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SEC Adopts Modernized Oil and Gas Reporting Requirements

January 9, 2009

On December 29, 2008, the U.S. Securities and Exchange Commission adopted final rules amending and modernizing its oil and gas reporting requirements.  The new rules represent the SEC’s effort to reflect in its regulations the oil and gas industry's technological advances, globalization and continuing evolution since the current rules were last amended over 25 years ago.  In adopting the new rules, the SEC sought to produce a more flexible and adaptive principles-based regime that will remain relevant in the face of similar changes in the future.  Overall, we believe that the SEC accomplished these goals and that the new rules will be well received by the industry. 

This update describes the key elements of the new rules, which will become effective for registration statements filed on or after January 1, 2010 and for annual reports on Forms 10-K and 20-F for fiscal years ending on or after December 31, 2009.  Voluntary early compliance is not permitted.

Summary of Key Provisions

The most notable provisions of the new rules are as follows: 

  • In estimating reserves for disclosure purposes, an oil and gas company will use a 12-month average of the closing prices for the commodity on the first day of each of the twelve months preceding the end of the company's fiscal year.
    • Full-cost companies will use the same 12-month average price to calculate reserves for accounting purposes under Rule 4-10 of Regulation S-X, including calculation of the full-cost ceiling.
    • The SEC is communicating with the FASB staff to modify applicable FASB statements (e.g., SFAS Nos. 19 and 69) to utilize the 12-month average price used in the new rules.
  • Oil and gas companies will be permitted, but not required, to disclose probable and possible reserves.
  • Companies that produce oil and natural gas from non-traditional and unconventional sources, such as bitumen extracted from oil sands and oil and gas extracted from coal and shale, may report these resources as oil and gas reserves.
  • Oil and gas companies may use any "reliable technology" to establish reserves volumes in addition to those established by production and flow test data.
  • Oil and gas companies may classify proved undeveloped reserves ("PUDs") any distance from known proved reserves (rather than only in immediately offsetting units) based on a “reasonable certainty” standard.
  • An oil and gas company that discloses that a third party prepared or audited its reserves estimates or conducted a process review must file with the SEC a prescribed report of the third party.
  • Oil and gas companies must disclose generally the internal controls used to ensure objectivity in reserves estimation and disclose the qualifications of the technical person primarily responsible for reserves estimates or any reserves audit.

Additionally, the SEC provided guidance as to several topics that an oil and gas company should consider discussing, if material to the company, in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) section of its registration statement or periodic report.

In the final rules, the SEC made significant changes, clarifications and improvements to the proposed rules it published in June 2008 (the proposing release is available at www.sec.gov/rules/proposed/2008/33-8935.pdf.  Compared to the proposed rules, the final rules are more principles-based, more closely follow the Society of Petroleum Engineers' Petroleum Resources Management System (“PRMS”), more closely follow existing disclosure requirements in the SEC's Industry Guide 2, and generally reflect an effort to address concerns raised in comment letters.  The final rules differ from the proposed rules in the following key respects:

  • the SEC decided to harmonize the year-end pricing method used in reserves disclosures and its full-cost accounting standards;
  • the required disclosure of the technologies relied upon in classifying reserves has been reduced to a general discussion instead of specific identification of potentially proprietary or competitive technologies;
  • PUDs that may take longer than five years to develop may still be classified as PUDs if "specific circumstances" make a longer development time period necessary, and no discussion of future plans for or investment in conversion of PUDs into proved developed reserves will be required;
  • companies will not be required to separately disclose reserves in conventional versus continuous accumulations; and
  • the level of detail required for reserves, production and other information that must be disclosed by geographic area has been reduced, and exemptions will be allowed for confidentiality requirements applicable to reserves in foreign jurisdictions.

The new rules primarily consist of amendments to and additions of definitions in Rule 4-10 of Regulation S-X and the codification of Industry Guide 2, with revisions, in a new Subpart 1200 of Regulation S-K.  The SEC’s final rule release is available at www.sec.gov/rules/final/2008/33-8995.pdf.

