
We believe that these instructions are no longer necessary in light
of changes in the oil and gas industry and markets and relate to issues
that are commonly understood and do not require additional instruction.
Several of these instructions have very limited application.
[[Page 39545]]
Request for Comments
Should we adopt the proposed table?
Should the disclosure be made based on the proposed
definition of ``geographic area,'' or should we continue to follow the
definition set forth in SFAS 69?
Should we eliminate the instructions listed above, as
proposed? If not, which instructions should we retain? Please explain
why those instructions continue to be useful.
6. Proposed Item 1205 (Drilling and other exploratory and development
activities)
Item 6 of Industry Guide 2 currently calls for disclosure of
drilling activities by geographic area. We propose to codify this
disclosure as Item 1205 of Regulation S-K, in tabular form.\135\ A form
of the proposed table is set forth below:
---------------------------------------------------------------------------
\135\ See proposed Item 1205.
Drilling Activities
[Geographic area]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Exploratory wells Development wells Extension wells
----------------------------------------------------------------------------------------------------------------------
Gross Net Gross Net Gross Net
--------------------------------------------------------------------------------------------------------------------------------------------------------
Oil .................. .................. .................. .................. .................. .................
Fiscal Year.................. .................. .................. .................. .................. .................. .................
Fiscal Year-1................ .................. .................. .................. .................. .................. .................
Fiscal Year-2................ .................. .................. .................. .................. .................. .................
Natural Gas .................. .................. .................. .................. .................. .................
Fiscal Year.................. .................. .................. .................. .................. .................. .................
Fiscal Year-1................ .................. .................. .................. .................. .................. .................
Fiscal Year-2................ .................. .................. .................. .................. .................. .................
Product A .................. .................. .................. .................. .................. .................
Fiscal Year.................. .................. .................. .................. .................. .................. .................
Fiscal Year-1................ .................. .................. .................. .................. .................. .................
Fiscal Year-2................ .................. .................. .................. .................. .................. .................
Suspended .................. .................. .................. .................. .................. .................
Fiscal Year.................. .................. .................. .................. .................. .................. .................
Fiscal Year-1................ .................. .................. .................. .................. .................. .................
Fiscal Year-2................ .................. .................. .................. .................. .................. .................
Dry .................. .................. .................. .................. .................. .................
Fiscal Year.................. .................. .................. .................. .................. .................. .................
Fiscal Year-1................ .................. .................. .................. .................. .................. .................
Fiscal Year-2................ .................. .................. .................. .................. .................. .................
----------------------------------------------------------------------------------------------------------------------
Total.................... .................. .................. .................. .................. .................. .................
--------------------------------------------------------------------------------------------------------------------------------------------------------
We are also proposing several revisions to the existing
disclosures. First, the existing item calls for disclosure by
geographic area. We propose to clarify that, for purposes of this item,
disclosure should be made pursuant to the definition of ``geographic
area'' set forth in proposed Item 1201(d). Second, we propose to add
two categories of wells:
Extension wells and
Suspended wells.
Currently, Industry Guide 2 only calls for disclosure of the drilling
of exploratory and development wells. However, we believe that
distinguishing between extension well drilling and exploratory drilling
is important because exploratory drilling typically is associated with
the discovery of new fields, and thus new sources of oil and gas,
rather than merely the extension of an existing field. Thus, we believe
that disclosure of extension wells should be distinct from disclosure
about exploratory wells.
Similarly, companies sometimes suspend drilling of a well before
completion. Because the definition of a dry well requires that the
company report the well as abandoned, these suspended drilling projects
are not reflected as drilling activities under the current disclosure
requirements. Although suspension of drilling does not necessarily mean
that the company has abandoned the well, such activities can consume
significant capital resources. Thus, we propose to include this
category of drilling activity in the disclosure item.
Proposed new Item 1205 would also require disclosure of any other
exploratory or development activities that the company has conducted
over the prior three years, including implementation of mining methods
for the extraction of oil or gas. We recognize that resources in
continuous accumulations often require extraction methods that differ
significantly from the extraction methods used in connection with
traditional oil or gas wells. This proposed new disclosure would
provide investors with information about an oil and gas company's full
spectrum of exploratory and development activities.
Request for Comment
Should we adopt the proposed table? Should the disclosures
be made based on the definition of ``geographic area'' in proposed Item
1201(d)?
Should we require separate disclosure about the two new
proposed categories of wells-extension wells and suspended wells? Does
distinguishing these types of wells from exploratory wells and dry
wells provide enough clarity regarding the types of exploratory or
development activities?
7. Proposed Item 1206 (Present activities)
Proposed Item 1206 would codify 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
[[Page 39546]]
(including wells temporarily suspended), waterfloods in process of
being installed, pressure maintenance operations, and any other related
activities of material importance.\136\ We are proposing no substantive
changes to the existing disclosure item except clarification that the
meaning of the term ``geographical area'' would be based on the
proposed definition of that term in proposed Item 1201(d).\137\
---------------------------------------------------------------------------
\136\ See proposed Item 1206.
\137\ See proposed Item 1206(a).
---------------------------------------------------------------------------
Request for Comment
Should the disclosure of present activities be made based
on the definition of ``geographic area'' in proposed Item 1201(d)?
Should we adopt any other changes to the disclosures
currently set forth in existing Item 7 of Industry Guide 2 that we
propose to codify in Item 1206?
8. Proposed Item 1207 (Delivery Commitments)
Proposed Item 1207 would codify 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.\138\ We are not proposing any
substantive changes to the disclosure currently called for by Item 8.
However, we are proposing a significant amount of restructuring and
rewording of the disclosure item to make it easier to understand. These
proposed changes largely involve separating embedded lists into
separate subparagraphs and general plain English revisions but are not
intended to change the substance of the disclosures.
---------------------------------------------------------------------------
\138\ See proposed Item 1207.
---------------------------------------------------------------------------
Request for Comment
Are the proposed revisions appropriate? Do the proposed
revisions make any unintended substantive changes to the existing
disclosures?
Should we adopt any substantive changes to the disclosures
currently set forth in Item 8 of Industry Guide 2 that we propose to
codify in Item 1207?
Is this disclosure requirement still necessary? Do oil and
gas companies still enter into such delivery commitments? Are they
material?
9. Proposed Item 1208 (Oil and gas properties, wells, operations, and
acreage)
Proposed Item 1208 would codify existing Items 4 and 5 of Industry
Guide 2. The proposed item also would require new disclosures not
currently called for by Industry Guide 2 that are described below.
i. Enhanced Description of Properties Disclosure Requirement
Item 102 of Regulation S-K provides a very broad, general
description of the properties and facilities that a company must
disclose in its filings. We propose to add a paragraph to Item 1208
that better illustrates the types of properties and the types of
disclosures for those properties that apply to oil and gas
companies.\139\ The proposed paragraph would require a company to do
the following:
---------------------------------------------------------------------------
\139\ See proposed Item 1208(a).
---------------------------------------------------------------------------
Identify and describe generally its material properties,
plants, facilities, and installations;
Identify the geographic area in which they are located;
Indicate whether they are located onshore or offshore; and
Describe any statutory or other mandatory relinquishments,
surrenders, back-ins, or changes in ownership.
Request for Comment
Are the proposed disclosure enhancements regarding oil and
gas properties appropriate? Would this enhanced disclosure be helpful
to investors?
Should the disclosures be made based on the definition of
``geographic area'' in proposed Item 1201(d)?
Do we need to define any of the terms in the proposed
language?
ii. Wells and Acreage
Proposed Item 1208 would require separate tabular disclosure of the
number of the registrant's producing wells, expressed in terms of both
gross wells and net wells, by geographic area.\140\ These disclosures
are currently called for by Items 4 and 5 of Industry Guide 2. This
proposed table would illustrate oil wells and gas wells in both
conventional and continuous accumulations and other wells for products
from continuous accumulations. A form of the proposed table is set
forth below:
---------------------------------------------------------------------------
\140\ See proposed Item 1208(b) and (c).
Wells
------------------------------------------------------------------------
Producing wells
Location ------------------------------------
Gross Net
------------------------------------------------------------------------
Geographic Area A: ................. ................
Oil Wells...................... ................. ................
Natural Gas Wells.............. ................. ................
Product A Wells................ ................. ................
------------------------------------
Total...................... ................. ................
========================================================================
Geographic Area B:
Oil Wells...................... ................. ................
Natural Gas Wells.............. ................. ................
Product A Wells................ ................. ................
------------------------------------
Total...................... ................. ................
------------------------------------------------------------------------
Similarly, it would require tabular disclosure, by geographic area,
of the company's total gross and net developed acres (that is, acres
spaced or assignable to productive wells) and undeveloped acres,
including leases and concessions.\141\ A form of the proposed table is
set forth below:
---------------------------------------------------------------------------
\141\ See proposed Item 1208(e) and (f).
Acreage
----------------------------------------------------------------------------------------------------------------
Developed acres Undeveloped acres
------------------------------------------------------------------------------
Gross Net Gross Net
----------------------------------------------------------------------------------------------------------------
Geographic Area A................ .................. .................. .................. .................
Geographic Area B................ .................. .................. .................. .................
Geographic Area C................ .................. .................. .................. .................
------------------------------------------------------------------------------
Total.................... .................. .................. .................. .................
----------------------------------------------------------------------------------------------------------------
[[Page 39547]]
Request for Comment
Is the proposed table appropriate? Is there a better way
to disclose such information?
Should the disclosures be made based on the definition of
``geographic area'' in proposed Item 1201(d)?
Is it necessary to disclose wells and acreage in
conventional accumulations separate from wells and acreage in
continuous accumulations, as proposed?
