basis for decisions to invest in resource development.
    Most commenters addressing this issue supported permitting the
disclosure of probable and possible reserves in filed documents.\191\
They believed that such disclosure would provide a more complete
picture of a company's full portfolio of opportunities.\192\ One
commenter noted that this information often is already available on
company Web sites and in press releases.\193\ However, several
commenters supporting the proposal cautioned that there could be
significant variability among disclosures.\194\
---------------------------------------------------------------------------

    \191\ See letters from CFA, Chesapeake, Deloitte, EnCana,
Evolution, McMoRan, Newfield, Petrobras, Petro-Canada, Questar,
Ryder Scott, Sasol, Ryder Scott, Shell, SPE, Three Senators, Wagner,
and Zakaib.
    \192\ See letters from CFA, Evolution, Petro-Canada, Ryder
Scott, and Wagner.
    \193\ See letter from Evolution.
    \194\ See letter from EnCana.
---------------------------------------------------------------------------

    Other commenters expressed concern about disclosure of unproved
reserves, but conceded that voluntary disclosure would be
acceptable.\195\ These commenters were concerned that such disclosure
may confuse investors and expose companies to increased litigation
because of the inherent uncertainty associated with probable and
possible reserves.\196\ They noted that various

technologies may be used to support these estimates.\197\
---------------------------------------------------------------------------

    \195\ See letters from API, ExxonMobil, Imperial, Repsol, and
Total.
    \196\ See letters from API, ExxonMobil, Imperial, and Repsol.
    \197\ See letters from API, ExxonMobil, and Imperial.
---------------------------------------------------------------------------

    Several commenters opposed permitting disclosure of probable and
possible reserves in Commission filings for similar reasons.\198\
Again, they were concerned that the inherent uncertainty associated
with such reserves estimates may lead to investor confusion and
misunderstanding.\199\ They believed that the broad range of
technologies and methods used by companies to support these estimates
would lead to inconsistent disclosure among companies.\200\
---------------------------------------------------------------------------

    \198\ See letters from Apache, Devon, Energen, Eni, and
Southwestern.
    \199\ See letters from Apache, Devon, Eni, and Southwestern.
    \200\ See letters from Devon, Eni, and Southwestern.
---------------------------------------------------------------------------

    We note that numerous oil and gas companies already disclose
unproved reserves on their Web sites and in press releases. This
practice does not appear to have created confusion in the market.
However, we understand commenters' concerns that probable and possible
reserves estimates are less certain than proved reserves estimates and
so may increase litigation risk. By making these disclosures voluntary,
a company could exercise its own discretion as to whether to provide
the market with this disclosure.
    Some commenters were concerned that voluntary disclosure by some
companies may raise confusion as to why other companies do not disclose
these classifications of reserves.\201\ One commenter was concerned
that voluntary disclosure may increase market pressure on all companies
to disclose probable and possible reserves estimates.\202\ Considering
the fact that many companies already make these disclosures public, we
do not believe that this is an adequate reason for prohibiting from
filings disclosure that may be helpful to investors.
---------------------------------------------------------------------------

    \201\ See letters from Apache and Total.
    \202\ See letter from Eni.
---------------------------------------------------------------------------

iv. Resources Not Considered Reserves
    Because we are permitting disclosure of probable and possible
reserves, we are revising existing Instruction 5 to Item 102 of
Regulation S-K to continue to prohibit disclosure of estimates of oil
or gas resources other than reserves, and any estimated values of such
resources, in any document publicly filed with the Commission, unless
such information is required to be disclosed in the document by foreign
or state law.\203\ Five commenters recommended that the rules permit
disclosure of all categories of resources, including those that do not
qualify as reserves.\204\ One commenter believed that the prohibition
against disclosing all resources deprives public markets of significant
information without meaningfully enhancing investor protection and
ultimately may harm the efficiency and development of U.S. markets and
U.S. companies raising capital.\205\ That commenter also thought such a
restriction could also encourage companies to form outside of the
U.S.\206\ Another commenter believed that the uncertainty of resource
estimates is best communicated by reporting the full range of
estimates.\207\ In addition, another commenter believed that clear
disclosure would allay concerns about investor misunderstanding of
estimates of resources that do not qualify as reserves.\208\ That
commenter noted that excluding resources that are not reserves is
inconsistent with international standards and the fact that these
resources are disclosed in the U.S. on Web sites and in press
releases.\209\ We continue to be concerned that such resources are too
speculative and may lead investors to incorrect conclusions. Therefore,
we are adopting the proposal to prohibit disclosure of resources other
than reserves.
---------------------------------------------------------------------------

    \203\ See Instruction 5 to Item 102 [17 CFR 229.102].
    \204\ See letters from Davis Polk, Petro-Canada, Shearman &
Sterling, SPE, and Zakaib.
    \205\ See letter from Shearman & Sterling.
    \206\ Id.
    \207\ See letter from SPE.
    \208\ See letter from Davis Polk.
    \209\ See letter from Davis Polk.
---------------------------------------------------------------------------

    However, consistent with existing Instruction 5, a company may
continue to disclose such estimates of non-reserves resources in a
Commission filing related to an acquisition, merger, or consolidation
if the company previously provided those estimates to a person that is
offering to acquire, merge, or consolidate with the company or
otherwise to acquire the company's securities.\210\ Several commenters
recommended that the Commission maintain this exception so that the
company's shareholders would not be at an informational disadvantage
compared to the counterparty when assessing a merger.\211\ We agree
with these commenters and have retained the exception in the revised
Instruction 5 adopted today.
---------------------------------------------------------------------------

    \210\ Id.
    \211\ See letters from Devon, ExxonMobil, Shell, and Total.
---------------------------------------------------------------------------

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

    \212\ See letters from Canadian Natural, CAPP, CFA, Chesapeake,
Deloitte, Devon, Evolution, ExxonMobil, McMoRan, Nexen, Petro-
Canada, and Total.
    \213\ See letters from Chesapeake, Deloitte, and McMoRan.
    \214\ See letter from CFA.
    \215\ See letters from Evolution and Total.
---------------------------------------------------------------------------

    However, five commenters specifically opposed requiring such an
analysis.\216\ They believed that such a requirement would cause
confusion and harm comparability.\217\ Three commenters opposed such a
sensitivity analysis because using different prices could mislead
investors.\218\ We are adopting this table, as proposed, as a voluntary
disclosure rather than a requirement. However, as proposed, the table
would require disclosure of the assumptions behind varying estimates.
We believe this disclosure will mitigate any investor confusion.
---------------------------------------------------------------------------

    \216\ See letters from Canadian Natural, CAPP, Devon, EnCana,
and ExxonMobil.
    \217\ See letters from EnCana and Ryder Scott.
    \218\ See letters from Apache, Petrobras, and Wagner.
---------------------------------------------------------------------------

    In addition, we remind companies that Item 303 of Regulation S-K
(Management's Discussion and Analysis of Financial Condition and
Results of Operations) \219\ requires discussion of

known trends and uncertainties, which may include changes to prices and
costs. A form of this optional reserves sensitivity analysis table is
set forth below.
---------------------------------------------------------------------------

    \219\ 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                               Oil     Gas    Product A     Oil     Gas    Product A     Oil     Gas    Product A
                                                                    Mbbls   mmcf     measure     mbbls   mmcf     measure     mbbls   mmcf     measure
--------------------------------------------------------------------------------------------------------------------------------------------------------
Scenario 1.......................................................  ......  ......  ...........  ......  ......  ...........  ......  ......  ...........
Scenario 2.......................................................  ......  ......  ...........  ......  ......  ...........  ......  ......  ...........
--------------------------------------------------------------------------------------------------------------------------------------------------------

c. Separate Disclosure of Conventional and Continuous Accumulations
    Under the proposal, new Item 1202 would have required companies to
disclose reserves from conventional accumulations separately from
reserves in continuous accumulations. Nine commenters recommended
disclosure based on the final product.\220\ These commenters opposed
segregating disclosure based on the type of accumulation that is
involved.\221\ They believed that such disclosure would be too complex
and detailed and of little use to investors.\222\ In addition, seven
commenters pointed out that separation may be impossible because some
fields contain both conventional and continuous accumulations.\223\
This would make allocation of costs arbitrary.\224\ However, four
commenters supported the definitions and separate disclosure by type of
accumulation.\225\ One commenter believed that such disclosure would
allow investors to assess the impact of unconventional sources on
reserves.\226\
---------------------------------------------------------------------------

    \220\ See letters from Apache, API, Canadian Natural, CAPP,
EnCana, ExxonMobil, Imperial, Petro-Canada, and Total.
    \221\ See letters from Apache, API, CAPP, Chesapeake, Devon,
ExxonMobil, Imperial, Repsol, and Shell.
    \222\ See letters from Apache, API, BP, CAPP, Chesapeake,
Chevron, Devon, E&Y, EnCana, ExxonMobil, Imperial, Petro-Canada,
Repsol, and Southwestern.
    \223\ See letters from BP, Canadian Natural, CAPP, EnCana,
Petro-Canada, Ryder Scott, and Talisman.
    \224\ See letters from EnCana and Ryder Scott.
    \225\ See letters from Davis Polk, EIA, Petrobras, and Wagner.
    \226\ See letter from Wagner.
---------------------------------------------------------------------------