Key Elements of the New Rules

Changes to Proved Oil and Gas Reserves


The definition of proved oil and gas reserves in both the current rules and the new rules requires, among other things, that reserves be economically producible under existing economic conditions.  Under the current rules, existing economic conditions are determined using a single-day, year-end commodity price.  The new rules change the price used in estimating reserves to an unweighted average of the closing prices for the applicable commodity on the first day of each of the twelve months preceding the end of a company's fiscal year (e.g., January 1 through December 1 for calendar year companies).  While the proposing release had contemplated 12-month average pricing, it proposed using the closing price on the last day of each month.  At the suggestion of commenters, the final rules specify use of the first day of each month, largely to afford oil and gas companies an additional thirty days from the time the 12-month average price is set to the due date for filings.  The new rules also provide that prices defined by contractual arrangements, if applicable, should be used in place of the 12-month average price for the affected volumes. 

We believe these changes will be largely well received.  Virtually all commenters on the SEC's concept and proposing releases had criticized single-day pricing as leading to arbitrary results (especially for full-cost companies) and as not reflective of the volatility of commodity prices.  Several commenters sought the use of forward pricing information as more reflective of the "value" of reserves.  The SEC rejected these comments stating that the objective of reserves estimation under its rules is to provide the public with comparable information about volumes, not fair value.  Moreover, as discussed more fully below, companies also have the option under the new rules to separately disclose reserves estimates based upon futures or other prices, thus allowing disclosure of the price sensitivity of reserves and alternative economic considerations management may use in its planning and decision making.

In a change from the proposing release, the SEC has, in the final release, amended its full-cost accounting rules set forth in Rule 4-10 of Regulation S-X to use the same 12 month average price used for reserves disclosures.  The SEC stated that it is currently communicating with the FASB staff to coordinate revisions to the FASB's pronouncements to adopt the 12-month average price.  We believe these changes also will be well received, as most commenters opposed having different pricing schemes for reserves disclosure versus accounting purposes.

Reasonable Certainty

Both the current rules and the new rules require that, for reserves to be proved, production of the reserves on an economic basis must be reasonably certain.  The current rules do not define the term "reasonable certainty."  The new rules define "reasonable certainty" as follows:

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

The definition goes on to state that a high degree of confidence exists if the quantity is much more likely to be achieved than not and, as changes are made to estimated ultimate recovery ("EUR") due to increased availability of data, reasonably certain EUR is much more likely to increase or remain constant than to decrease. 

The SEC stated that it believes the definition set forth in the new rules is consistent with PRMS standards and does not represent a change from the historical interpretation of the reasonable certainty definition. 

The SEC also added two definitions familiar to reserves estimators.  A "deterministic estimate" is now defined as an estimate made based on a reserves calculation using a single value for each parameter that is determined to be most appropriate.  A "probabilistic estimate" is now defined as an estimate obtained by using the full range of values that could reasonably occur for each unknown parameter to generate a full range of possible outcomes with associated probabilities of occurrence. 

Reliable Technology

The current rules generally require actual production or flow test data to support the classification of proved reserves.  The new rules include a concept of "reliable technology" that can be relied upon to establish reasonable certainty in estimating proved reserves and in other contexts discussed below.  "Reliable technology" is:

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

In the context of proved oil and gas reserves, reliable technology can be used to establish the volume of proved reserves below the "lowest known hydrocarbons" and above the "highest known oil" (two limitations imposed by the current rules on reserves volumes in the absence of other fluid contact information from well penetration data).  Additionally, reliable technology may be used to establish with reasonable certainty the effectiveness of enhanced recovery projects, thus allowing the inclusion of the subject volumes as proved reserves.

Relative to the proposing release, the final rules provide further clarification that reliable technology can be a single technology or a combination of technologies for which a company can establish and document reliability and consistency.  Additionally, the SEC eliminated in the final rules a requirement included in the proposing release that the technology be “widely accepted,” acknowledging that it would disqualify internally developed, proprietary technologies.  The SEC also excluded from the final rules a bright-line test requiring reliable technology to have been proven empirically to lead to correct conclusions in 90% or more of its applications.

The final rules require that a company that has not previously disclosed reserves estimates in a filing with the SEC or that is making a material addition to its reserves estimates to provide a general disclosure of the technologies relied upon in establishing the required level of certainty for such reserves.  However, the SEC stated that companies will not be required to disclose proprietary technologies with such specificity as may cause competitive harm.

We suspect that most companies, in light of the sophisticated technologies now used in oil and gas exploration, will be pleased with the addition of the "reliable technology" concept, particularly with the revisions made relative to the proposing release, and with its prospective flexibility.