Is this disclosure requirement still necessary? Is
disclosure of the number of wells and acreage material? Should we
require the disclosures related to wells and acreage only if there is a
high concentration of production or reserves attributable to a few
wells or limited acreage? If so, should we specify what that
concentration would be?
iii. New Proposed Disclosures Regarding Extraction Techniques and
Acreage
As noted previously, some oil and gas resources require extraction
techniques other than traditional oil and gas wells. Because we are
adding non-traditional resources, such as bitumen, to the definition of
oil and gas producing activities, we believe that it is appropriate for
companies to describe the techniques that the company is using to
extract the resources if it is not using a well. Thus, we are proposing
to add a new requirement for companies extracting hydrocarbons through
means other than wells to provide a discussion of such operations.\142\
This disclosure requirement has been drafted broadly to allow for
unanticipated developments in extraction technologies.
---------------------------------------------------------------------------
\142\ See proposed Item 1208(d).
---------------------------------------------------------------------------
Proposed Item 1208 also would require a company to disclose, for
unproved properties:
The existence, nature (including any bonding
requirements), timing, and cost (specified or estimated) of any work
commitments; and
By geographic area, the net area of unproved property for
which the registrant expects its rights to explore, develop, and
exploit to expire within one year.\143\
---------------------------------------------------------------------------
\143\ See proposed Item 1208(g).
---------------------------------------------------------------------------
Finally, the proposed Item would continue to require disclosure of
areas of acreage concentration, and, if material, the minimum remaining
terms of leases and concessions.\144\
---------------------------------------------------------------------------
\144\ See proposed Item 1208(h).
Request for Comment
Should we require more specific disclosure regarding
extraction activities that do not involve wells? Should this proposed
item remain open-ended to permit description of unanticipated
technologies?
Is the proposed disclosure for unproved properties
appropriate? Should the proposed disclosure for unproved properties be
set forth in proposed Item 1208? Should we move such disclosure to the
reserves table in proposed Item 1202, where reserves are discussed?
10. Proposed Item 1209 (Discussion and Analysis for Registrants Engaged
in Oil and Gas Activities)
We propose to add new Item 1209, which would provide topics that a
company should address either as part of Management's Discussion and
Analysis of Financial Condition and Results of Operations (MD&A) \145\
or in a separate section. First, the proposed Item would require
companies to discuss material 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:
---------------------------------------------------------------------------
\145\ See 17 CFR 229.303.
---------------------------------------------------------------------------
Changes in prices;
Technical revisions; and
Changes in the status of any concessions held (such as
terminations, renewals, or changes in provisions).
We note that SFAS 69 currently requires reconciliation of changes to
reserves estimates. This proposal is intended to supplement the SFAS 69
disclosure because SFAS 69 currently does not provide for these
categories of changes. We believe such disclosure would be helpful
because developments in the oil and gas industry and markets, including
more liquid commodities markets and expansion of interests in foreign
countries involving concessions, have made distinguishing changes
resulting from these factors more important.
The proposed Item also would require companies to discuss
technologies used to establish the appropriate level of certainty for
any material additions to, or increases in, reserves estimates.
Finally, the proposed Item would list matters that a company should
consider in discussing known trends, demands, commitments,
uncertainties, and events that are reasonably likely to have a material
effect on the company. These matters include, but are not limited to,
the following:
Prices and costs;
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 registrant'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;
Anticipated capital expenditures directed toward
conversion of proved undeveloped reserves to proved developed reserves,
and, if disclosed, probable reserves to proved reserves and possible
reserves to probable or proved reserves;
Anticipated exploratory activities, well drilling, and
production;
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; and
Potential effects of different forms of rights to
resources, such as production sharing contracts, on operations.
The MD&A is typically presented in a self-contained section of the
registration statement or report. However, the disclosure requirements
that would comprise proposed new Subpart 1200 of Regulation S-K would
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 would be able to include that discussion or analysis with
the relevant table, with appropriate cross-references, rather than
including it in its general MD&A section.\146\
---------------------------------------------------------------------------
\146\ See proposed Item 1209(b).
---------------------------------------------------------------------------
Request for Comment
Proposed Item 1209 is not intended to increase a company's
disclosure requirements, but specify disclosures already required
generally by MD&A. Is such an item helpful?
Are the proposed topics that an oil and gas company should
consider discussing as part of MD&A, whether in the main MD&A section
or in conjunction with the relevant table,
[[Page 39548]]
appropriate? Are there other topics that an oil and gas company should
consider discussing?
Should we permit such discussions in conjunction with the
relevant table as proposed? Would this aid comparability of the
disclosures? Or should we keep MD&A as a self-contained section?
IV. Proposed 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.\147\ Appendix A is significantly shorter, and provides far
less guidance regarding disclosures, than proposed Subpart 1200 or
Industry Guide 2.
---------------------------------------------------------------------------
\147\ See Appendix A to Item 4.D--Oil and Gas of Form 20-F [17
CFR 249.220f].
---------------------------------------------------------------------------
We believe that the proposed 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 proposing to revise 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.\148\ We propose to revise
the Instructions to Item 4 of Form 20-F to refer to Subpart 1200
instead of Appendix A.\149\
---------------------------------------------------------------------------
\148\ We are not proposing changes to Form 40-F, which is the
form on which Canadian companies reporting under the multi-
jurisdictional disclosure system file Exchange Act registration
statements and annual reports with the Commission, because the
disclosures regarding oil and gas activities for those companies are
not currently governed by our rules.
\149\ See proposed Instruction 2 to Item 4.
---------------------------------------------------------------------------
Thus, the proposal would continue to require the same type of
disclosure currently required by Appendix A regarding reserves and
production. In addition, the proposal would require foreign private
issuers to comply with the following disclosures currently in Industry
Guide 2 that we propose to codify in Subpart 1200 of Regulation S-K:
Drilling and other exploratory and development activities
(Item 1205);
Present activities (Item 1206);
Delivery commitments (Item 1207); and
Oil and gas properties, wells, operations, and acreage
(Item 1208).
Finally, applying the proposed Subpart 1200 on foreign private
issuers would impose the completely new disclosures that we are
proposing for domestic companies in this release, including the
following:
Reserves from non-traditional sources (i.e., bitumen,
shale, coalbed methane);
Optional disclosure of probable and possible reserves;
Optional disclosure of oil and gas reserves' sensitivity
to price;
Proved undeveloped reserves held for five years or more
and an explanation of why they should continue to be considered proved;
Technologies used to establish additions to reserves
estimates;
Material changes due to technology, prices, and concession
conditions;
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;
The qualifications and measures taken to ensure the
independence and objectivity of any employee primarily responsible for
preparing or auditing the reserves estimates; and
Filing of the report of a third party if a company
represents that it is relying on a third party to prepare the reserves
estimates or conduct a reserves audit.
Appendix A currently allows a foreign private issuer to exclude
required disclosures about reserves and agreements if its home country
prohibits the disclosures. Because these considerations still apply to
such foreign private issuers, we propose to move that provision from
Appendix A, which we propose to delete, to the Instructions to Item 4
of Form 20-F.\150\
---------------------------------------------------------------------------
\150\ Id.
---------------------------------------------------------------------------
Also, similar to our revisions to Item 102 of Regulation S-K, we
propose to limit the Instruction to Item 4.D of Form 20-F to extractive
enterprises conducting activities other than oil and gas producing
activities because Subpart 1200 would cover companies conducting oil
and gas producing activities.\151\
---------------------------------------------------------------------------
\151\ See proposed Instruction 4.D of Form 20-F.
---------------------------------------------------------------------------
Request for Comment
Should we delete Appendix A and refer to Subpart 1200 with
respect to Form 20-F, as proposed? Why? Should we expand the
requirements of Form 20-F to require more disclosure than currently
required by Appendix A, as proposed? Conversely, should we only update
Appendix A to reflect the proposed new definitions and formats for
disclosing reserves and production?
Would the proposed reference to Subpart 1200 in Form 20-F
significantly change the information currently disclosed by foreign
private issuers? If so how? Would such a change be appropriate?
Is the proposed exception for foreign laws that prohibit
disclosure about reserves and agreements appropriate? Do such laws
affect domestic companies as well? Should Subpart 1200 have a general
instruction with respect to such foreign laws?
Are the proposed revisions to Instructions to Item 4.D
appropriate with respect to foreign private issuers that have
extractive activities other than oil and gas producing activities?
V. Impact of Proposed Amendments on Accounting Literature
A. Consistency With FASB and IASB Rules
Several commenters noted that changing the definition of the term
``proved reserves'' in Rule 4-10(a) of Regulation S-X would affect both
the full cost accounting treatment of Rule 4-10(c) and the successful
efforts accounting treatment of Statement of Financial Accounting
Standard No. 19 (SFAS 19).\152\ One commenter suggested the Commission
consider the impact on the required immediate expensing of seismic
tests under SFAS 19.\153\ In addition, a revised definition could
affect the primary inputs to the standardized measure, such as static
operating conditions, year-end prices and costs and the 10% discount
rate, which would affect the full cost ceiling under the full cost
accounting treatment.\154\ These changes could also affect how costs
are expensed.\155\ Companies should clearly explain the changes in
their filings.\156\ Commenters recommended that the Commission
coordinate corresponding rule changes with the FASB and IASB to ensure
[[Page 39549]]
consistency of the rules.\157\ Some commenters remarked that the IASB
is currently considering establishing a set of guidelines for oil and
gas extractive activities, including a definition of oil and gas
reserves, and recommended that the Commission align its regulations
with those guidelines. We intend to discuss our rulemaking project with
the FASB and IASB and work with them to harmonize the rules upon
effectiveness of the proposed rules, if adopted.
---------------------------------------------------------------------------
\152\ See letters from D&T, Grant Thornton, and KPMG.
\153\ See letter from Audit Quality.
\154\ See letters from Audit Quality, KPMG, and PWC.
\155\ See letter from KPMG.
\156\ Id.
\157\ See letters from Audit Quality, CFA, KPMG, and PWC.