    Although we agree conceptually that the focus of reserves
disclosure should be on the final product, we also recognize that the
production of oil and gas from varying sources can have significantly
different economics. Extraction of oil and gas from continuous
accumulations can be much more labor and resource intensive than
extraction of oil and gas from traditional wells. They often require
greater ongoing efforts and expense after the initial extraction
equipment is in place, making such operations more sensitive to price
fluctuations.
    We agree with the commenters that disclosure based on the end
product sold would provide a more effective basis for distinguishing
reserves that disclosure based on the type of accumulation in which the
reserves are held. Therefore, we have revised the disclosure to be
based on the end product that is sold by the company.\227\ However,
with respect to the end product, new Item 1202 makes a distinction
between oil and gas, on the one hand, and synthetic oil and gas, on the
other. Synthetic products require processing of the raw resource
material, either while it is still in the ground (``in situ'') or after
it is extracted, before it can be used as refinery feedstock or as
natural gas. Such processes currently include bitumen upgrading as well
as coal liquefaction and gasification. However, resources from some
continuous accumulations, such as coalbed methane, do not require such
processing and therefore are not associated with the same level of
ongoing costs once a well has been drilled because the in-ground
resource is already oil or gas (in the case of coalbed methane, the in-
ground resource is methane, trapped in a coalbed). Thus, coalbed
methane would not be considered a synthetic product.
---------------------------------------------------------------------------

    \227\ See Item 1202 [17 CFR 229.1202].
---------------------------------------------------------------------------

d. Preparation of Reserves Estimates or Reserves Audits
    In the Proposing Release, we proposed to require a company to
disclose whether or not the technical person \228\ primarily
responsible for preparing the reserves estimate possessed certain
specified qualifications and was subject to a list of controls for
maintaining objectivity. Most commenters addressing the issue opposed
this proposed requirement.\229\ However, many of these commenters
appeared to believe that the disclosure requirement would pertain to
every person involved with the estimation process.\230\ If adopted,
they noted that such disclosure would be voluminous, adding unnecessary
complexity to disclosures.\231\ Four commenters suggested that we
clarify that the disclosure is limited to the chief technical person
who oversees the company's overall reserves estimation process,\232\
which was the intent of the proposal. Five commenters supported this
disclosure because it helps users understand the objectivity and
quality of reserves estimates.\233\
---------------------------------------------------------------------------

    \228\ With regard to the objectivity of a technical person, the
``person'' could be an individual or an entity, as appropriate.
However, with regard to the qualifications of a person, the
disclosure would relate to the individual who is primarily
responsible for the technical aspects of the reserves estimation or
audit. Thus, this individual is not necessarily the individual
generally overseeing the estimation or audit, but the individual who
is primarily responsible for the actual calculations and estimation
or audit.
    \229\ See letters from Apache, API, Chevron, Energen, Eni,
ExxonMobil, Newfield, Nexen, PEMEX, Petro-Canada, Ryder Scott,
Shell, and Total.
    \230\ See letters from Apache, API, ExxonMobil, Newfield, Nexen,
PEMEX, Ryder Scott, and Total.
    \231\ See letters from Apache, API, ExxonMobil, Newfield, Nexen,
PEMEX, Repsol, and Total.
    \232\ See letters from API, ExxonMobil, PEMEX, and Petro-Canada.
    \233\ See letters from CFA, Devon, EnCana, Southwestern, and
Wagner.
---------------------------------------------------------------------------

    It was our intent to limit the disclosure to the technical person
primarily responsible for overseeing the reserves estimates. However,
there may have been confusion with respect to this point based on a
footnote which stated that we sought disclosure about the person who
``is primarily responsible for the actual calculations and estimation
or audit.'' By that term, we did not intend to include any person
making ``actual calculations.'' We recognize that, ultimately, the
reserves estimates are overseen by top management, which may or may not
have reserves estimation expertise. The focus of the final rule is the
primary technical person responsible for overseeing the preparation of
the reserves estimation process. We have

revised the language in the rule to clarify this point.\234\
---------------------------------------------------------------------------

    \234\ See Item 1202(a)(7) [17 CFR 229.1202(a)(7)].
---------------------------------------------------------------------------

    Two commenters noted that it was inconsistent to require such
precise disclosure about reserves experts, but not other experts.\235\
One of those commenters recommended that the rule require expert
language, including clear disclosure of which portion of the reserves
estimate the third party is expertising and filed consents.\236\ The
concept of an expert under the Securities Act is different from the
disclosures that we seek regarding the qualifications and objectivity
of persons responsible for the preparation or audit of oil and gas
reserves. Under the Securities Act, disclosure must be made when the
company represents that disclosure is based on the authority of an
expert. Although the Securities Act concept of experts will continue to
be relevant when the reserves disclosures are in, or incorporated into,
a Securities Act filing and the company represents that disclosure is
based on the authority of an expert, the new rules requiring disclosure
about the reserves preparer or auditor in a company's Exchange Act
reports are intended to help investors determine whether reserves
estimates, which are highly technical, have been prepared by a
qualified, objective person, regardless of whether that person is an
employee of the company.
---------------------------------------------------------------------------

    \235\ See letters from API and Deloitte.
    \236\ See letter from Deloitte.
---------------------------------------------------------------------------

    However, we agree with commenters that a prescribed list of
qualifications and objectivity requirements may be too rigid for all
situations. With respect to technical qualifications, several
commenters noted that licensing requirements can vary greatly among
jurisdictions.\237\ Commenters also believed that disclosure of a
person's objectivity was unnecessary because management is required to
install appropriate internal controls to ensure the reliability of
reserves estimates.\238\ In fact, some commenters recommended that we
limit the disclosure to a description of a company's internal controls,
including the company's technical assessment routine, management and
board review and approval processes, the internal audit process, the
extent to which the company uses external parties to estimate or audit
reserves estimates, and a summary description of the qualifications of
the company's typical reserves estimators.\239\ We are following these
commenters' recommendations and adopting a rule that requires a company
to provide a general discussion of the internal controls that it uses
to assure objectivity in the reserves estimation process and disclosure
of the qualifications of the technical person primarily responsible for
preparing the reserves estimates or conducting the reserves audit if
the company discloses that such a reserves audit has been performed,
regardless of whether the technical person is an employee or an outside
third party.\240\
---------------------------------------------------------------------------

    \237\ See letters from AAPG, API, Chevron, Eni, Petro-Canada,
Questar, and SPE.
    \238\ See letters from API, Chevron, Energen, ExxonMobil,
Newfield, Nexen, Petrobras, Ryder Scott, Shell, StatoilHydro, and
Total.
    \239\ See letters from ExxonMobil, Nexen, Shell, and
StatoilHydro.
    \240\ See Item 1202(a)(7) [17 CFR 229.1202(a)(7)].
---------------------------------------------------------------------------

    We did not propose, but sought comment on, whether the rules should
require a company to retain an independent third party to prepare, or
conduct a reserves audit of, the company's reserves estimates. Most
commenters urged the Commission not to adopt such a requirement.\241\
They believed that a company's internal staff, particularly at larger
companies, is generally in a better position to prepare those estimates
\242\ and that there is a potential lack of qualified third party
engineers and other professionals available to conduct the increased
work that would result from such a requirement.\243\ We agree with
these commenters and are not adopting a requirement that an independent
third party prepare, or conduct a reserves audit of, the company's
reserves estimates.
---------------------------------------------------------------------------

    \241\ See letters from API, BHP, BP, CFA, CNOOC, Denbury, Devon,
Eni, Energy Literacy, ExxonMobil, Imperial, R. Jones, D. McBride,
Newfield, Nexen, Petro-Canada, Ross, D. Ryder, Sasol, Shell,
Talisman, Total, and W. van de Vijver.
    \242\ See letters from API, Denbury, ExxonMobil, Imperial,
Nexen, Shell, and Talisman.
    \243\ See letters from AAPG, API, BP, Devon, ExxonMobil,
Imperial, D. McBride, Newfield, D. Ryder, and Sasol.
---------------------------------------------------------------------------

e. Reserve Audits and The Contents of Third-Party Reports
    In the Proposing Release, we proposed that, if a company represents
that its estimates of reserves are prepared or audited by a third
party, the company must file a report of the third party as an exhibit
to the relevant registration statement or report. Two commenters
believed that a company description of the third party's report would
be sufficient because the reports can contain sensitive
information.\244\ However, another commenter was concerned that not
filing the report may lead to mischaracterizations by the company.\245\
This commenter supported the filing of a report by the third party
reserves estimator or auditor, but believed that the Commission should
determine the contents of such a report.\246\ Two commenters supported
the filing of the report ``letter'' as an exhibit, but not the full
reserves report because it may contain proprietary information.\247\
---------------------------------------------------------------------------

    \244\ See letters from Evolution and Petro-Canada.
    \245\ See letter from Wagner.
    \246\ See letter from Wagner.
    \247\ See letters from Devon and Ryder Scott.
---------------------------------------------------------------------------

    As proposed, we are adopting a new rule to require that if the
company represents that a third party prepared the reserves estimate or
conducted a reserves audit of the reserves estimates, the company must
file a report of the third party as an exhibit to the relevant
registration statement or report.\248\ These reports need not be the
full ``reserves report,'' which is often very detailed and voluminous.
Rather, these reports could be shorter form reports that summarize the
scope of work performed by, and conclusions of, the third party. These
reports must include the following disclosure, based on the Society of
Petroleum Evaluation Engineers's audit report guidelines:
---------------------------------------------------------------------------

    \248\ See Item 1202(a)(8) [17 CFR 229.1202(a)(8)].
---------------------------------------------------------------------------

     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.