Unproved Reserves – Probable and Possible Reserves

Existing SEC rules require the disclosure of proved oil and gas reserves and generally prohibit the disclosure of other reserves categories in SEC filings.  Presently, many companies disclose other reserves categories voluntarily in press releases, on their websites or through other means.  Under the new rules, companies will be permitted the option to disclose "probable reserves" and "possible reserves" in SEC filings.

"Probable reserves" are reserves that are as likely as not to be recovered, while "possible reserves" are reserves that might be recovered, but only under more favorable circumstances than are likely.  When considered using probabilistic methods, the classification of reserves as probable or possible requires that there be at least a 50% probability that the actual quantities recovered will exceed the proved plus probable reserves estimates and at least a 10% probability that the actual quantities recovered will exceed the sum of the proved, probable and possible reserves estimates.  When deterministic methods are used, the standards are that it is as likely as not that the actual remaining amounts recovered will equal or exceed the proved plus probable reserves estimates and that there is a low probability that actual recovery will equal or exceed the sum of the proved, probable and possible reserves estimates.  As with proved reserves, the associated levels of certainty may be established through the use of reliable technology.  If a company discloses probable or possible reserves, it must state whether they are developed or undeveloped and must disclose the relative uncertainty associated with these categories of reserves estimates.

It remains unclear how many companies will decide to disclose probable and possible reserves in their Securities Act registration statements and Exchange Act reports in light of the heightened liability standards applicable in those contexts.  It also remains to be seen whether underwriters will have a favorable or unfavorable view about including such disclosures in Securities Act registration statements.  Underwriters will need to develop appropriate due diligence practices where such information is included in a registration statement or included in an Exchange Act report that is incorporated by reference in a registration statement.

Developed Versus Undeveloped Reserves

Oil and gas companies historically have divided their proved oil and gas reserves between developed reserves and undeveloped reserves.  The new rules make minor modifications to the definition of developed reserves, make significant modifications to the definition of undeveloped reserves, and alter both definitions so that they apply to all three reserves classifications (i.e., proved, probable and possible).

"Developed oil and gas reserves" are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods or, as clarified in the final rules, for which the cost of required equipment is relatively minor compared to the cost of a new well, and through installed extraction equipment and infrastructure operational at the time of the reserves estimate if the extraction is by means not involving a well.  "Undeveloped oil and gas reserves," on the other hand, 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.

Under the current rules, volumes in drilling units beyond those immediately adjacent to units containing a producing well can only be classified as PUDs if economic productibility is established with "certainty."  Under the new rules, PUDs can be booked beyond adjacent drilling units if reliable technology establishes reasonable certainty of economic productibility.  The proposing release included a limitation that undrilled locations could be classified as PUDs only if a development plan had been adopted to drill such locations within five years, unless "unusual circumstances" justified a longer time period.  In the final rules, the SEC has acknowledged that many companies have PUDs that present significant costs and difficulties that are not necessarily "unusual circumstances," and, thus, adopted the "specific circumstances" language used by the PRMS.  We anticipate this new provision, and the change in the final rules relative to the proposing release, will be very well received by companies with large positions in shale plays and other continuous accumulations.

Additionally, as suggested above, the new rules modify the definition of "undeveloped oil and gas reserves" to allow inclusion of additional reserves subject to enhanced recovery techniques.  Under the existing rules, a company can include reserves expected to be subject to enhanced recovery techniques only where the techniques have been proved effective by actual production from a project in the area and in the same reservoir.  Under the new rules, undeveloped reserves can be included in reserves estimates where reliable technology establishes with reasonable certainty that such techniques will be effective.

Definition of Reserves

The final rules also define "reserves," a previously undefined term, as the estimated remaining quantities of oil and gas and related substances anticipated to be economically producible, as of a given date, by application of development projects to known accumulations.  In addition, there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interest in the production of oil and gas, installed means of delivering oil and gas or related substances to market, and all permits and financing required to implement the project.  A note to the definition clarifies that reserves should not be assigned to adjacent reservoirs isolated by major, potentially sealing faults or to areas clearly separated from a known accumulation by a non-productive reservoir until such are penetrated and evaluated as economically producible.  The final release clarifies that resources that do not constitute "reserves" may not be disclosed in SEC filings.