---------------------------------------------------------------------------
B. Change in Accounting Principle or Estimate
One commenter noted that the proposals would raise the question of
whether a change in the definition of proved reserves is a change in
accounting principle (which requires retroactive revision of past
years) or a change in an estimate caused by a change in accounting
principle under SFAS 154.\158\ The proposed change in the definition of
proved reserves and the change from using single-day year-end price to
an average price should be viewed as a change in accounting 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.
---------------------------------------------------------------------------
\158\ See letter from Audit Quality.
---------------------------------------------------------------------------
Request for Comment
Are the proposed changes more properly characterized as a
change in accounting principle or a change in estimate under SFAS 154?
Would it be appropriate to consider the changes as a
change in accounting principle, but specify that no retroactive
revision of past years would be required?
If we required retroactive revision of past years, would
companies have the historical engineering and scientific data to make
such revisions? If not, are there alternatives to retroactive revision
that we should consider?
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 would be considered oil and gas producing activities, and not
mining activities, if we adopt the proposals. 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 proposed rules, bitumen
extraction and operations that produce oil or gas through mining
methods would be included under oil and gas accounting rules, which
only permit capitalization of costs associated with proved
reserves.\159\ 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, if adopted.
---------------------------------------------------------------------------
\159\ See Rule 4-10(c) of Regulation S-X [17 CFR 210.4-10(c)].
---------------------------------------------------------------------------
Request for Comment
How should we address these inconsistencies between oil
and gas accounting rules and mining accounting rules?
Should we permit companies that extract, through mining
methods, materials from which oil and gas can be produced to continue
to capitalize costs under mining rules, or should we require them to
capitalize costs based on oil and gas rules? Are there circumstances
involved with mining operations, different from oil and gas operations,
that justify capitalization of costs of proved plus probable reserves,
as opposed to only costs of proved reserves?
D. Price Used To Determine Proved Reserves for Purposes of Capitalizing
Costs
Statement of Financial Accounting Standard No. 19 ``Financial
Accounting and Reporting by Oil and Gas Producing Companies'' (SFAS 19)
requires the units-of-production method to be used for amortizing
acquisition costs of proved properties and development costs. As noted
above, we are not proposing to change the use of the period end price
assumption when determining reserves for accounting purposes. Changes
in the definition of reserves and the price used to determine whether
resources are reserves (i.e., whether they are economically producible)
would impact the determination of the quantity of reserves, and
therefore would impact the amount of amortization expense that is
recorded in the income statement. It is expected that, for most
companies, based on the relationship between the amount of proved
reserves and the production in a given period, the impact of such a
change on the financial statements would not be significant and would
not have a significant impact on comparability between periods.
Request for Comment
Would the effect of such changes be material or have a
material effect on historical amortization levels?
Would the effect of such changes be material or have a
material effect on comparability? Please provide any empirical evidence
to support your conclusion.
Would it be appropriate to continue to require the use of
the year-end price for purposes of determining reserves for purposes of
amortization expense while using a different price for purposes of
disclosing reserves estimates in Commission filings? This would result
in a different value associated with the use of the term ``proved
reserves'' for purposes of disclosure, as opposed to the use of that
term for purposes of accounting. Would this be confusing? Should we use
a different term? Should we otherwise clarify the two different
meanings of that term in different contexts?
VI. Impact of the Proposed Codification of Industry Guide 2 on Other
Industry Guides
There currently are six Securities Act Industry Guides:
Guide 2--Disclosure of oil and gas operations;
Guide 3--Statistical disclosure by bank holding companies;
Guide 4--Prospectuses relating to interests in oil and gas
programs;
Guide 5--Preparation of registration statements relating
to interests in real estate limited partnerships;
Guide 6--Disclosures concerning unpaid claims and claim
adjustment expenses of property-casualty insurance underwriters; and
Guide 7--Description of property by issuers engaged, or to
be engaged, in significant mining operations.
There also are four Exchange Act Industry Guides:
Guide 2--Disclosure of oil and gas operations;
Guide 3--Statistical disclosure by bank holding companies;
Guide 4--Disclosures concerning unpaid claims and claim
adjustment expenses of property-casualty underwriters; and
Guide 7--Description of property by issuers engaged, or to
be engaged, in significant mining operations.
As discussed above, the specific disclosures that relate to oil and
gas operations currently are set forth in both Securities Act and
Exchange Act
[[Page 39550]]
Industry Guide 2, as well as Securities Act Industry Guide 4. The
codification of the Industry Guide 2 disclosures that we are proposing
in this release should not have any impact on the manner in which the
other Industry Guides are applied to company disclosures. Those guides
will remain in effect in their current form and companies in the
industries to which the guides relate will continue to include
disclosure in response to the guides in their Securities Act and
Exchange Act filings. In the future, the staff plans to review and
update each of the Industry Guides; as part of the initiative to update
a particular guide, we would propose to codify it as a new subpart of
Regulation S-K.
Request for Comment
Is it appropriate to codify Industry Guide 2 separately
from the other industry guides? Should we merely amend Industry Guide 2
and codify it with all of the other industry guides when they have been
updated?
Would the codification of Industry Guide 2 overrule or
otherwise affect any of the disclosures required in the other Industry
Guides?
VII. Solicitation of Comment Regarding the Application of Interactive
Data Format to Oil and Gas Disclosures
Many oil and gas companies already present much of their oil and
gas disclosure in tabular form. In this release, we propose to require
that disclosure in tabular form. Such tabular disclosure appears to be
conducive to presentation in an interactive data format that uses a
standard list of electronic tags that a variety of software
applications can recognize and process. We recently proposed to require
that financial statement information be presented in interactive data
format in addition to the currently required format.\160\ We seek
comment on the desirability of rules that would permit, or require, oil
and gas companies to present the tabular disclosures in proposed
Subpart 1200 in interactive data format in addition to the currently
required format. We note that at this time, there is no well-developed
standard list of electronic tags for the tabular disclosure proposed in
this release.
---------------------------------------------------------------------------
\160\ See Release No. 33-8924 (May 30, 2008) [73 FR 32794].
---------------------------------------------------------------------------
Request for Comment
Should we adopt rules that require oil and gas disclosures
to be provided in interactive data format? Instead of requiring such
formatting, should we only permit the filing of oil and gas disclosures
in interactive data format? What are the principal factors that we
should consider in making these decisions?
If we require oil and gas disclosures to be filed in
interactive data format, should we provide for a voluntary phase-in
period to create a well-developed standard list of electronic tags?
Without a requirement, would the development of products for using
interactive data meet the needs of investors, analysts, and others who
seek to use interactive data? Would a large percentage of oil and gas
companies provide interactive data voluntarily and follow the same
standard, if not required to do so?
Would investors, analysts, and others find presentation of
oil and gas disclosures helpful if presented in interactive data
format? In what ways would such users of the information find such a
format beneficial?
As we note above, there is not currently a well-developed
standard list of electronic tags for the oil and gas disclosures. Are
there any obstacles to creating a useful standard list of electronic
tags for the oil and gas disclosures? Is the type of data presented in
the proposed table conducive to interactive data format? Would it be
particularly difficult to create standard electronic tags for any of
the proposed data? Would there be any obstacles to providing comparable
data in interactive format?
Would it be useful for the data in the proposed tables to
interact with other data in Commission filings? If so, which data?
If we adopt rules requiring oil and gas disclosures in
interactive data format, should we require the use of the eXtensible
Business Reporting Language (XBRL) standard? Are any other standards
becoming more widely used or otherwise superior to XBRL? What would the
advantages of any such other standards be over XBRL?
VIII. Proposed Implementation Date
We propose to require companies to begin complying with the
proposed disclosure requirements, if adopted, 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 December 31, 2009, and
after. We believe that this time period would be appropriate to enable
companies to familiarize themselves with the new rules. We would
require that all companies begin complying with the disclosure
requirements at the same time to maximize comparability of disclosure.
Therefore, we would not permit early adoption of the proposed
disclosure requirements.
Request for Comment
Should we provide a delayed compliance date, as proposed
above? If so, is the proposed date appropriate? Should we provide more
or less time for companies to familiarize themselves with the proposed
amendments?
If we provide a delayed compliance date, should we permit
early adoption by companies?
IX. General Request for Comment
We request and encourage any interested person to submit comments
regarding:
The proposed rule changes and additions that are the
subject of this release;
Additional or different changes; or
Other matters that may have an effect on the proposals
contained in this release.
We request comment from the point of view of registrants,
investors, and other users of information about the disclosures that
should be required with regard to oil and gas companies and the
corresponding definitions of terms used in those disclosure
requirements.
X. Paperwork Reduction Act
A. Background
The proposed rules and amendments contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995.\161\ We are submitting these to the Office of
Management and Budget for review and approval in accordance with the
Paperwork Reduction Act.\162\ The titles for this information are:
---------------------------------------------------------------------------
\161\ 44 U.S.C. 3501 et seq.
\162\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------
(1) ``Regulation S-K'' (OMB Control No. 3235-0071); \163\
---------------------------------------------------------------------------
\163\ 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);
(4) ``Form S-1'' (OMB Control No. 3235-0065);
(5) ``Form S-4'' (OMB Control Number 3235-0324);
(6) ``Form F-1'' (OMB Control Number 3235-0258);
(7) ``Form F-4'' (OMB Control Number 3235-0325);
(8) ``Form 10'' (OMB Control No. 3235-0064);
[[Page 39551]]
(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 \164\ 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.
---------------------------------------------------------------------------
\164\ The pertinent annual reports are those on Forms 10-K and
20-F.
---------------------------------------------------------------------------
Our proposed 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 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 measure taken
to assure the independence and objectivity of any employee primarily
responsible for preparing or auditing the reserves estimates. The
proposals also are intended to codify, modernize, and centralize the
disclosure items for oil and gas companies into Regulation S-K.
Finally, the proposals are intended to harmonize oil and gas
disclosures by foreign private issuers with disclosures by domestic
companies. Overall, the proposed 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.