In addition, if the report is related to a reserves audit, it must
contain a brief summary of the third party's conclusions with respect
to the reserves estimates. Finally, if the disclosures are

made in, or incorporated into, a Securities Act registration statement,
the company must file a consent of the third party as an exhibit to the
filing.
    In the Proposing Release, we proposed to define the term ``reserves
audit'' as ``the process of reviewing certain of the pertinent facts
interpreted and assumptions made that have resulted in an estimate of
reserves prepared by others and the rendering of an opinion about the
appropriateness of the methodologies employed, the adequacy and quality
of the data relied upon, the depth and thoroughness of the reserves
estimation process, the classification of reserves appropriate to the
relevant definitions used, and the reasonableness of the estimated
reserves quantities. In order to disclose that a `reserves audit' has
been conducted, the report resulting from this review must represent an
examination of at least 80% of the portion of the registrant's reserves
covered by the reserves audit.'' We are substantively adopting the
first sentence of this definition as proposed.
    However, in response to comments received, we are not adopting the
proposed second sentence of the definition of the term ``reserves
audit.'' Two commenters supported the proposed 80% threshold regarding
the proportion of reserves that a reserves auditor must review in order
for the company to characterize that auditor's work as a ``reserves
audit.'' \249\ Another commenter believed that the 80% threshold was
appropriate for preparing reserves estimates.\250\ But three commenters
believed that an audit should simply disclose the percentage that was
audited.\251\ One of these noted that it has its reserves audit
performed on a rolling basis.\252\ We believe that disclosure of the
work done in the required third-party report makes a bright-line
percentage test unnecessary. If a company conducts its reserves audit
on a rolling basis, it is appropriate for its shareholders to be aware
of that fact. Therefore, we are not adopting the proposed 80%
threshold. We believe that disclosure of the scope of the review will
enable investors to assess the significance to attribute to a reserves
audit.
---------------------------------------------------------------------------

    \249\ See letters from Evolution and Wagner.
    \250\ See letter from Ryder Scott.
    \251\ See letters from Devon, Ryder Scott, and Talisman.
    \252\ See letter from Talisman.
---------------------------------------------------------------------------

f. Process Reviews
    In the Proposing Release, we solicited comment regarding whether we
should permit a company to disclose that it has hired a third party to
perform a process review under the Society of Petroleum Engineers'
(SPE's) reserves auditing standards.\253\ Those standards define a
process review as an investigation by a person who is qualified by
experience and training equivalent to that of a reserves auditor to
address the adequacy and effectiveness of an entity's internal
processes and controls relative to reserves estimation. However, those
standards also note that a process review should not include an opinion
relative to the reasonableness of the reserves quantities and should be
limited to the processes and control system reviewed. The SPE's
standards state that, although such reviews may provide value to the
entity, an external or internal process review is not of sufficient
rigor to establish appropriate classifications and quantities of
reserves and should not be represented to the public as being
equivalent to a reserves audit.
---------------------------------------------------------------------------

    \253\ See SPE Reserves Auditing Standards.
---------------------------------------------------------------------------

    Five commenters believed that internal process reviews are helpful
in promoting accuracy and effectiveness, so companies should be
permitted to disclose them.\254\ However, one commenter was concerned
that, although a process review can be helpful for a company,
disclosure may give investors a false sense of security.\255\ Two
commenters suggested that, if a company discloses that it performed a
process review, it should clearly disclose what a process review
is.\256\
---------------------------------------------------------------------------

    \254\ See letters from Devon, ExxonMobil, Petro-Canada, Ryder
Scott, and Shell.
    \255\ See letter from Wagner.
    \256\ See letters from Devon and Petro-Canada.
---------------------------------------------------------------------------

    We agree that a process review can be helpful to the company and
ultimately to investors. However, we also agree that if a company
discloses that it has hired a third party to perform a process review,
it must clearly disclose the details surrounding that process review.
As such, the new rules treat a process review similar to a reserves
audit. If the company discloses that it has hired a third party to
conduct a process review, it must file a report of the third party as
an exhibit to the relevant registration statement or report and, if the
disclosures are made in, or incorporated into, a Securities Act
registration statement, the company must file a consent of the third
party as an exhibit to the filing.\257\
---------------------------------------------------------------------------

    \257\ See Item 1202(a)(8) [17 CFR 229.1202(a)(8)].
---------------------------------------------------------------------------

4. Item 1203 (Proved Undeveloped Reserves)
    We proposed requiring tabular disclosure of the aging of proved
undeveloped reserves (PUDs). Proposed Item 1203 would have required an
oil and gas company to prepare a table showing, for each of the last
five fiscal years and by product type, proved reserves estimated using
current prices and costs in the following categories:
     Proved undeveloped reserves converted to proved developed
reserves during the year; and
     Net investment required to convert proved undeveloped
reserves to proved developed reserves during the year.\258\
---------------------------------------------------------------------------

    \258\ See Item 1204 [17 CFR 229.1204].
---------------------------------------------------------------------------

    Numerous commenters were concerned that the proposed five-year
table would be too complex for investors to understand.\259\ They
expressed concern that the proposed table may mislead investors by not
clearly attributing costs to the year in which the corresponding PUDs
are converted because much of the costs may have been spent in previous
years.\260\ In addition, commenters noted that maintenance of such data
would be costly \261\ and that companies currently do not always
capture this type of information because management does not use it to
run the business.\262\
---------------------------------------------------------------------------

    \259\ See letters from API, BP, Canadian Natural, CAPP, Chevron,
Eni, Equitable, ExxonMobil, Nexen, Petrobras, Repsol, Shell, and
Wagner.
    \260\ See letters from API, ExxonMobil, Petrobras, Ryder Scott,
Total, and Wagner.
    \261\ See letters from API, Canadian Natural, CAPP, Chevron,
Eni, Equitable, ExxonMobil, Nexen, Petrobras, Southwestern, and
Wagner.
    \262\ See letter from Apache.
---------------------------------------------------------------------------

    Eight commenters suggested an alternative of disclosing (1) the
quantity of undeveloped reserves if material, (2) the progress in
converting PUDs, and (3) any material changes in the current year.\263\
Three U.S. Senators recommended requiring disclosure of development
plans in addition to the table.\264\ They believed that requiring
reporting of investments and planned investments in oil and gas
development would provide investors with certainty about companies'
intentions to develop the federal lands that they have at their
disposal.\265\ However, three commenters opposed disclosure of a
company's plans to drill and expected capital expenditures because
disclosing their business plan may cause competitive harm and might
expose them to litigation if results differ from their plan.\266\ Six
commenters supported the proposed table.\267\
---------------------------------------------------------------------------

    \263\ See letters from API, Canadian Natural, Chevron,
ExxonMobil, Newfield, Nexen, Petrobras, and Ryder Scott.
    \264\ See letter from Three Senators.
    \265\ See letter from Three Senators.
    \266\ See letters from Chesapeake, Devon, and Newfield.
    \267\ See letters from Chesapeake, Deloitte, Devon, Three
Senators, Talisman, and Wagner.

---------------------------------------------------------------------------

    We recognize the concern that the PUD table that we proposed may be
confusing to investors because it would not attribute capital
expenditures to the corresponding reserves as they are developed. As an
alternative to the proposed table, we are adopting rules that require a
company to disclose the following in narrative form:
     The total quantity of PUDs at year end;
     Any material changes in PUDs that occurred during the
year, including PUDs converted into proved developed reserves;
     Investments and progress made during the year to convert
PUDs to proved developed oil and gas reserves; and
     An explanation of the reasons why material concentrations
of PUDs in individual fields or countries have remained undeveloped for
five years or more after disclosure as PUDs.\268\
---------------------------------------------------------------------------

    \268\ See Item 1203 [17 CFR 229.1203].
---------------------------------------------------------------------------

    These disclosures would have been required under the proposal, but
much of it would have been presented in tabular format. We believe that
a narrative approach to these disclosures will provide companies with a
better vehicle to explain the status of their PUDs and their track
record for developing such reserves. Rather than requiring forward-
looking information about a company's plans to develop reserves that
may lead to exaggeration of a company's capability to actually convert
such reserves, we believe that disclosure of a company's verifiable,
established track record of converting such reserves, including its
ability to obtain financing for such activities, would be a better
indication of the likelihood of that company's success in developing
reserves in the future. Specific required disclosure regarding a
company's failure to develop material concentrations of PUDs for five
or more years should address commenters' concerns that the company may
have no intention to develop such reserves.
5. Item 1204 (Oil and Gas Production)
    We proposed to codify the Industry Guide 2 disclosure regarding oil
and gas production as Item 1204 of Regulation S-K, in tabular form and
with greater detail. One commenter did not believe that separating
production, sales price and production costs based on whether they were
related oil wells or gas wells would be valuable to investors.\269\ It
believed that companies do not use this information to manage their
business and do not maintain systems to capture this information on
that basis, so tracking such data would require costly changes to their
systems.\270\ Two commenters also believed that it would not be
possible to separate production cost by product because many units
extract different products.\271\ One commenter also recommended that
production not be segregated by type of accumulation.\272\
---------------------------------------------------------------------------