Broadened Definition of Oil and Gas Producing Activities

Currently, the definition of "oil and gas producing activities," which is used in determining those companies that are subject to the SEC's oil and gas reserves disclosure rules, explicitly excludes hydrocarbons extracted by means other than through traditional oil and gas wells.  The new rules amend this definition to change its focus from the natural state of the product and the means of extraction to the final product produced.  Accordingly, "oil and gas producing activities" now include the extraction of saleable hydrocarbons, in the solid, liquid, or gaseous state, from oil sands, shale, coalbeds, or other nonrenewable natural resources which are intended to be upgraded into synthetic oil or gas, and activities undertaken with a view to such extraction.  The proposing release would have required that reserves associated with such untraditional activities be disclosed according to the extracted product, without consideration of the economics of the processing facilities of the reporting company.  However, the final rules instead require disclosure of reserves based on the final product sold by the reporting company and the price for that processed product, thus allowing companies to disclose reserves that take into account price and cost advantages unique to each based upon both extraction and processing capabilities.

Required Disclosures

In addition to modifying the regulations related to reserves identification and classification, the new rules codify the disclosures required to be made by companies that have material oil and gas producing activities in a new Subpart 1200 to Regulation S-K.  These provisions presently reside in Industry Guide 2, which the new rules repeal.  The new rules closely follow Industry Guide 2 in many respects, but include certain revised and enhanced disclosures.Geographic Detail

The new rules require that disclosures of reserves, production, drilling activity and other information be given "by geographic area."  Under the proposing release, this would have required disclosure by continent, with further disclosure for any country containing 15% of the company’s reserves and any sedimentary basin or field containing 10% of the company’s reserves.  Many commenters expressed concerns about the burden this proposed level of detail would impose upon companies and questioned its usefulness to investors.  Additionally, several commenters noted that the disclosure of field and basin level information could cause competitive harm in future transactions or be prohibited by foreign governments.  In response, the SEC revised the definition of "by geographic area" in the final rules to be substantially similar to SFAS 69 and to require disclosure by individual country, by groups of countries within a continent, or by continent, as appropriate for meaningful disclosure under a company’s particular circumstances.  However, the final rules retain requirements for slightly more detailed disclosures of reserves and production, as discussed below.

Reserves Tables

The final rules require the disclosure in tabular format of proved developed reserves, proved undeveloped reserves and total proved reserves, and allow the optional disclosure of probable developed and undeveloped reserves and possible developed and undeveloped reserves.  The disclosures are to be made by geographic area and, specifically, for each country containing 15% or more of the company’s overall proved reserves.  The disclosures are also to be made by the final product sold by the company, (i.e., oil, gas, synthetic oil, synthetic gas or other natural resource).  The final rules eliminate the requirement for disclosure of reserves separated between continuous and conventional accumulations that was included in the proposing release. 

The final rules also permit the inclusion of an optional reserves sensitivity analysis table.  A company that includes such a table may choose the different scenarios that it wishes to disclose, but it must also disclose the price and cost schedules and assumptions on which the alternate reserves estimates are based.  The SEC specifically noted that a company including a reserves sensitivity analysis table should remember that it is required to discuss known trends and uncertainties, which may include changes to prices and costs (as may be used in alternate reserves estimates), in its MD&A.

Reliable Technologies

A company that has not previously disclosed reserves estimates in a filing with the SEC or that is making a material addition to its reserves estimates must include a general disclosure of the technologies relied on in establishing the required level of certainty for such reserves. 

Persons Preparing Reserves Estimates or Conducting Reserves Audits

The proposing release would have required extensive disclosure regarding the qualifications of the technical person primarily responsible for preparing a company’s reserves estimates or conducting a reserves audit according to a specified list of criteria relating to education, experience, licensing and organization membership.  The SEC followed the recommendations of numerous commenters and, in the final rules, required instead that a company provide a general discussion of the internal controls used to assure objectivity in the reserves estimation process and disclosure of the qualifications of the technical person primarily responsible for preparing the reserves estimates or conducting any reserves audit.  The disclosures are required whether the reserves preparers or auditors are employees of the filer or a third party.  Additionally, the final rules require that if a third party prepared reserves estimates or conducted a reserves or process audit, the company must file a report of the third party as an exhibit to the relevant filing.  This report is not the complete reserves report but rather a report incorporating specific information prescribed by the new rules regarding the scope of work undertaken and the results thereof.