Much, but not all, of the information collection requirements
related to annual reports and registration statements would be
mandatory. 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.
B. Summary of Information Collections
The proposals would increase existing disclosure burdens for annual
reports on Forms 10-K \165\ and 20-F and registration statements on
Forms 10, 20-F, S-1, S-4, F-1, and F-4 by creating the following new
disclosure requirements, many of which were requested by industry
participants:
---------------------------------------------------------------------------
\165\ The proposed 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 in the Rule 14a-3(b) annual report to security
holders to satisfy the disclosure requirements of Form 10-K. The
analysis that follows assumes that companies would either provide
the proposed disclosure in a Form 10-K only, if the company is not
subject to the proxy rules, or would incorporate the required
disclosure into the Form 10-K by reference to the Rule 14a-3(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 the Form
10-K and in Regulation 14A or 14C.
---------------------------------------------------------------------------
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 development of proved undeveloped
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 additions to
reserves estimates;
Disclosure regarding material changes due to technology,
prices, and concession conditions;
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;
The qualifications and measures taken to assure the
independence and objectivity of any employee primarily responsible for
preparing or auditing the reserves estimates;
If a company represents that it is relying on a third
party to prepare the reserves estimates or conduct a reserves audit,
filing a report prepared by the third party; and
Disclosure based on a new definition of the term ``by
geographic area.''
In addition, the amendments would 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, the proposal would require foreign private
issuers to disclose the information required by proposed Items 1205
through 1208 of Regulation S-K regarding drilling activities, present
activities, delivery commitments, wells, and acreage, which they are
not required to provide currently under Appendix A to Form 20-F. These
proposed disclosure items present the substantive disclosures currently
called for by Items 4 through 8 of Industry Guide 2, but are not
included specifically in Appendix A to Form 20-F, although much of this
disclosure may be included in the more general discussions of business
and property on that form.
C. Paperwork Reduction Act Burden Estimates
For purposes of the Paperwork Reduction Act, we estimate 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.\166\ These estimates include the time and the cost of
preparing and reviewing disclosure, filing documents, and retaining
records. Our methodologies for deriving the above estimates are
discussed below.
---------------------------------------------------------------------------
\166\ 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.
---------------------------------------------------------------------------
Our estimates represent 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 information called for by the new proposed 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 proposed
disclosures include:
[[Page 39552]]
Information on the company's development of proved
undeveloped reserves;
Technologies that the company used to establish additions
to reserves estimates;
Material changes to reserves estimates due to technology,
prices, and concession conditions;
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;
The qualifications and measures taken to assure the
independence and objectivity of any employee primarily responsible for
preparing or auditing the reserves estimates;
The report of a third party preparer or reserves auditor,
if one is used;
Disclosure of reserves by geographic area; and
Optional disclosure of probable and possible reserves and
a sensitivity analysis.
We estimate that, on average, companies will incur a burden of 35 hours
to prepare these disclosures in an annual report or registration
statement.
The proposed amendments would not require, or request, companies to
disclose probable and possible reserves. Rather, the proposed rules
only would remove the current prohibition on companies from disclosing
this information in their filings with the Commission. As we have
noted, many companies already disclose this information on their Web
sites. Similarly, commenters on the Concept Release noted that many
companies already use such estimates in their business decisions. Our
rules also do not dictate how companies generate estimates for probable
and possible reserves. Thus, we have not included an estimate of the
burden and cost of preparing probable and possible reserves estimates
in this PRA analysis, but we have included the burden and cost of
disclosing such information.
The proposed amendments would 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, would 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. We estimate that this burden
would be 20 hours per foreign private issuer.
The proposed amendments would include reserves from non-traditional
sources (e.g., bitumen and oil shale) as oil and gas reserves. Such
reserves currently are required to be disclosed as reserves related to
mining operations. Although there are differences in the way such
reserves may be calculated, such as different levels of certainty, the
processes involved in estimating such reserves do not differ
significantly. We believe that there would be no change in the relative
burden for estimating these reserves under the oil and gas rules, as
opposed to the mining rules.
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 cost of $400 per hour.\167\ 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 changes to the PRA estimates:
---------------------------------------------------------------------------
\167\ 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.
\168\ The burden estimates for Form 10-K assume that the
proposed 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.
Table 1.--Calculation of Incremental Paperwork Reduction Act Burden Estimates for Exchange Act Periodic Reports
--------------------------------------------------------------------------------------------------------------------------------------------------------
$400
Form Annual Incremental Incremental 75% Issuer 25% Professional
responses hours/form burden Professional cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
(A) (B) (C) = (A)*(B) (D) = (C)*0.75 (E) = (C)*0.25 (F) = (E)*$300
--------------------------------------------------------------------------------------------------------------------------------------------------------
10-K\168\............................................... 206 35 7,210 5,408 1,803 721,000
20-F.................................................... 35 55 1,925 1,444 481 192,500
-----------------------------------------------------------------------------------------------
Total............................................... 241 .............. 9,135 6,851 2,284 913,500
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table 2.--Calculation of Incremental Paperwork Reduction Act Burden Estimates for Securities Act Registration Statements and Exchange Act Registration
Statements
--------------------------------------------------------------------------------------------------------------------------------------------------------
$400
Form Annual Incremental Incremental 25% Issuer 75% Professional
responses hours/form burden Professional cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
(A) (B) (C) = (A)*(B) (D) = (C)*0.25 (E) = (C)*0.75 (F) = (E)*$300
--------------------------------------------------------------------------------------------------------------------------------------------------------
10...................................................... 5 35 175 44 131 52,500
20-F.................................................... 2 55 110 28 83 33,000
S-1..................................................... 38 35 1,330 333 998 399,000
S-4..................................................... 17 35 595 149 446 178,500
F-1..................................................... 2 55 110 28 83 33,000
F-4..................................................... 3 55 165 41 124 49,500
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Total............................................... 67 .............. 2,485 621 1864 745,500
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[[Page 39553]]
D. Request for Comment
We request comment in order to evaluate the accuracy of our
estimate of the burden of the collections of information. Any member of
the public may direct to us 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 20549-1110. 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 proposing revisions to the oil and gas reserves disclosure
requirements 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 proposed revisions are intended to modernize and update the
Commission's oil and gas disclosure requirements because modern
technologies enables better estimates, and therefore more helpful
disclosure to investors. The oil and gas industry has experienced
significant changes since the Commission initially adopted its current
rules and disclosure requirements between 1978 and 1982, including
advancements in technology and changes in the types of projects in
which oil and gas companies invest. The proposed revisions also are
intended to provide investors with 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. Description of Proposal
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. Although the
Industry Guide itself does not appear in Regulation S-K or in the Code
of Federal Regulations, it is referenced in an instruction to Item 102
of Regulation S-K (Description of Property) and also is included in the
listing of Industry Guides in Items 801 and 802 of Regulation S-K.
Generally, the proposal would codify the existing disclosures of
Industry Guide 2 into a new Subpart 1200 of Regulation S-K, while at
the same time updating such disclosures, clarifying the level of detail
required to be disclosed, and requiring disclosure in a tabular
presentation. The proposed changes would accomplish the following:
Disclosure of reserves from non-traditional sources (e.g.,
bitumen and oil 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 five years or more and an
explanation of why they should continue to be considered proved;
Disclosure of technologies used to establish additions to
reserves estimates;
Disclosure regarding material changes due to technology,
prices, and concession conditions;
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;
The qualifications and measures taken to assure the
independence and objectivity of any employee primarily responsible for
preparing or auditing the reserves estimates;
If a company represents that it is relying on a third
party to prepare the reserves estimates or conduct a reserves audit,
filing a report prepared by the third party; and
Disclosure based on a new definition of the term ``by
geographic area.''
The proposal also would make revisions and additions to the
definitions section of Rule 4-10 of Regulation S-X. These revisions
would update and extend reserves definitions to reflect changes in the
oil and gas industry and new technologies. The revisions are intended
to address perceived inadequacies in existing definitions while
maintaining standards of clarity and comparability that provide
protection and transparency to investors. In particular, the proposal
would:
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, widely accepted technologies to establish proved reserves;
Define probable and possible reserves estimates; and
Add definitions to explain new terms used in the revised
definitions.
In addition, the amendments would 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, the proposal would require foreign private
issuers to disclose the information required by proposed Items 1205
through 1208 regarding drilling activities, present activities,
delivery commitments, wells, and acreage, which they are not required
to provide currently under Appendix A to Form 20-F. These proposed
disclosure items present the substantive disclosures currently called
for by Items 4 through 8 of Industry Guide 2, but are not included
specifically in Appendix A to Form 20-F, although much of this
disclosure may be included in the more general discussions of business
and property on that form.
C. Benefits
We expect that the proposed rules would increase transparency in
disclosure by oil and gas companies by providing improved reporting
standards. The proposed 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 proposed 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 proposals to
improve disclosure by aligning the required
[[Page 39554]]
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 proposals would permit them to make such
disclosures more accessible to investors. Disclosure of these
categories of reserves beyond proved reserves may foster better company
valuations by investors, creditors, and analysts, thus improving
capital allocation and reducing investment risk. Because some of the
proposed disclosure requirements are optional, the amount of increased
transparency will depend on the extent to which companies elect to
provide the additional disclosure afforded by the proposal. 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. We expect that replacing the Industry Guide with new
Regulation S-K items would provide greater certainty because the
disclosure requirements would be in rules established by the
Commission.
By permitting increased disclosure, the proposal provides 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 proposal
would 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 would increase market transparency, provide investors
with more reserves information, and allow for more accurate production
forecasts. By correlating deterministic criteria to comparable
probabilistic thresholds for establishing a given level of certainty,
the proposed rules should result in increased standardization in
reporting practices which would promote comparability of reserves
across companies. The proposal would define the term ``reliable
technology'' to 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 proposed definition is
designed to encompass new technologies as they are developed in the
future and become widely accepted, thereby providing investors and the
market with a more comprehensive understanding of a company's estimated
reserves.