    \269\ See letter from Apache.
    \270\ See letter from Apache.
    \271\ See letters from Total and ExxonMobil.
    \272\ See letter from ExxonMobil.
---------------------------------------------------------------------------

    We have decided not to adopt Item 1204 as proposed. Rather, we are
codifying the existing Industry Guide 2 disclosure item with several
revisions. Consistent with the Industry Guide 2 disclosure item, the
Item 1204, as adopted, requires disclosure, for each of the prior three
fiscal years, of production, by final product sold, of oil, gas, and
other products. In addition, for the same time period, the company must
disclose, by geographical area:
     The average sales price (including transfers) per unit of
oil, gas and other products produced; and
     The average production cost, not including ad valorem and
severance taxes, per unit of production.
    However, unlike the Industry Guide disclosure item, this disclosure
must be made by geographical area and for each country and field
containing 15% or more of the registrant's proved reserves, expressed
on an oil-equivalent-barrels basis.
    Similarly, we are codifying the instructions to the Industry Guide
2 item. One commenter recommended that we maintain some of the existing
instructions from the Industry Guide.\273\ The first instruction
codified from the Industry Guide clarifies that net production should
include only production that is owned by the registrant and produced to
its interest, less royalties and production due others. However, in
special situations (e.g., foreign production), net production before
any royalties may be provided, if more appropriate. If ``net before
royalty'' production figures are furnished, the change from the usage
of ``net production'' should be noted.
---------------------------------------------------------------------------

    \273\ See letter from ExxonMobil.
---------------------------------------------------------------------------

    The second instruction, which is also from the Industry Guide,
states that production of natural gas should include only marketable
production of natural gas on an ``as sold'' basis. Production will
include dry, residue, and wet gas, depending on whether liquids have
been extracted before the registrant transfers title. Flared gas,
injected gas, and gas consumed in operations should be omitted.
Recovered gas-lift gas and reproduced gas should not be included until
sold. Synthetic gas, when marketed as such, should be included in
natural gas sales.
    We are adding a third instruction that was not in the Industry
Guide. This instruction states that, if any product, such as bitumen,
is sold or custody is transferred prior to conversion to synthetic oil
or gas, the product's production, transfer prices, and production costs
should be disclosed separately from all other products. This
instruction is necessary because the existing Industry Guide 2
disclosure requirement only required separate disclosure based on
whether the end product was oil or gas. This instruction merely
clarifies that disclosures under this item must be based on the end
product, which may not be oil or gas because the amendments will permit
the disclosure of reserves of other end products, such as bitumen.
    The fourth instruction codified from the Industry Guide states that
the transfer price of oil and gas (natural and synthetic) produced
should be determined in accordance with SFAS 69. And the fifth
instruction codified from the Industry Guide clarifies that the average
production cost per unit of production should be computed using
production costs disclosed pursuant to SFAS 69. Units of production
should be expressed in common units of production with oil, gas, and
other products converted to a common unit of measure on the basis used
in computing amortization. This instruction also adds products from
unconventional sources to the existing disclosure Item in Industry
Guide 2.
6. Item 1205 (Drilling and Other Exploratory and Development
Activities)
    We proposed to codify the Industry Guide 2 disclosure item
regarding drilling activities as Item 1205 of Regulation S-K, in
tabular form, with several revisions to that Industry Guide 2
disclosure item, including applying a new definition of the term
``geographic area'' and adding two categories of wells:
     Extension wells; and
     Suspended wells.
    Three commenters believed that the disclosures required under this
proposed Item would become too detailed.\274\ One of these commenters
also believed that the number of wells being drilled does not provide
an accurate picture of a company's drilling

activities because of the increased usage of horizontal wells.\275\
    Some commenters also did not believe that creating new categories
for extension wells and suspended wells would be meaningful.\276\ They
noted the burden of the added detail would exceed the value of the
information to investors.\277\ One pointed out that determining whether
a well constitutes an extension well would be difficult because of
multipurpose drilling.\278\
---------------------------------------------------------------------------

    \274\ See letters from Apache, ExxonMobil, and Total.
    \275\ See letter from ExxonMobil.
    \276\ See letters from Apache, API, and Imperial.
    \277\ See letters from Apache and Southwestern.
    \278\ See letter from Total.
---------------------------------------------------------------------------

    After considering the above comments, we have decided not to adopt
all of the proposed revisions to the existing Industry Guide 2
disclosure. We recognize that, for some companies that use advanced
drilling techniques, the proposed disclosure may not be a good
indicator of the extent of their exploratory and development
activities, although we believe that this disclosure is still important
for many companies. Therefore, we have decided to codify the existing
disclosures found in Industry Guide 2 related to drilling activities
without revision and to not require tabular disclosure.\279\ However,
as proposed, we are adding a new provision to this Item that requires
companies to discuss their exploratory and development activities
regarding oil and gas resources that are extracted by mining techniques
because we are now including such resources under the definition of
``oil and gas producing activities.''
---------------------------------------------------------------------------

    \279\ See Item 1205 [17 CFR 229.1205].
---------------------------------------------------------------------------

7. Item 1206 (Present Activities)
    Item 1206 codifies existing Item 7 of Industry Guide 2, which calls
for disclosure of present activities, including the number of wells in
the process of being drilled (including wells temporarily suspended),
waterfloods in process of being installed, pressure maintenance
operations, and any other related activities of material
importance.\280\ We are adopting Item 1206 substantially as proposed.
---------------------------------------------------------------------------

    \280\ See Item 1206 [17 CFR 229.1206].
---------------------------------------------------------------------------

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

    \281\ See Item 1207 [17 CFR 229.1207].
---------------------------------------------------------------------------

9. Item 1208 (Oil and Gas Properties, Wells, Operations, and Acreage)
    We proposed to codify disclosure about oil and gas properties,
wells, operations, and acreage as Item 1208 of Regulation S-K, in
tabular form, as well as make several revisions to the existing
disclosures, including applying a new definition of the term
``geographic area'' and adding language that better illustrates the
types of properties and the types of disclosures for those properties,
including the following:
     Identification and description generally of the company's
material properties, plants, facilities, and installations;
     Identification of the geographic area in which they are
located;
     Indication of whether they are located onshore or
offshore; and
     Description of any statutory or other mandatory
relinquishments, surrenders, back-ins, or changes in ownership.
    Six commenters believed that it is not necessary to enhance this
section from Industry Guide 2 because the requirements are already
covered by Item 102 of Regulation S-K.\282\ Commenters were
particularly concerned with the segmentation of this disclosure by
product, by type of accumulation, and by geographic location.\283\ They
believed that this level of detail would not be helpful to investors
and would impose added costs on companies because they currently do not
collect this detailed information.\284\ Moreover, seven commenters
thought that the well count disclosure is no longer meaningful because
of technologies such as horizontal drilling.\285\ They thought that, in
light of these new technologies, well count disclosure could be
misleading.\286\
    As with the case of drilling activities, we agree that the proposed
added detail could make the disclosures too cumbersome. In addition,
such disclosure may be of less importance to many companies because of
new drilling technology. Therefore, we are merely codifying the
existing Industry Guide 2 disclosure, without revision.\287\
---------------------------------------------------------------------------

    \282\ See letters from API, Chevron, ExxonMobil, Imperial,
Shell, and Total.
    \283\ See letters from Apache, ExxonMobil, Shell, and Total.
    \284\ See letters from Apache, ExxonMobil, and Petro-Canada.
    \285\ See letters from API, BP, Chevron, ExxonMobil, Imperial,
StatoilHydro, and Total.
    \286\ See letters from API and Imperial.
    \287\ See Item 1208 [17 CFR 229.1208].
---------------------------------------------------------------------------

V. Guidance for Management's Discussion and Analysis for Companies
Engaged in Oil and Gas Producing Activities

    We proposed to add a new Item 1209, which would have specified
topics that a company should address either as part of its Management's
Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) or in a separate section.\288\ Four commenters were
concerned that, although the proposed Item was intended to provide more
guidance regarding the disclosures required, it would effectively
require companies to address all of the issues listed in the Item.\289\
One recommended that, instead of a detailed list, the requirement
should clarify that companies should address ``material changes due to
technology, prices, concession conditions, commercial terms, known
trends, demands, commitments, uncertainties and any events that are
reasonably likely to have a material effect on reserves estimates and
financial condition.'' \290\ Similarly, another commenter recommended
that the Commission clarify that the Item is limited to material
impacts.\291\
---------------------------------------------------------------------------

    \288\ See Item 303 of Regulation S-K [17 CFR 229.303].
    \289\ See letters from Chevron, ExxonMobil, Petrobras, and
Shell.
    \290\ See letter from Repsol.
    \291\ See letter from Total.
---------------------------------------------------------------------------

    We are not adopting the proposed Item as part of Regulation S-K
because it is intended to be guidance, rather than a specific
disclosure Item. We agree that, if companies were to discuss every
issue provided in the list, the disclosure would be too long and
detailed to be of much use to most investors. Important issues could be
hidden amid unnecessary detail. However, we believe that added guidance
would be beneficial to companies regarding the issues that the
Commission's staff commented upon in its review of the MD&A section of
filings made by oil and gas companies.
    To begin, a fundamental premise of MD&A is that the information
provided should be related to issues that are material to a company.
Although we discuss a list of topics that a company might need to
discuss, a company need only discuss a topic if it constitutes,
involves, or indicates known trends, demands, commitments,
uncertainties, and events that are reasonably likely to have a material
effect on the company. These topics include:

     Changes in proved reserves and, if disclosed, probable and
possible reserves, and the sources to which such changes are
attributable, including changes made due to:
    [cir] Changes in prices;
    [cir] Technical revisions; and
    [cir] Changes in the status of any concessions held (such as
terminations, renewals, or changes in provisions);
     Technologies used to establish the appropriate level of
certainty for any material additions to, or increases in, reserves
estimates, including any material additions or increases to reserves
estimates that are the result of any of the final rules adopted in this
release;
     Prices and costs, including the impact on depreciation,
depletion and amortization as well as the full cost ceiling test;
     Performance of currently producing wells, including water
production from such wells and the need to use enhanced recovery
techniques to maintain production from such wells;
     Performance of any mining-type activities for the
production of hydrocarbons;
     The company's recent ability to convert proved undeveloped
reserves to proved developed reserves, and, if disclosed, probable
reserves to proved reserves and possible reserves to probable or proved
reserves;
     The minimum remaining terms of leases and concessions;
     Material changes to any line item in the tables described
in Items 1202 through 1208 of Regulation S-K;
     Potential effects of different forms of rights to
resources, such as production sharing contracts, on operations; and
     Geopolitical risks that apply to material concentrations
of reserves.
    The MD&A is typically presented in a self-contained section of the
registration statement or report. However, the disclosure requirements
that comprise new Subpart 1200 of Regulation S-K will cause a
substantial amount of an oil and gas company's disclosure to appear in
tabular format, providing an outline of much of a company's operations.
Because the tables will present many of the types of changes that
management often discusses in its MD&A, we believe it may be more
helpful to investors to locate such discussion close to the tables
themselves. Thus, to the extent that any discussion or analysis of
known trends, demands, commitments, uncertainties, and events that are
reasonably likely to have a material effect on the company is directly
relevant to a particular disclosure required by Subpart 1200, the
company may include that discussion or analysis with the relevant
table, with appropriate cross-references, rather than including it in
its general MD&A section.

VI. Conforming Changes to Form 20-F

    Form 20-F is the form on which foreign private issuers file their
annual reports and Exchange Act registration statements. Currently,
Form 20-F contains instructions that are similar to those in Item 102
of Regulation S-K. However, rather than referring to Industry Guide 2
for disclosures regarding oil and gas producing activities, Form 20-F
contains its own ``Appendix A to Item 4.D--Oil and Gas'' (Appendix A)
that provides guidance for oil and gas disclosures for foreign private
issuers.\292\ Appendix A is significantly shorter, and provides far
less guidance regarding disclosures, than Subpart 1200 or Industry
Guide 2. We proposed to revise Form 20-F to eliminate the reference to
Appendix A, and rather refer to Subpart 1200, which would expand the
disclosures required by foreign private issuers.
---------------------------------------------------------------------------

    \292\ See Appendix A to Item 4.D--Oil and Gas of Form 20-F [17
CFR 249.220f].
---------------------------------------------------------------------------

    Six commenters supported harmonizing the Form 20-F disclosures with
Regulation S-K.\293\ One noted that the proposal would make disclosure
more consistent and comparable among oil companies.\294\ It believed
the proposal would put all oil companies on a level playing field.\295\
However, one commenter recommended that the Commission exempt companies
reporting under International Financial Reporting Standards
(IFRS).\296\ It also recommended that instead of applying the proposed
Subpart 1200 to foreign private issuers, the Commission should revise
Appendix A to Form 20-F itself, making appropriate limitations for
foreign private issuers, such as eliminating the disclosure of wells
and acreage.\297\ Another commenter was concerned because the proposals
may hinder, rather than facilitate, transition to the use of IFRS.\298\
---------------------------------------------------------------------------

    \293\ See letters from CAQ, Deloitte, ExxonMobil, KPMG, PWC, and
Shell.
    \294\ See letter from ExxonMobil.
    \295\ See letter from ExxonMobil.
    \296\ See letter from Total.
    \297\ See letter from Total.
    \298\ See letter from Ross.
---------------------------------------------------------------------------

    We continue to believe that Subpart 1200 would be appropriate
disclosure for all public companies engaged in oil and gas producing
activities, including foreign private issuers. The added guidance in
Subpart 1200 should promote more consistent and comparable disclosures
among oil and gas companies. It is our understanding that many of the
larger foreign private issuers already provide disclosure in their
filings with the Commission comparable to the disclosure provided by
domestic companies. Thus, we are revising Form 20-F to incorporate
Subpart 1200 with respect to oil and gas disclosures and delete
Appendix A to Item 4.D in that form. We recognize that this requirement
may require a foreign private issuer to prepare two different reserves
estimates if the rules in their home jurisdiction require a different
pricing standard than the 12-month average that we adopt in this
release. However, we believe the same conflict would have existed under
our previous rule to the extent our pricing method differed from the
home jurisdiction's method.
    Appendix A currently allows a foreign private issuer to exclude
required disclosures about reserves and agreements if its home country
prohibits the disclosures. Two commenters suggested that the rule
continue to provide an exception for disclosures about reserves and
agreements that are prohibited by foreign laws.\299\ However, another
commenter believed that a company taking advantage of such an exception
should be required to disclose the country, the citation of the
relevant law or regulation, and the fact that the disclosed estimates
do not include amounts from the named country.\300\ We are not revising
this provision. Rather, because these considerations still apply to
such foreign private issuers, we are moving that provision from
Appendix A and adopting it as Instruction 2 to Item 4 of Form 20-F, as
proposed.\301\
---------------------------------------------------------------------------

    \299\ See letters from Shell and Total.
    \300\ See letter from ExxonMobil.
    \301\ Id.
---------------------------------------------------------------------------

    One commenter recommended clarifying that the new disclosures would
not apply to foreign private issuers under the Multi-Jurisdictional
Disclosure System (MJDS) using Form 40--F that comply with NI 51-101 in
Canada because those rules already are broadly consistent with
PRMS.\302\ We agree with this commenter and believe that such issuers
need not provide disclosures beyond those required in Canada.
---------------------------------------------------------------------------

    \302\ See letter from Deloitte.
---------------------------------------------------------------------------

VII. Impact of Amendments on Accounting Literature

A. Consistency With FASB and IASB Rules

    Numerous commenters recommended that the SEC generally coordinate
its efforts with the IASB and FASB to create a cohesive whole and not
adopt

competing models.\303\ We have begun, and will continue, to work with
both of these organizations to ensure a smooth transition to the new
reporting rules.
---------------------------------------------------------------------------

    \303\ See letters from CAQ, CFA, Eni, Grant Thornton, KPMG, and
PWC.
---------------------------------------------------------------------------

B. Change in Accounting Principle or Estimate

    In the Proposing Release, we expressed our view that the change
from using single-day year-end price to an average price should be
treated as a change in accounting principle, or a change in the method
of applying an accounting principle, that is inseparable from a change
in accounting estimate. Therefore, this change would be considered a
change in accounting estimate pursuant to Statement of Financial
Accounting Standard No. 154 ``Accounting Changes and Error
Corrections'' (SFAS 154) and would be accounted for prospectively.
    Commenters believed that the change would be best described as:
     A change in accounting estimate; \304\
---------------------------------------------------------------------------

    \304\ See letters from CAQ, Canadian Natural, CAPP, Deloitte,
Devon, KPMG, Petrobras, PWC, Repsol, Shell, and StatoilHydro.
---------------------------------------------------------------------------

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

    \305\ See letter from Deloitte.
---------------------------------------------------------------------------

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

    \306\ See letter from Petro-Canada.
---------------------------------------------------------------------------

    We believe that any accounting change resulting from the changes in
definitions and required pricing assumptions in Rule 4-10, should be
treated as a change in accounting principle that is inseparable from a
change in accounting estimate, which does not require retroactive
revision. We note that pursuant to AU 420.13, such a change requires
recognition in the independent auditor's report through the addition of
an explanatory paragraph.
    All commenters on the issue agreed that adoption of the rules
should not require retroactive revision of past reserves
estimates.\307\ Some believed retroactive revision of reserves
estimates would be very burdensome or impossible because such data was
not maintained.\308\ We agree with those commenters and believe that no
retroactive revisions will be necessary.
---------------------------------------------------------------------------

    \307\ See letters from Apache, CAQ, Canadian Natural, CAPP,
Deloitte, Devon, Evolution, ExxonMobil, Petrobras, Petro-Canada,
PWC, Repsol, Shell, StatoilHydro, and Total.
    \308\ See letters from Canadian Natural, Deloitte, Evolution,
Petrobras, and Shell.
---------------------------------------------------------------------------

    Three commenters recommended that the FASB revise Statement of
Financial Accounting Standard No. 19 (SFAS 19) to include
unconventional resources currently accounted for as mining activities
and also provide guidance that no retroactive revisions would be
required in that scenario.\309\ We will continue to work with the FASB
on this issue.
---------------------------------------------------------------------------

    \309\ See letters from CAQ, Petrobras, and PWC.
---------------------------------------------------------------------------

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

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

    \310\ See Rule 4-10(c) of Regulation S-X [17 CFR 210.4-10(c)].
---------------------------------------------------------------------------