Proved Undeveloped Reserves

The SEC proposed requiring a table disclosing for each of the last five years the amount of PUDs converted to proved developed reserves and the net investment in conversion of PUDs into proved developed reserves during the year.  The proposing release also would have required a discussion of plans to develop PUDs in the future.  Under the final rules, however, oil and gas companies are only required to include a narrative disclosure of the total quantity of PUDs at year end, any material changes in PUDs during the year (including by conversion to proved developed reserves), and investments and progress made in converting PUDs during the year.  Filers also must provide an explanation as to why any material concentrations of PUDs in individual fields or countries have remained undeveloped for five years or more after disclosure as PUDs.


Like the current rules, the final rules require disclosure for each of the prior three fiscal years of production, by final product sold, of oil, gas and other products.  The final rules additionally require disclosure of the average sales price per unit sold and the average production cost, not including ad valorem and severance taxes, per unit of production.  These disclosures are to be made by geographic area and for each country or field containing 15% or more of a company’s overall proved reserves.

Drilling Activities and Properties Disclosures

The proposing release would have required expanded tabular disclosures regarding drilling activities and a company’s properties.  In response to commenters concerns that these disclosures would require burdensome collection of information while providing little benefit to investors, the SEC abandoned its proposed changes and in the final rules codified substantially the same disclosure requirements for drilling activities and properties as are currently in effect in Industry Guide 2.  Similarly, other disclosure requirements from Industry Guide 2, such as those regarding delivery commitments and present activities, are codified by the final rules in substantially the same form.

MD&A Guidance for Companies Engaged in Oil and Gas Producing Activities

The proposed rules included a provision setting forth several detailed reserves and production-related MD&A topics that oil and gas companies should consider discussing in its MD&A or in a separate section accompanying its reserves disclosures.  The SEC did not codify this provision in the final rules and instead provided guidance in the final release as to topics that the SEC's staff has commented upon in its review of the MD&A section of filings made by oil and gas companies.  The SEC indentified in the release several topics that an oil and gas company should consider discussing in its MD&A, if material to the company, including:

  • changes in reserves and the sources of such changes, such as price changes, technical revisions and changes in the status of any concessions;
  • technologies used to establish the appropriate level of certainty for any material additions or increases in reserves, including those that are the result of the adoption of the final rules;
  • prices and costs, including the impact on depreciation, depletion and amortization and the full-cost ceiling test;
  • performance of currently producing wells, including water production from such wells and the need to use enhanced recovery techniques to maintain production;
  • a company's recent ability to convert PUDs to proved developed reserves, and, if disclosed, probable reserves to proved reserves and possible reserves to probable and proved reserves;
  • the minimum remaining terms of leases and concessions;
  • material changes to any line item in its tabular disclosures under the final rules; and
  • geopolitical risks that apply to material concentrations of reserves.

The SEC also noted that, as many of the relevant topics are specifically related to the disclosures required by these rules, discussion may be better placed closer to these disclosures within a filing with proper cross-references made in the MD&A section. 

Conforming Changes to Form 20-F

The final rules amend Form 20-F, which is used by certain foreign private issuers to file their annual reports, to make the disclosures of such issuers consistent with those required of U.S. oil and gas companies.  Foreign private issuers will still be allowed to exclude required disclosures about reserves and agreements if its home country prohibits the disclosures.    The SEC clarified in the final release that foreign private issuers under the Multi-Jurisdictional Disclosure System that use Form 40-F and that comply with NI 51-101 in Canada will not need to comply with the new rules.


The final rules require companies to begin complying with the new disclosure requirements for registration statements filed on or after January 1, 2010 and for annual reports on Forms 10-K and 20-F for fiscal years ending on or after December 31, 2009.  A company with a non-calendar fiscal year will not be able to apply the new rules to disclosures in its quarterly reports prior to filing its first annual report under the new rules.  Further, the final rules do not allow voluntary early compliance.  The SEC has indicated that the date for mandatory compliance may be delayed if warranted by its discussions with the FASB or the IASB regarding corresponding accounting standard revisions.

© Bracewell & Giuliani LLP, 2009