1. Average Price
The proposal to change the price used to calculate reserves from a
year-end single-day price to an historical average price over the
company's most recently ended fiscal year is expected to reduce the
effects of seasonality and facilitate comparability between companies.
Many of the commenters to the Concept Release supported the use of an
historical price, even though this approach is less useful with respect
to a company's future prospects 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 recognize that some reserves will be of more value than others due
to extraction and transportation costs. As a result, since our proposal
would require the use of a single price to estimate reserves, the
proposal 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. 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 companies
believe such disclosure will reduce the cost of capital formation. The
proposal would 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 valuations and
improve projections of company prospects.
2. Probable and Possible Reserves
We anticipate that disclosure of probable and possible reserves, if
companies elect to do so, would allow investors, creditors, and other
users to better assess a company's reserves. The proposed 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 would provide a more consistent means of
comparison. Although our proposal would 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, 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.
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. The
proposed disclosure requirements relating to 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 should provide greater confidence with
respect to the accuracy of reserves estimates. Unproved reserves are
inherently less certain than proved reserves. Although not all
companies would choose to undertake a reserves audit, because the
proposal would 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.
[[Page 39555]]
4. Development of Proved Undeveloped Reserves
The proposal would require tabular disclosure of the aging of
proved undeveloped reserves. We believe that such disclosure
supplements our proposed amendments that would ease the requirements
for recognizing PUDs and thereby 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.
5. Disclosure Guidance
The proposal also provides guidance about the type of information
that companies should consider disclosing in Management's Discussion
and Analysis, and would allow companies to include this information
with the relevant tables. 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. Providing the additional guidance should assist companies in
preparing their disclosure, improving the quality and consistency of
this disclosure.
6. Updating of Definitions Related to Oil and Gas Activities
The proposal also updates 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 those operations. This includes
resources extracted from nontraditional sources that companies consider
oil and gas activities, although our definitions have 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 proposals to harmonize foreign private issuer
disclosure would help make disclosures of foreign private issuers more
comparable with domestic companies. 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 proposal to harmonize foreign private
issuer disclosure is intended to promote comparability among all oil
companies.
D. Costs
We expect that the proposed amendments would result in some initial
and ongoing costs to oil and gas companies. Although we are proposing
to add a new subpart to Regulation S-K to set forth the disclosure
requirements that are unique to oil and gas companies, the proposed
subpart, for the most part, codifies the substantive disclosure called
for by Industry Guide 2. The proposed disclosure requirements have been
updated and clarified, and require the disclosure to be presented in a
tabular format. Although many companies already present this
information in tabular form, for companies that do not, this proposed
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 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 risk and 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 geography and nature of their exploration and discovery. 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 expect companies would incur costs in
preparing the additional disclosures such as calculating and
aggregating the reserve projections in a prescribed format. If probable
and possible categories of reserves have different extraction cost
structures, particularly with respect to time, and they are not
sufficiently separated from proved reserves, this could result in
increased uncertainty in an investor's assessment of a company's
prospects. 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 would incur costs to hire these outside
consultants. The proposed amendments would 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 third party 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 less market reputation, than larger companies, this could increase
the need for certification. We believe that making the third party
involvement optional is similar to the current approach. Current
disclosures of proved reserves do not require a third party to audit
the reserves estimates, and oil and gas producers already release, as
discussed above, unproved reserve information through other means.
Thus, even if companies do not choose to use a third party to audit
their reserves estimates, the disclosure of
[[Page 39556]]
unproved reserves with improved standards on how such reserves should
be reported, should benefit investors.
3. Average Price
While the use of an historical average price to calculate reserves
should enhance comparability, it would provide investors with less
forward-looking information than if we were to adopt a price standard
based on futures prices. Forward-looking prices based on futures,
however, are not necessarily available for all products in all
geographic areas and would require adjustments.
4. 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 a definition 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 proposal 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.
5. Harmonizing Foreign Private Issuer Disclosure
The proposal to harmonize foreign private issuer disclosure
regarding oil and gas activities would 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 disclosures relate 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 the proposed 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.
E. Request for Comments
We request comment on all aspects of the Cost-Benefit Analysis,
including identification of any additional costs or benefits of, or
suggested alternatives to, the proposed amendments. We also request
that those submitting comments provide, to the extent possible,
empirical data and other factual support for their views.
XII. Consideration of Burden on Competition and Promotion of
Efficiency, Competition, and Capital Formation
Securities Act section 2(b) \169\ requires 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 \170\ 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. Section 3(f) of the Exchange Act \171\ requires us, when engaging
in rulemaking that requires us 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.
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\169\ 15 U.S.C. 77b(b).
\170\ 15 U.S.C. 78w(a)(2).
\171\ 15 U.S.C. 78c(f).
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We expect the proposed amendments, if adopted, 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 non-traditional sources of oil and gas. Such increased and improved
information would 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 resources and prospects. The proposals 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 proposals
would permit smaller companies, who often participate in a significant
amount of exploratory activity, to better disclose their business
prospects. Consequently, we anticipate that the proposal, if adopted,
could lead to efficiencies in capital formation, as more information
would be available regarding the prospects of smaller issuers.
The effects of the proposed 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
would 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 proposal would
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, 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.
We request comment on whether the proposals, if adopted, would
promote efficiency, competition, and capital formation or have an
impact or burden on competition. Commenters are requested to provide
empirical data and other factual support for their views, if possible.
XIII. Initial Regulatory Flexibility Analysis
This Initial Regulatory Flexibility Act Analysis has been prepared
in accordance with 5 U.S.C. 603. It relates to proposed revisions to
disclosure items for oil and gas companies.
A. Reasons for, and Objectives of, the Proposed Action
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
[[Page 39557]]
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.\172\ 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.
---------------------------------------------------------------------------
\172\ See Release No. 33-8870 (Dec. 12, 2007) [72 FR 71610].
---------------------------------------------------------------------------
Our proposed 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
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
proposals also are intended to codify, modernize and centralize the
disclosure items for oil and gas companies into Regulation S-K.
Finally, the proposals are intended to harmonize oil and gas
disclosures by foreign private issuers with disclosures by domestic
companies. Overall, the proposed 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. Legal Basis
We are proposing 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.
C. Small Entities Subject to the Proposed Amendments
The proposals would 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 proposals 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 \173\ and
Exchange Act Rule 0-10(a) \174\ 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. We believe that the proposals
would affect small entities that are operating companies. Based on
filing in 2007, we estimate that there are approximately 28 oil and gas
companies that may be considered small entities.
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\173\ 17 CFR 230.157.
\174\ 17 CFR 240.0-10(a).
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D. Reporting, Recordkeeping, and Other Compliance Requirements
The proposed amendments to Regulation S-K would expand some
existing disclosures, and eliminate others. In particular, the proposed
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 additions to
reserves estimates;
Disclosure regarding material changes due to technology,
prices, and concession conditions;
Disclosure of 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;
Disclosure of the qualifications and measures taken to
assure the independence and objectivity of any employee primarily
responsible for preparing or auditing the reserves estimates;
If a company represents that it is relying on a third
party to prepare the reserves estimates or conduct a reserves audit,
filing a report prepared by the third party; and
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.
E. Duplicative, Overlapping, or Conflicting Federal Rules
We believe that there are no federal rules that conflict with or
duplicate the proposed rules.
F. Significant Alternatives
The Regulatory Flexibility Act directs us to consider significant
alternatives that would accomplish the stated objectives, while
minimizing any significant adverse impact on small entities. In
connection with the proposals, we considered the following
alternatives:
(1) Establishing different compliance or reporting requirements
which take into account the resources available to smaller entities;
(2) Exempting smaller entities from coverage of the disclosure
requirements, or any part thereof;
(3) The clarification, consolidation, or simplification of
disclosure for small entities; and
(4) Use of performance standards rather than design standards.
With regard to Alternatives 1 and 2, we believe that separate
disclosure requirements for small entities that would differ from the
proposed reporting requirements, or exempting them from these
disclosures, would not achieve our disclosure objectives. In
particular, we believe the changes that are reflected in the proposed
amendments would balance the informational needs of investors in
smaller companies with the burdens imposed on such companies by the
disclosure requirements. We note that a number of the proposed new
disclosure items are voluntary. We believe that small entities are more
likely to take advantage of these permitted disclosures, particularly
regarding probable and possible reserves, than larger companies, which
typically already have significant proved reserves. A wholesale
exemption for small entities would thwart our intent to make uniform
the application of the disclosure and other requirements that would be
amended.
Regarding Alternative 3, we believe the amendments would clarify
and consolidate the requirements for all public companies into
Regulation S-K, which may make such requirements easier to access. This
may simplify the process of preparing a company's annual report or
registration statement. In addition, the proposed tabular format
[[Page 39558]]
for making the disclosures may lead to systemization of the
disclosures, making such information simpler to organize.
Regarding Alternative 4, we have used design rather than
performance standards in connection with the proposals for two reasons.
First, based on our past experience, we believe the proposed disclosure
would be more useful to investors if there were specific informational
requirements. The proposed mandated disclosures are intended to result
in more focused and comprehensive disclosure. Second, the specific
disclosure requirements in the proposals would promote more comparable
disclosure among public companies because they would provide greater
certainty as to the scope of required disclosure.
G. Solicitation of Comment
We encourage the submission of comments with respect to any aspect
of this Initial Regulatory Flexibility Analysis. In particular, we
request comments regarding: (i) The number of small entity issuers that
may be affected by the proposed revisions; (ii) the existence or nature
of the potential impact of the proposed revisions on small entity
issuers discussed in the analysis; and (iii) how to quantify the impact
of the proposed revisions. Commenters are asked to describe the nature
of any impact and provide empirical data supporting the extent of the
impact. Such comments will be considered in the preparation of the
Final Regulatory Flexibility Analysis, if the proposed revisions are
adopted, and will be placed in the same public file as comments on the
proposed amendments.