    One commenter believed that the industry would need guidance
regarding how to transition operations that are disclosed and accounted
for as mining operations to oil and gas disclosure and accounting.\311\
It noted that this issue would be relevant not only coincident with the
new rules, but could be relevant to future events, such as a coal
mining company that in subsequent years changes its operations to in
situ coal gasification.\312\ That commenter believed that, without
guidance, the change from mining treatment to oil and gas treatment
could be considered a change in accounting principle which requires
retroactive revision.\313\ We acknowledge this commenter's concerns.
With respect to resources formerly considered mining activities, we
view the change from mining treatment to oil and gas treatment as a
change in accounting principle that is inseparable from a change in
accounting estimate, which does not require retroactive revision.
---------------------------------------------------------------------------

    \311\ See letter from KPMG.
    \312\ See letter from KPMG.
    \313\ See letter from KPMG.
---------------------------------------------------------------------------

VIII. Application of Interactive Data Format to Oil and Gas Disclosures

    In the Proposing Release, we sought comment on the desirability of
rules that would permit, or require, oil and gas companies to present
the tabular disclosures in Subpart 1200 in interactive data format in
addition to the currently required format. Most commenters addressing
the topic supported the use of XBRL for oil and gas disclosures.\314\
They believed using interactive data would be very helpful to investors
and analysts.\315\
---------------------------------------------------------------------------

    \314\ See letters from Audit Policy, CFA, Deloitte, Devon, E&Y,
ExxonMobil, PWC, Shell, Standard Advantage, StatoilHydro, and
Zakaib.
    \315\ See letters from CFA, Devon, E&Y, StatoilHydro, and
Zakaib.
---------------------------------------------------------------------------

    However, they also recommended that the Commission wait until a
well-developed taxonomy exists.\316\ Some recommended that the
Commission implement it in stages, initially with a voluntary
program.\317\ One commenter recommended that the SEC work with other
groups like SPE, IASB, and the United Nations to ensure tags ultimately
become the industry standard.\318\
---------------------------------------------------------------------------

    \316\ See letters from Audit Policy, Deloitte, Devon, E&Y,
ExxonMobil, PWC, Shell, StatoilHydro, and Zakaib.
    \317\ See letters from Audit Policy, Devon, E&Y, PWC,
StatoilHydro, and Zakaib.
    \318\ See letter from Zakaib.
---------------------------------------------------------------------------

    We agree that much of the disclosures regarding oil and gas
companies would be conducive to interactive data. We intend to continue
to work on developing a taxonomy for such disclosure. Once a well-
developed taxonomy is created, we will address this issue further. We
are not, however, adopting interactive data requirements in this
release. We will continue to consider whether to require interactive
oil and gas disclosure filings in the future and, if so, when such
filings should be required based on the development status of an oil
and gas disclosure taxonomy.

IX. Implementation Date

A. Mandatory Compliance

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

    Fifteen commenters agreed that a delayed compliance date would be
helpful in allowing companies to familiarize themselves with the new
disclosure requirements before having to comply with them.\319\ Four
commenters supported the proposed January 1, 2010 compliance date of
Securities Act filings and Exchange Act filings related to fiscal
periods ending on or after December 31, 2009.\320\ However, one
conditioned this approval upon the adoption of the rules before
December 31, 2008.\321\ Another suggested one year after adoption of
the rules.\322\
---------------------------------------------------------------------------

    \319\ See letters from Apache, Chevron, Davis Polk, Deloitte,
ExxonMobil, KPMG, Newfield, Petrobras, Petro-Canada, PWC, Ryder
Scott, Shell, Southwestern, Talisman, and Total.
    \320\ See letters from Davis Polk, ExxonMobil, Shell, and
StatoilHydro.
    \321\ See letter from ExxonMobil.
    \322\ See letter from Talisman.
---------------------------------------------------------------------------

    Four commenters believed that the proposed compliance date would be
too soon.\323\ One recommended a compliance date of December 31, 2010
to enable companies to make necessary changes in IT systems and data
processing.\324\ Another noted the magnitude of the proposed changes,
length of time to design, program and implement system changes, and the
goal of getting the best possible disclosure.\325\ One commenter
suggested delaying implementation for two years after adoption.\326\
---------------------------------------------------------------------------

    \323\ See letters from Apache, Petrobras, PWC, and Total.
    \324\ See letter from Petrobras.
    \325\ See letter from Apache.
    \326\ See letter from Devon.
---------------------------------------------------------------------------

    We continue to believe that the proposed compliance dates are
appropriate. However, as we discuss our revisions with the FASB and
IASB, we will consider whether to delay the compliance date further.

B. Voluntary Early Compliance

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

    \327\ See letters from Davis Polk, Devon, ExxonMobil, Petrobras,
Ryder Scott, Shell, and Wagner.
    \328\ See letter from Evolution.
    \329\ See letter from Davis Polk.
---------------------------------------------------------------------------

X. Paperwork Reduction Act

A. Background

    Our new rules and amendments contain ``collection of information''
requirements within the meaning of the Paperwork Reduction Act of 1995
(``PRA'').\330\ We submitted the new rules and amendments to the Office
of Management and Budget (OMB) for review in accordance with the
PRA.\331\ OMB has approved the revisions. The titles for these
collections of information are:
---------------------------------------------------------------------------

    \330\ 44 U.S.C. 3501 et seq.
    \331\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

    (1) ``Regulation S-K'' (OMB Control No. 3235-0071); \332\
---------------------------------------------------------------------------

    \332\ The paperwork burden from Regulation S-K and the Industry
Guides is imposed through the forms that are subject to the
disclosures in Regulation S-K and the Industry Guides and is
reflected in the analysis of those forms. To avoid a Paperwork
Reduction Act inventory reflecting duplicative burdens, for
administrative convenience, we estimate the burdens imposed by each
of Regulation S-K and the Industry Guides to be a total of one hour.
---------------------------------------------------------------------------

    (2) ``Industry Guides'' (OMB Control No. 3235-0069);
    (3) ``Regulation S-X'' (OMB Control No. 3235-0009);
    (4) ``Form S-1'' (OMB Control No. 3235-0065);
    (5) ``Form S-4'' (OMB Control No. 3235-0324);
    (6) ``Form F-1'' (OMB Control No. 3235-0258);
    (7) ``Form F-4'' (OMB Control No. 3235-0325);
    (8) ``Form 10'' (OMB Control No. 3235-0064);
    (9) ``Form 10-K'' (OMB Control No. 3235-0063); and
    (10) ``Form 20-F'' (OMB Control No. 3235-0063).
    We adopted all of the existing regulations and forms pursuant to
the Securities Act and the Exchange Act. These regulations and forms
set forth the disclosure requirements for annual reports \333\ and
registration statements that are prepared by issuers to provide
investors with the information they need to make informed investment
decisions in registered offerings and in secondary market transactions.
The industry guides supplement the existing regulations and forms and
provide guidance with respect to industry-specific disclosures.
---------------------------------------------------------------------------

    \333\ The pertinent annual reports are those on Forms 10-K and
20-F.
---------------------------------------------------------------------------

    Our amendments to these existing forms are intended to modernize
and update our reserves definitions to better reflect changes in the
oil and gas industry and markets and new technologies that have
occurred in the decades since the current rules were adopted, including
expanding the scope of permissible technologies for establishing
certainty levels of reserves, reserves classifications that a company
can disclose in a Commission filing, and the types of resources that
can be included in a company's reserves, as well as providing
information regarding a company's internal controls over reserves
estimation and the qualifications of person preparing reserves
estimates or conducting reserves audits. The new rules and amendments
also are intended to codify, modernize, and centralize the disclosure
items for oil and gas companies in Regulation S-K. Finally, the new
rules and amendments are intended to harmonize oil and gas disclosures
by foreign private issuers with disclosures by domestic companies.
Overall, the new rules and amendments attempt to provide improved
disclosure about an oil and gas company's business and prospects
without sacrificing clarity and comparability, which provide protection
and transparency to investors.
    The hours and costs associated with preparing disclosure, filing
forms, and retaining records constitute reporting and cost burdens
imposed by the collection of information. An agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid control number.
    Many, but not all, of the information collection requirements
related to annual reports and registration statements will be
mandatory. There is no mandatory retention period for the information
disclosed, and the information will be publicly available on the EDGAR
filing system.

B. Summary of Information Collections

    The new rules and amendments increase existing disclosure burdens
for annual reports on Forms 10-K \334\ and

20-F and registration statements on Forms 10, 20-F, S-1, S-4, F-1, and
F-4 by creating the following new disclosure requirements, many of
which were requested by industry participants:
---------------------------------------------------------------------------

    \334\ The disclosure requirements regarding oil and gas
properties and activities are in Form 10-K as well as the annual
report to security holders required pursuant to Rule 14a-3(b) [17
CFR 240.14a-3(b)]. Form 10-K permits the incorporation by reference
of information from the Rule 14a-3(b) annual report to security
holders to satisfy the Form 10-K disclosure requirements. The
analysis that follows assumes that companies would either provide
the proposed disclosure in a Form 10-K or 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 Form 10-K
and 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 company's progress in converting proved
undeveloped reserves into proved developed reserves, including those
that are held for five years or more and an explanation of why they
should continue to be considered proved;
     Disclosure of technologies used to establish reserves in a
company's initial filing with the Commission and in filings which
include material additions to reserves estimates;
     The company's internal controls over reserves estimates
and the qualifications of the technical person primarily responsible
for overseeing the preparation or audit of the reserves estimates;
     If a company represents that disclosure is based on the
authority of a third party that prepared the reserves estimates or
conducted a reserves audit or process review, filing a report prepared
by the third party; and
     Disclosure based on a new definition of the term ``by
geographic area.''
    In addition, the amendments harmonize the disclosure requirements
that apply to foreign private issuers with the disclosure requirements
that apply to domestic issuers with respect to oil and gas activities.
In particular, foreign private issuers must disclose the information
required by Items 1205 through 1208 of Regulation S-K regarding
drilling activities, present activities, delivery commitments, wells,
and acreage, which previously were not specified in Appendix A to Form
20-F. These disclosure items codify the substantive disclosures called
for by Items 4 through 8 of Industry Guide 2, although much of this
disclosure may have been disclosed by some companies under the more
general discussions of business and property on that form.

C. Revisions to PRA Burden Estimates

    For purposes of the PRA, we estimated, in the Proposing Release,
the total annual increase in the paperwork burden for all affected
companies to comply with our proposed collection of information
requirements to be approximately 7,472 hours of in-house company
personnel time and to be approximately $1,659,000 for the services of
outside professionals.\335\ These estimates included the time and the
cost of preparing and reviewing disclosure and filing documents. Our
methodologies for deriving the above estimates are discussed below.
---------------------------------------------------------------------------

    \335\ For administrative convenience, the presentation of the
totals related to the paperwork burden hours have been rounded to
the nearest whole number and the cost totals have been rounded to
the nearest thousand.
---------------------------------------------------------------------------

    Our estimates represented the burden for all oil and gas companies
that file annual reports or registration statements with the
Commission. Based on filings received during the Commission's last
fiscal year, we estimate that 241 oil and gas companies file annual
reports and 67 oil and gas companies file registration statements. Most
of the information called for by the new disclosure requirements,
including the optional disclosure items, is readily available to oil
and gas companies and includes information that is regularly used in
their internal management systems. These disclosures include:
     Disclosure of reserves from non-traditional sources (i.e.,
bitumen, shale, coalbed methane) as oil and gas reserves;
     Optional disclosure of probable and possible reserves;
     Optional disclosure of oil and gas reserves' sensitivity
to price;
     Disclosure of the company's progress in converting proved
undeveloped reserves into proved developed reserves, including those
that are held for five years or more and an explanation of why they
should continue to be considered proved;
     Disclosure of technologies used to establish reserves in a
company's initial filing with the Commission and in filings which
include material additions to reserves estimates;
     The company's internal controls over reserves estimates
and the qualifications of the technical person primarily responsible
for overseeing the preparation or audit of the reserves estimates;
     If a company represents that disclosure is based on the
authority of a third party that prepared the reserves estimates or
conducted a reserves audit or process review, filing a report prepared
by the third party; and
     Disclosure based on a new definition of the term ``by
geographic area.''

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

prices for disclosure and full cost accounting purposes. We also intend
to continue to work with the FASB to align the accounting standards
with that pricing mechanism. In addition, we have significantly reduced
the level of detailed geographic and product disclosure that the rules
require. Finally, we are providing for a substantial transition period
to allow companies to adjust their systems to comply with the new
rules. We believe that these changes will help to mitigate the
increased burden of the new rules.
    We do, however, believe that our initial burden estimates may have
been too low. We are therefore adjusting our burden estimate to reflect
an additional increase of 100 hours per company per year. In addition,
we are increasing our burden estimate for foreign private issuers by an
additional 150 hours per company per year. Consistent with current
Office of Management and Budget estimates and recent Commission
rulemakings, we estimate that 25% of the burden of preparation of
registration statements on Forms S-1, S-4, F-1, F-4, 10, and 20-F is
carried by the company internally and that 75% of the burden is carried
by outside professionals retained by the issuer at an average cost of
$400 per hour.\336\ We estimate that 75% of the burden of preparation
of annual reports on Form 10-K or Form 20-F is carried by the company
internally and that 25% of the burden is carried by outside
professionals retained by the company at an average cost of $400 per
hour. The portion of the burden carried by outside professionals is
reflected as a cost, while the portion of the burden carried by the
company internally is reflected in hours. The following tables
summarize the additional changes to the PRA estimates:
---------------------------------------------------------------------------

    \336\ In connection with other recent rulemakings, we have had
discussions with several private law firms to estimate an hourly
rate of $400 as the average cost of outside professionals that
assist issuers in preparing disclosures and conducting registered
offerings.

                     Table 1--Calculation of Incremental Paperwork Reduction Act Burden Estimates for Exchange Act Periodic Reports
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                              Annual        Incremental     Incremental     75% Issuer          25%            $400
                                                             responses      hours/form        burden     ----------------  Professional    Professional
                          Form                           ------------------------------------------------                ----------------      cost
                                                                                (D)=(C)*0.75                  ---------------
                                                                (A)             (B)         (C)=(A)*(B)                    (E)=(C)*0.25    (F)=(E)*$400
--------------------------------------------------------------------------------------------------------------------------------------------------------
10-KSec.   \337\........................................             206             100          20,600          15,450           5,150       2,060,000
20-F....................................................              35             150           5,250           3,938           1,312         525,000
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................             241  ..............          25,850          19,388           6,462       2,585,000
--------------------------------------------------------------------------------------------------------------------------------------------------------

  Table 2--Calculation of Incremental Paperwork Reduction Act Burden Estimates for Securities Act Registration Statements and Exchange Act Registration
                                                                       Statements
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                              Annual        Incremental     Incremental     25% Issuer          75%            $400
                                                             responses      hours/form        burden     ----------------  Professional    Professional
                          Form                           ------------------------------------------------                ----------------      cost
                                                                                (D)=(C)*0.25                  ---------------
                                                                (A)             (B)         (C)=(A)*(B)                    (E)=(C)*0.75    (F)=(E)*$400
--------------------------------------------------------------------------------------------------------------------------------------------------------
10......................................................               5             100             500             125             375         150,000
20-F....................................................               2             150             300              75             225          90,000
S-1.....................................................              38             100           3,800             950           2,850       1,140,000
S-4.....................................................              17             100           1,700             425           1,275         510,000
F-1.....................................................               2             150             300              75             225          90,000
F-4.....................................................               3             150             450           112.5           337.5         135,000
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................              67  ..............           7,050          1762.5         5,287.5       2,115,000
--------------------------------------------------------------------------------------------------------------------------------------------------------

D. Request for Comment

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

    \337\ The burden estimates for Form 10-K assume that the
requirements are satisfied by either including information directly
in the annual reports or incorporating the information by reference
from the Rule 14a-3(b) annual report to security holders.
---------------------------------------------------------------------------

XI. Cost-Benefit Analysis

A. Background

    We are adopting revisions to the oil and gas reserves disclosure
regime of Regulation S-K and Regulation S-X under the Securities Act of
1933 and the Securities Exchange Act of 1934 and Industry Guide 2. The
revisions are intended to modernize and update oil and gas disclosure.
The oil and gas industry has experienced significant changes since the
Commission initially adopted its current rules and disclosure

regime between 1978 and 1982, including advancements in technology and
changes in the types of projects in which oil and gas companies invest.
The revisions also are intended to provide investors with improved
disclosure about an oil and gas company's business and prospects
without sacrificing clarity and comparability.

B. Description of New Rules and Amendments

    Currently, Industry Guide 2 specifies many of the disclosure
guidelines for oil and gas companies. The Industry Guide calls for
disclosure relating to reserves, production, property, and operations
in addition to that which is required by Regulation S-K. Generally, the
new rules and amendments codify and update the existing Industry Guide
2 disclosures in a new Subpart 1200 of Regulation S-K, clarify the
level of detail required to be disclosed, and require reserves
disclosure in a tabular presentation. The changes relate primarily to
disclosure of the following:
     Disclosure of reserves from non-traditional sources (e.g.,
bitumen, shale) as oil and gas reserves;
     Optional disclosure of probable and possible reserves;
     Optional disclosure of oil and gas reserves' sensitivity
to price;
     Disclosure of the company's progress in converting proved
undeveloped reserves into proved developed reserves, including those
that are held for five years or more and an explanation of why they
should continue to be considered proved;
     Disclosure of technologies used to establish reserves in a
company's initial filing with the Commission and in filings which
include material additions to reserves estimates;
     The company's internal controls over reserves estimates
and the qualifications of the technical person primarily responsible
for overseeing the preparation or audit of the reserves estimates;
     If a company represents that disclosure is based on the
authority of a third party that prepared the reserves estimates or
conducted a reserves audit or process review, filing a report prepared
by the third party; and
     Disclosure based on a new definition of the term ``by
geographic area.''
    The new rules and amendments also make revisions and additions to
the definitions section of Rule 4-10 of Regulation S-X. These revisions
update and extend reserves definitions to reflect changes in the oil
and gas industry and new technologies. In particular, the new and
revised definitions:
     Expand the definition of ``oil and gas producing
activities'' to include the extraction of hydrocarbons from oil sands,
shale, coalbeds, or other natural resources and activities undertaken
with a view to such extraction;
     Add a definition of ``reasonable certainty'' to provide
better guidance regarding the meaning of that term;
     Add a definition of ``reliable technology'' to permit the
use of new technologies to establish proved reserves;
     Define probable and possible reserves estimates; and
     Add definitions to explain new terms used in the revised
definitions.
    In addition, the amendments harmonize the disclosure requirements
that apply to foreign private issuers with the disclosure requirements
that apply to domestic issuers with respect to oil and gas activities.
In particular, the amendments to Form 20-F will require foreign private
issuers to disclose the information required by Items 1205 through 1208
of Regulation S-K regarding drilling activities, present activities,
delivery commitments, wells, and acreage, which are not currently
specified under Appendix A to Form 20-F, although much of this
disclosure is often disclosed by companies under the more general
discussions of business and property on that form.