XIV. Small Business Regulatory Enforcement Fairness Act
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996,\175\ a rule is ``major'' if it has resulted, or is likely
to result in:
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\175\ Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------
An annual effect on the U.S. economy of $100 million or
more;
A major increase in costs or prices for consumers or
individual industries; or
Significant adverse effects on competition, investment or
innovation.
We request comment on whether our proposals would be a ``major
rule'' for purposes of the Small Business Regulatory Enforcement
Fairness Act. We solicit comment and empirical data on: (a) The
potential effect on the U.S. economy on an annual basis; (b) any
potential increase in costs or prices for consumers or individual
industries; and (c) any potential effect on competition, investment, or
innovation.
XV. Statutory Basis and Text of Proposed Amendments
We are proposing 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 Proposed Amendments
List of Subjects
17 CFR Part 210
Accountants, Accounting, Reporting and recordkeeping requirements,
Securities.
17 CFR Parts 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 proposed to be 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:
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 Sec. 210.4-10 by:
a. Redesignating the subparagraphs in paragraph (a) as follows:
------------------------------------------------------------------------
New paragraph
Old paragraph number number
------------------------------------------------------------------------
(a)(1) (a)(16)
(a)(2) (a)(24)
(a)(3) (a)(22)
(a)(4) (a)(25)
(a)(5) (a)(23)
(a)(6) (a)(34)
(a)(7) (a)(21)
(a)(8) (a)(15)
(a)(9) (a)(29)
(a)(10) (a)(13)
(a)(11) (a)(9)
(a)(12) (a)(32)
(a)(13) (a)(33)
(a)(14) (a)(1)
(a)(15) (a)(12)
(a)(16) (a)(7)
(a)(17) (a)(20)
------------------------------------------------------------------------
b. 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)(26),
(a)(27), (a)(28), (a)(30), and (a)(31); and
c. Revising newly redesignated paragraphs (a)(13), (a)(16),
(a)(22), (a)(24), and (a)(25).
The additions and revisions read as follows:
Sec. 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) * * *
* * * * *
(2) Analogous formation in the immediate area. An ``analogous
formation in the immediate area'' refers to a formation that shares the
following characteristics with the formation of interest:
(i) Same geological formation;
(ii) Same environment of deposition;
(iii) Similar geological structure; and
(iv) Same drive mechanism.
Instruction to paragraph (a)(2): Reservoir properties must be no
more favorable in the analog than in the formation of interest. When
the geological properties change, the proposed analog formation can no
longer be said to be an analogous formation in the immediate area of
the formation of interest.
(3) 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.
(4) Continuous accumulations. Continuous accumulations are
resources that are pervasive throughout large areas, have ill-defined
boundaries, and typically lack or are unaffected by hydrocarbon-water
contacts near the base of the accumulation. Examples include, but are
not limited to, natural bitumen (oil sands), gas hydrates, and self-
sourced accumulations such as coalbed methane, shale gas, and oil shale
deposits. Typically, such accumulations require specialized extraction
technology (e.g., removal of water from coalbed methane accumulations,
large fracturing programs for shale gas, steam, or solvents to mobilize
bitumen for in-situ recovery, and, in some cases, mining methods).
Moreover, the extracted oil or gas may require significant processing
prior to sale (e.g., bitumen upgraders).
(5) Conventional accumulations. Conventional accumulations are
discrete oil or gas resources related to
[[Page 39559]]
localized geological structural features or stratigraphic conditions,
with the accumulation typically bounded by a hydrocarbon-water contact
near its base, and which are significantly affected by the tendency of
lighter hydrocarbons to ``float'' or accumulate above heavier water.
(6) 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.
* * * * *
(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.
* * * * *
(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. A well drilled to find and produce oil or
gas in an unproved area 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. A well drilled to extend the limits of a
proved 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 existing reservoirs on such properties;
(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 marketable hydrocarbons, in the solid, liquid, or
gaseous state, from oil sands, shale, coalbeds, or other nonrenewable
natural resources which can be upgraded into natural or 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 terminating at the first point at which:
a. Oil, gas, or gas liquids are delivered to a main pipeline, a
common carrier, a refinery, or a marine terminal; and
b. In the case of marketable hydrocarbons that can be upgraded into
natural or synthetic oil or gas, the marketable hydrocarbons 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 from the natural resources.
Instruction 2 to paragraph (a)(16)(i): For purposes of this
paragraph (a)(16), the term ``marketable hydrocarbons'' means
hydrocarbons for which there is a market for the product in the state
in which the hydrocarbons are delivered.
(ii) Oil and gas producing activities do not include:
(A) Transporting, refining, processing (other than field processing
of gas to extract liquid hydrocarbons), or marketing oil and gas;
(B) Activities relating to the production of natural resources
other than oil, gas, or natural resources from which natural or
synthetic oil and gas can be extracted; or
(C) 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.
(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, but are interpreted to be in communication with the known
(proved) reservoir. Probable or 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)(24)(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 and/or gas based on reservoir
fluid properties and pressure gradient interpretations.
(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
[[Page 39560]]
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.
(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) through
(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,
engineering, and economic data) is used to generate a full range of
possible outcomes and their associated probabilities of occurrence.
* * * * *
(22) Proved developed oil and gas reserves. Proved developed oil
and gas reserves are proved reserves that can be expected to be
recovered:
(i) In projects that extract oil and gas through wells, through
existing wells with existing equipment and operating methods; and
(ii) In projects that extract oil and gas in other ways, through
installed extraction technology operational at the time of the reserves
estimate.
* * * * *
(24) 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 geoscience,
engineering, or performance data and reliable technology establishes
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 formation in the immediate area, 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 ending price for each month within
such period.
(25) Proved undeveloped reserves. Proved undeveloped oil and gas
reserves are reserves 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
drilling units directly offsetting productive units that are reasonably
certain of production when drilled, unless evidence using reliable
technology exists that establishes reasonable certainty of economic
producibility at greater distances.
(A) In a conventional accumulation, offsetting productive units
must lie within an area in which economic producibility has been
established by reliable technology to be reasonably certain.
(B) 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.
(ii) Undrilled locations can be classified as having proved
undeveloped reserves only if a development plan has been adopted
indicating that they are scheduled to be drilled within five years,
unless unusual circumstances justify a longer time.
(iii) Under no circumstances shall estimates for proved 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 area and in the same reservoir or an analogous reservoir in the
same geologic formation in the immediate area or by other evidence
using reliable technology establishing reasonable certainty.
(26) Reasonable certainty. Reasonable certainty means ``much more
likely to be achieved than not.'' When deterministic methods are used,
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 than to either decrease or remain
constant. When probabilistic methods are used, reasonable certainty
means that there is at least a 90% probability that the quantities
actually recovered will equal or exceed the stated volume.
(27) Reliable technology. Reliable technology is technology
(including computational methods) that, when applied using high quality
geoscience and engineering data, is widely accepted within the oil and
gas industry, has been field tested and has demonstrated consistency
and
[[Page 39561]]
repeatability in the formation being evaluated or in an analogous
formation. Expressed in probabilistic terms, reliable technology has
been proved empirically to lead to correct conclusions in 90% or more
of its applications.
(28) Reserves. Reserves are 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 technology appropriate to establish the degree of certainty
of the reserves; 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 not likely) to do so; and
economic producibility at current prices and costs. The volumes of
reserves shall be determined on the basis of their volumes at the
terminal point of oil and gas producing activities as defined in
paragraph (a)(16) of this section. Reserves are classified as proved,
probable, and possible according to the degree of uncertainty
associated with the estimates.
Note to paragraph (a)(28):
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).
* * * * *
(30) 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.
(31) Sedimentary basin. A sedimentary basin is a low area in the
crust of the earth in which sediments have accumulated. Frequently,
sedimentary basins that contain oil and gas reserves contain a number
of discrete oil and gas reservoirs.
* * * * *
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
3. 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.
* * * * *
4. Amend Sec. 229.102 by revising the introductory text of
Instruction 3, and Instructions 4, 5 and 8 to read as follows.
Sec. 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, 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 Guide
4 (referred to in Sec. 229.801(d)).
* * * * *
Sec. 229.801 [Amended]
5. Amend Sec. 229.801 by removing and reserving paragraph (b) and
removing the authority citation following the section.
Sec. 229.802 [Amended]
6. Amend Sec. 229.802 by removing and reserving paragraph (b) and
removing the authority citation following the section.
7. 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.
229.1205 (Item 1205) Drilling and other exploratory and development
activities.
229.1206 (Item 1206) Present activities.
229.1207 (Item 1207) Delivery commitments.
229.1208 (Item 1208) Oil and gas properties, wells, operations, and
acreage.
229.1209 (Item 1209) Discussion and analysis of changes, trends, and
uncertainties for registrants engaged in oil and gas activities.
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.
(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 (Sec. Sec. 229.1202
through 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.
[[Page 39562]]
(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, to the extent allowed by law:
(1) By continent;
(2) By country totals for each country that contains 15% or more of
the registrant's global oil reserves or gas reserves; and
(3) By sedimentary basin or field totals for each sedimentary basin
or field that contains 10% or more of the registrant's global oil
reserves or gas reserves.
Sec. 229.1202 (Item 1202) Disclosure of reserves.
(a) Summary of conventional 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 in Conventional Accumulations as of
Fiscal-Year End Based on Average Fiscal-Year Prices
------------------------------------------------------------------------
Reserves
--------------------------------------
Reserves category Natural gas
Oil (mbbls) (mmcf)
------------------------------------------------------------------------
PROVED .................. .................
Developed: .................. .................
Continent A.............. .................. .................
Continent B.............. .................. .................
15% Country A........ .................. .................
15% Country B........ .................. .................
10% Field A in .................. .................
Country B.
Other Fields in .................. .................
Country B.
Other Countries in .................. .................
Continent B.
Undeveloped: .................. .................
Continent A.............. .................. .................
Continent B.............. .................. .................
15% Country A........ .................. .................
15% Country B........ .................. .................
10% Field A in .................. .................
Country B.
Other Fields in .................. .................
Country B.
Other Countries in .................. .................
Continent B.
--------------------------------------
TOTAL PROVED..................... .................. .................
PROBABLE .................. .................
POSSIBLE .................. .................
------------------------------------------------------------------------
(2) Disclose, in the aggregate and by geographic area, reserves
from conventional accumulations estimated using prices and costs under
existing economic conditions, for each product type, in the following
categories:
(i) Proved developed reserves;
(ii) Proved undeveloped reserves;
(iii) Total proved reserves;
(iv) Probable reserves (optional); and
(v) Possible 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) and (a)(2)(v) 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.
(3) Reported total reserves shall be simple arithmetic sums of all
estimates for individual properties or fields within each reserves
category. When probabilistic methods are used, reserves should not be
aggregated probabilistically beyond the field or property level;
instead, they should also be aggregated by simple arithmetic summation.
(4) If the registrant has not previously disclosed reserves
estimates in a filing with the Commission, the registrant shall
disclose 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.
(5) If the registrant chooses to disclose probable or possible
reserves, discuss the relative risks related to such reserves
estimates.
(6) Preparation of reserves estimates or reserves audit. Disclose
the following information regarding the technical person primarily
responsible for preparing the reserves estimates and, if the registrant
represents that a third party conducted a reserves audit, regarding the
technical person primarily responsible for conducting such reserves
audit:
(i) If the person is an employee of the registrant:
(A) The fact that an employee of the registrant had primary
responsibility for preparing the reserves estimate (but the employee
does not have to be identified); and
(B) Measures taken to assure the independence and objectivity of
the estimate;
(ii) If the person is not an employee of the registrant:
(A) The identity of the person;
(B) The nature and amount of all work that the person has performed
for the registrant during the past three fiscal years, other than
preparing the reserves estimate or conducting the reserves audit, as
well as all compensation and fees (in any form) paid to that person for
all such services;
(C) Whether the person has any other interests in the company or
other conflict of interests;
(iii) Whether the person:
(A) Has a minimum of three years of practical experience in
petroleum engineering or petroleum production geology, with at least
one full year of this experience being in the estimation and evaluation
of reserves if the person
[[Page 39563]]
was primarily responsible for preparing the reserves estimates;
(B) Has a minimum of ten years of practical experience in petroleum
engineering or petroleum production geology, with at least five years
of this experience being in the estimation and evaluation of reserves
and the conducting of reserves audits if that person conducted a
reserves audit of the registrant's reserves estimates;
(C) Has received, and is maintaining in good standing, a registered
or certified professional engineer's license or a registered or
certified professional geologist's license, or the equivalent thereof,
from an appropriate governmental authority or a recognized self-
regulating professional organization; and
(D) Has a bachelor's or advanced degree in petroleum engineering,
geology, or other discipline of engineering or physical science, and if
so, the specific degree earned by that person; and
(iv) Any memberships, in good standing, of the person with a self-
regulatory organization of engineers, geologists, other geoscientists,
or other professionals whose professional practice includes reserves
evaluations or reserves audits, that:
(A) Admits members primarily on the basis of their educational
qualifications;
(B) Requires its members to comply with the professional standards
of competence and ethics prescribed by the organization that are
relevant to the estimation, evaluation, review, or audit of reserves
data; and
(C) Has disciplinary powers, including the power to suspend or
expel a member; and
(v) To the extent the person does not have all of the
qualifications listed in paragraphs (a)(6)(iii) and (iv) of this Item,
the reasons why the registrant believes that the person is sufficiently
qualified to be primarily responsible for the technical aspects of the
reserves estimation or audit, as applicable, and any risks associated
with reserves estimates not prepared or audited by persons with such
qualifications.
Instruction to paragraph (a)(6): For purposes of this Item, the
identified ``person'' may be an individual or a business entity. To the
extent that the person is a business entity, any disclosure regarding
the qualifications listed in paragraphs (a)(6)(iii) and (iv) of this
Item of that person will relate to the individual that is primarily
responsible for the technical aspects of the reserves estimation or
audit, as applicable.
(7) Third party preparer reports. If the registrant represents that
its reserves estimates, or any estimated valuation thereof, are based
on estimates prepared by a third party, the registrant shall file a
report of the third party as an exhibit to the relevant registration
statement or report. The report must include the following disclosure:
(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 company'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 to
estimate reserves quantities, 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 risks and 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; and
(ix) The signature of the third party.
(8) Third party reserves audit reports. If the registrant
represents that a third party conducted a reserves audit of the
registrant's reserves estimates, or any estimated valuation thereof,
the registrant shall file a report of the third party as an exhibit to
the relevant registration statement or report. The report must include
the following disclosure:
(i) The purpose for which the report is being prepared and for whom
it is prepared;
(ii) The effective date of the report and the date on which the
report was completed;
(iii) The proportion of the company'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 to conduct
the reserves audit, 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 risks and 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;
(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 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.
(b) Summary of oil and gas reserves from continuous accumulations.
(1) Provide the information specified in paragraph (b)(2) of this Item
in tabular format as provided below:
[[Page 39564]]
Summary of Oil and Gas Reserves From Continuous Accumulations as of Fiscal-Year End Based on Average Fiscal-Year
Prices
----------------------------------------------------------------------------------------------------------------
Reserves
Reserves category -------------------------------------------------------------------------
Product A (measure) Product B (measure) Product C (measure)
----------------------------------------------------------------------------------------------------------------
PROVED ....................... ....................... ......................
Developed: ....................... ....................... ......................
Country A..................... ....................... ....................... ......................
Country B..................... ....................... ....................... ......................
10% Field A in Country B.. .......................
Other Fields in Country B. .......................
Undeveloped: ....................... ....................... ......................
Country A..................... ....................... ....................... ......................
Country B..................... ....................... ....................... ......................
10% Field A in Country B.. ....................... ....................... ......................
Other Fields in Country B. ....................... ....................... ......................
-------------------------------------------------------------------------
TOTAL PROVED.......................... ....................... ....................... ......................
PROBABLE ....................... ....................... ......................
POSSIBLE ....................... ....................... ......................
----------------------------------------------------------------------------------------------------------------
(2) Disclose, in the aggregate and by geographic area, reserves
from continuous accumulations (including, but not limited to, bitumen
and shale oil, shale gas, and coalbed methane) estimated using prices
and costs under existing economic conditions, for each product type
applicable to the registrant, in the following categories:
(i) Proved developed reserves;
(ii) Proved undeveloped reserves;
(iii) Total proved reserves;
(iv) Probable reserves (optional); and
(v) Possible reserves (optional).
Instruction 1 to paragraph (b)(2): Disclose updated reserves tables
as of the close of each fiscal year.
Instruction 2 to paragraph (b)(2): The registrant is permitted, but
not required, to disclose probable or possible reserves pursuant to
paragraphs (b)(2)(iv) and (b)(2)(v) of this Item.
Instruction 3 to paragraph (b)(2): If the registrant discloses
amounts of a product in barrels of oil equivalent, disclose the basis
for such equivalency.
(3) Provide the disclosures required by paragraphs (a)(3) through
(a)(9) of this Item, as they apply to continuous accumulations.
(c) Reserves sensitivity analysis (optional). (1) The registrant
may, but is not required, to provide the information specified in
paragraph (c)(2) of this Item in tabular format as provided below:
Sensitivity of Reserves to Prices by Principal Product Type and Price Scenario
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Proved reserves Probable reserves Possible reserves
----------------------------------------------------------------------------------------------------------------------------------------------------------------
Price case Product A Product A Product A
Oil (mbbls) Gas (mmcf) (measure) Oil (mbbls) Gas (mmcf) (measure) Oil (mbbls) Gas (mmcf) (measure)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
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 (c)
of this Item, disclose the price and cost schedules and assumptions on
which the values disclosed under paragraphs (c)(2)(i) through
(c)(2)(iv) of this Item are based.
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.
Sec. 229.1203 (Item 1203) Proved undeveloped reserves.
(a) Provide the information specified in paragraph (b) of this Item
in tabular format as provided below:
Conversion of Proved Undeveloped Reserves
----------------------------------------------------------------------------------------------------------------
Proved undeveloped reserves converted to
proved developed reserves Investment in conversion of
Fiscal year ------------------------------------------------ proved undeveloped reserves to
Product A proved developed reserves, $
Oil (mbbls) Gas (mmcf) (measure)
----------------------------------------------------------------------------------------------------------------
Fiscal Year--4............... .............. .............. .............. .................................
[[Page 39565]]
Fiscal Year--3............... .............. .............. .............. .................................
Fiscal Year--2............... .............. .............. .............. .................................
Fiscal Year--1............... .............. .............. .............. .................................
Fiscal Year.............. .............. .............. .............. .................................
----------------------------------------------------------------------------------------------------------------
(b) For the last five fiscal years, disclose, by product type,
proved reserves estimated using current prices and costs in the
following categories:
(1) Proved undeveloped reserves converted to proved developed
reserves during the year; and
(2) Investments in the conversion of proved undeveloped reserves to
proved developed reserves during the year.
(c) Disclose, by product type, any proved undeveloped reserves
which have remained undeveloped for five years or more. Explain the
reason for the lack of development.
(d) Disclose the registrant's plans to develop proved undeveloped
reserves and to further develop proved oil and gas reserves.
(e) Discuss any material changes to proved undeveloped reserves.
Sec. 229.1204 (Item 1204) Oil and gas production.
(a) Provide the information specified in paragraph (b) of this Item
in tabular format as provided below:
Oil and Gas Production, Sales Prices, and Production Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
Oil Gas Product A
--------------------------------------------------------------------------------------------------------------------------
Location Production Production Production
Production Sales price cost ($US/ Production Sales price cost ($US/ Production Sales price cost ($US/
(mbbls) ($US/bbl) boe) (mmcf) ($US/mcf) mcfc) (measure) ($US/ measure) measure)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Geographic Area A............ ........... ........... ........... ........... ........... ........... ........... .............. ..............
Fiscal Year--2........... ........... ........... ........... ........... ........... ........... ........... .............. ..............
Fiscal Year--1........... ........... ........... ........... ........... ........... ........... ........... .............. ..............
Fiscal Year.............. ........... ........... ........... ........... ........... ........... ........... .............. ..............
Geographic Area B............ ........... ........... ........... ........... ........... ........... ........... .............. ..............
Geographic Area C............ ........... ........... ........... ........... ........... ........... ........... .............. ..............
--------------------------------------------------------------------------------------------------------------------------------------------------------
(b) Disclose, by geographic area, for the last three years:
(1) Net oil and gas production;
(2) Average oil and gas sales prices, net of any effects as a
result of hedging transactions; and
(3) Average production costs (lifting costs, not including
severance taxes) per unit of production.
(c) For purposes of this Item 1204, the term ``net production''
includes only production that the registrant owns and production
attributable to the registrant's interest in projects less royalties
and production due to others. In special situations (e.g., foreign
operations), the registrant may provide net production before royalties
if more appropriate. If the registrant provides ``net before royalty''
production figures, it must note the change from usage of ``net
production.''
Sec. 229.1205 (Item 1205) Drilling and other exploratory and
development activities.
(a) Provide the information specified in paragraph (b) of this Item
in tabular format as provided below:
Drilling Activities
[Geographic area]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Exploratory wells Development wells Extension wells
----------------------------------------------------------------------------------------------------------------------
Gross Net Gross Net Gross Net
--------------------------------------------------------------------------------------------------------------------------------------------------------
Oil
Fiscal Year.................. .................. .................. .................. .................. .................. .................
Fiscal Year--1............... .................. .................. .................. .................. .................. .................
Fiscal Year--2............... .................. .................. .................. .................. .................. .................
Natural Gas .................. .................. .................. .................. .................. .................
Fiscal Year.................. .................. .................. .................. .................. .................. .................
Fiscal Year--1............... .................. .................. .................. .................. .................. .................
Fiscal Year--2............... .................. .................. .................. .................. .................. .................
Product A .................. .................. .................. .................. .................. .................
Fiscal Year.................. .................. .................. .................. .................. .................. .................
Fiscal Year--1............... .................. .................. .................. .................. .................. .................
Fiscal Year--2............... .................. .................. .................. .................. .................. .................
Suspended .................. .................. .................. .................. .................. .................
Fiscal Year.................. .................. .................. .................. .................. .................. .................
[[Page 39566]]
Fiscal Year--1............... .................. .................. .................. .................. .................. .................
Fiscal Year--2............... .................. .................. .................. .................. .................. .................
Dry .................. .................. .................. .................. .................. .................
Fiscal Year.................. .................. .................. .................. .................. .................. .................
Fiscal Year--1............... .................. .................. .................. .................. .................. .................
Fiscal Year--2............... .................. .................. .................. .................. .................. .................
----------------------------------------------------------------------------------------------------------------------
Total.................... .................. .................. .................. .................. .................. .................
--------------------------------------------------------------------------------------------------------------------------------------------------------
(b) Disclose, by geographic area, for each of the last three years,
the following information:
(1) The number of gross and net productive, suspended, and dry
exploratory wells drilled;
(2) The number of gross and net productive, suspended, and dry
development wells drilled; and
(3) The number of gross and net productive, suspended, and dry
extension wells drilled.
(c) Definitions. For purposes of this Item, the following terms
shall be defined as indicated below.
(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) A suspended well is a well that has neither been declared dry
nor completed for use in field operations.
(4) 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.
(v) 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.
(d) 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.
Sec. 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.
Sec. 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;
(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
(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
(Sec. Sec. 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.
Sec. 229.1208 (Item 1208) Oil and gas properties, wells, operations,
and acreage.
(a) Identify and describe generally the registrant's material
properties, plants, facilities, and installations:
(1) Identify the geographic area in which they are located;
[[Page 39567]]
(2) Indicate whether they are located onshore or offshore; and
(3) Describe any statutory or other mandatory relinquishments,
surrenders, back-ins, or changes in ownership.
(b) Provide the information specified in paragraph (c) of this Item
in tabular format as provided below:
Wells
------------------------------------------------------------------------
Producing wells
Location ------------------------------------
Gross Net
------------------------------------------------------------------------
Geographic Area A: ................. ................
Oil Wells........................ ................. ................
Natural Gas Wells................ ................. ................
Product A Wells................ ................. ................
------------------------------------
Total...................... ................. ................
========================================================================
Geographic Area B: ................. ................
Oil Wells........................ ................. ................
Natural Gas Wells................ ................. ................
Product A Wells.................. ................. ................
------------------------------------
Total.......................... ................. ................
------------------------------------------------------------------------
(c) For oil wells and gas wells in both conventional and continuous
accumulations and for other wells for products from continuous
accumulations, disclose separately the number of the registrant's
producing wells, expressed in terms of both gross wells and net wells,
by geographic area.
(d) To the extent the registrant is extracting hydrocarbons through
means other than wells, provide a discussion of such operations.
(e) Provide the information specified in paragraph (f) of this Item
in tabular format as provided below:
Acreage
----------------------------------------------------------------------------------------------------------------
Developed acres Undeveloped acres
------------------------------------------------------------------------------
Gross Net Gross Net
----------------------------------------------------------------------------------------------------------------
Geographic Area A................ .................. .................. .................. .................
Geographic Area B................ .................. .................. .................. .................
Geographic Area C................ .................. .................. .................. .................
------------------------------------------------------------------------------
Total........................ .................. .................. .................. .................
----------------------------------------------------------------------------------------------------------------
(f) Disclose, by geographic area, the registrant's total gross and
net developed acres (i.e., acres spaced or assignable to productive
wells) and undeveloped acres, including leases and concessions.
(g) For unproved properties disclose:
(1) The existence, nature (including any bonding requirements),
timing, and cost (specified or estimated) of any work commitments; and
(2) By geographic area, the net area of unproved property for which
the registrant expects its rights to explore, develop, and exploit to
expire within one year.
(h) Disclose areas of acreage concentration, and, if material, the
minimum remaining terms of leases and concessions.
(i) Definitions. For purposes of this Item, the following terms
shall be defined as indicated:
(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.
Sec. 229.1209 (Item 1209) Discussion and analysis of changes, trends,
and uncertainties for registrants engaged in oil and gas activities.
(a) Provide, either as part of Management's Discussion and Analysis
of Financial Condition and Results of Operations or in a separate
section, a discussion of:
(1) Material 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:
(i) Changes in prices;
(ii) Technical revisions; and
(iii) Changes in the status of any concessions held (such as
terminations, renewals, or changes in provisions);
(2) Technologies used to establish the appropriate level of
certainty for any material additions to, or increases in, reserves
estimates; and
(3) Known trends, demands, commitments, uncertainties, and events
that have had, or are reasonably likely to have, a material effect on
the company with respect to matters including, but not limited to, the
following:
(i) Prices and costs;
(ii) 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;
(iii) Performance of any mining-type activities for the production
of hydrocarbons;
(iv) The registrant's recent ability to convert:
(A) Proved undeveloped reserves to proved developed reserves;
(B) Probable reserves to proved reserves, if disclosed; and
(C) Possible reserves to probable or proved reserves, if disclosed;
(v) Anticipated capital expenditures directed toward conversion of:
(A) Proved undeveloped reserves to proved developed reserves;
(B) Probable reserves to proved reserves, if disclosed; and
(C) Possible reserves to probable or proved reserves, if disclosed;
(vi) Anticipated exploratory activities, well drilling, and
production;
(vii) The minimum remaining terms of leases and concessions;
[[Page 39568]]
(viii) Material changes to any line item in the tables described in
Sec. Sec. 229.1202 through 229.1208; and
(ix) Potential effects of different forms of rights to resources,
such as production sharing contracts, on operations.
(b) To the extent that such discussion or analysis of material
changes, known trends, or uncertainties is directly relevant to a
particular disclosure required by Sec. Sec. 229.1202 through 229.1208,
the registrant may include such discussion or analysis in response to
the relevant section, with appropriate cross-references, rather than
including such discussion or analysis in its general response to Sec.
229.303 (Management's Discussion and Analysis of Financial Condition
and Results of Operations).
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
8. The authority citation for part 249 continues to read in part as
follows:
Authority: 15 U.S.C. 78a et seq., 7202, 7233, 7241, 7262, 7264,
and 7265; and 18 U.S.C. 1350, unless otherwise noted.
* * * * *
9. Amend Form 20-F (referenced in Sec. 249.220f) by:
a. 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 additions and revisions read as follows:
[Note: The text of Form 20-F does not, and this amendment
thereto 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 Part 9 of Regulation S-K (Sec. 229.802 of this chapter) that
applies to you.
2. If oil and gas operations are material to your or your
subsidiaries' business operations or financial position, provide the
information specified in Subpart 1200 of Regulation S-K (Sec. 229.1200
et seq. of this chapter). If the required information is not disclosed
because a foreign government restricts the disclosure of estimated
reserves for properties under its governmental authority, or amounts
under long-term supply, purchase, or similar agreements, the registrant
shall disclose the country, cite the law or regulation which restricts
such disclosure, and indicate that the reported reserves estimates or
amounts do not include figures for the named country.
* * * * *
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 proved or
probable and do not give estimated 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.
Dated: June 26, 2008.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-14944 Filed 7-8-08; 8:45 am]
BILLING CODE 8010-01-P