C. Benefits

    We expect that the new rules and amendments will increase
transparency in disclosure by oil and gas companies by providing
improved reporting standards. The revisions to the definitions should
align our disclosure rules with the realities of the modern oil and gas
markets. For example, we believe that the inclusion of bitumen and
other resources from continuous accumulations as oil and gas producing
activities is consistent with company practice to treat these
operations as part of, rather than separate from, their traditional oil
and gas producing activities. Similarly, the expansion of permissible
technologies for determining certainty levels of reserves recognizes
that companies now take advantage of these technological advances to
make business decisions. We expect these new rules and amendments to
improve disclosure by aligning the required disclosure more closely
with the way companies conduct their business.
    Allowing companies to disclose probable and possible reserves is
designed to improve investors' understanding of a company's unproved
reserves. For those companies that already disclose such reserves on
their Web sites, the new rules and amendments permit them to unify such
disclosures into a single, filed document. Disclosure of these
categories of reserves beyond proved reserves may foster better company
valuations by investors, creditors, and analysts, thus improving
capital allocation and reducing investment risk. Because some of the
disclosure items are optional, the amount of increased transparency
will depend on the extent to which companies elect to provide the
additional disclosures permitted under the new rules. If companies
elect not to provide the optional disclosure, then the benefits from
increased transparency would be limited to the extent that the new
rules improve the transparency of proved reserves disclosure.
    By permitting increased disclosure and promoting more consistency
and comparability among disclosures, the new rules and amendments
provide a mechanism for oil and gas companies to seek more favorable
financing terms through more disclosure and increased transparency.
Investors may be able to request such additional disclosure in
Commission filings during negotiations regarding bond and debt
covenants. Thus, we expect that, as a result of competing factors in
the marketplace, the new rules and amendments will result in increased
transparency, either because companies elect to voluntarily provide
increased disclosure, or because investors may discount companies that
do not do so. We believe that the benefits and costs of disclosing
unproved reserves ultimately will be determined by market conditions,
rather than regulatory requirements.
    We expect that permitting companies to disclose probable and
possible reserves will increase market transparency, provide investors
with more reserves information, and allow for more accurate production
forecasts. By relating standards used in deterministic methods to
comparable percentage thresholds used in probabilistic methods for
establishing a given level of certainty, the new rules and amendments
should result in increased standardization in reporting practices which
would promote comparability of reserves across companies. The new rules
would define the term ``reliable technology'' to permit oil and gas
companies to prepare their reserves estimates using new types of
technology that companies are not permitted to use under the current
rules. This new definition also is designed to encompass new
technologies as they are developed in the future, thereby

providing investors and the market with a more comprehensive
understanding of a company's estimated reserves.
    We expect that replacing the Industry Guide with new Regulation S-K
items will provide greater certainty because the disclosure
requirements would be in rules established by the Commission. In
addition, we believe that disclosure of reserves concentrated in
particular countries should provide better information to investors
regarding the geopolitical risk to which some companies may be exposed.
Overall, we believe that the amendments, as a whole, will provide
investors with more information that management uses to make business
decisions in the oil and gas industry.
1. Average Price and First of the Month Price
    The revision to change the price used to calculate reserves from a
year-end single-day price to a historical average price over the
company's most recently ended fiscal year is expected to reduce the
effects of seasonality. In particular, many commenters suggested the
use of a 12-month average price to mitigate the risk of a year-end
price affected by short-term price volatility such that it does not
reflect the true nature of a company investment, planning, and
performance. Our Office of Economic Analysis studied the publicly-
available pricing data and found evidence of year-end price volatility.
The historical volatility of year-end prices is between 16 percent and
41 percent higher than the volatility of annual average prices
depending on the grade and geography of oil or gas prices considered.
This difference demonstrates variability in oil and gas prices, likely
due to seasonal demands, that does not reflect long term fundamental
values, but that cannot be immediately corrected due to the costs of
transportation and speed of delivery. Given this variability, it is
likely that a 12-month average price will yield better reserves
estimates--that reflect management planning and investment to the
extent that they discount the short-term component of oil and gas
prices--than a year-end spot price.
    Many of the commenters to the Proposing Release supported the use
of a historical price, even though this approach may be less useful in
determining the fair value of a company's reserves compared to a
futures market price. We believe investors are concerned not only about
the quantity of a company's reserves, but also about the profitability
of those reserves. We also recognize that some reserves will be of more
value than others due to extraction and transportation costs. As a
result, since the new rules and amendments require the use of a single
price to estimate reserves and since that price may not be as
informative of value as a futures price, the new rules and amendments
also gives companies the option of providing a sensitivity analysis and
reporting reserves based on additional price estimates.
    If companies elect to provide a sensitivity analysis, we expect
this to benefit investors by allowing them to formulate better
projections of company prospects that are more consistent with
management's planning price and prices higher and lower that may
reasonably be achieved. In particular, it allows companies the
flexibility to communicate how their reserves would change under
alternative economic conditions, including those that they may believe
better reflect their future prospects. We expect that companies would
be more likely to adopt a sensitivity analysis approach if investors
and other market participants determine that this information would
reduce investment risk, or if companies believe such disclosure will
reduce the cost of capital formation. The new rules and amendments
should result in increased price stability in determining whether
reserves are economically producible. This should mitigate seasonal
effects, resulting in reserves estimates that more closely reflect
those used by management in planning and investment decisions. We
expect this to allow for more accurate company assessments and improve
projections of company prospects.
    In addition to an average annual price, many of the commenters
suggested that the price be computed on the first day of the month. Two
reasons were given. First, beginning month prices would allow an
additional month of preparation time in calculating reserves for
financial reporting. Second, some commenters suggested that month-end,
and in particular year-end, prices were subject to additional short-
term volatility because many oil and gas financial contracts expire on
those days, resulting in higher than normal trading activity. While the
staff of the Office of Economic Analysis did not find systematic
evidence of increased volatility around month-end or year-end oil and
gas prices relative to other days in the month, we agree that
additional preparation time is beneficial because reserves estimations
require significant time and resources. An additional month would help
reduce errors that might otherwise result from the financial reporting
time constraints.
    Finally, we believe that revising the full cost accounting method
to use the same pricing mechanism as the reserves disclosure
requirements should provide consistency between the disclosure and
accounting presentations. The use of a single pricing method should
also minimize the incremental burden placed on companies as a result of
the rule changes because they would not be required to prepare two
separate estimates.
2. Probable and Possible Reserves
    We anticipate that disclosure of probable and possible reserves, if
companies elect to do so, will allow investors, creditors, and other
users to better assess a company's reserves. In addition, the tabular
format for disclosing probable and possible reserves should reduce
investor search costs by making it easier to locate reserves
disclosures and facilitating comparability among oil and gas companies.
    While we recognize that many companies already communicate with
investors about their unproved and other reserves through alternative
means, such as company Web sites or press releases, some commenters
remarked that an objective comparison among companies is difficult
because different companies have defined such reserves classifications
differently. We believe that permitting disclosure of this information
in Commission filings will provide a more consistent means of
comparison because disclosure in our filings must comply with our
definitions. Although our new rules make disclosure of probable and
possible reserves optional, and large oil and gas producers suggested
in their comment letters that such disclosure would be of limited
benefit because of the relative uncertainty of those estimates, we
believe that competitive pressures within the industry might make it
beneficial for large producers to disclose this information. Increased
disclosure might, for example, improve credit quality and lower the
cost of debt financing, or reduce the risk associated with business
transactions between the company and its customers or suppliers.
Regardless, since the disclosure decision is voluntary, it should occur
only to the extent that companies find that the benefits justify the
costs of doing so.
    We believe that permitting the disclosure of probable and possible
reserves will benefit smaller companies, in particular. Larger issuers
tend to already have large amounts of proved reserves. The new rules
and amendments permit smaller companies,

who often participate in a significant amount of exploratory activity,
to better disclose their business prospects. Consequently, we
anticipate that the new rules and amendments could lead to efficiencies
in capital formation, as more information will be available regarding
the prospects of smaller issuers.
3. Reserves Estimate Preparers and Reserves Auditors
    We believe that investors would benefit from a greater level of
assurance with respect to the reliability of reserve estimates,
particularly if companies are allowed to disclose unproved reserves
because unproved reserves are inherently less certain than proved
reserves. We proposed disclosure requirements relating to whether the
person primarily responsible for preparing reserves estimates or
conducting a reserves audit, if the company represents that it has
enlisted a third party to conduct a reserves audit, met a specified
list of qualifications based on the Society of Petroleum Engineers's
reserves audit guidelines. However, commenters expressed concern that
many of these qualifications such as membership in professional
societies were not standardized worldwide. Without control over those
standards, the disclosures would not be comparable. We agree with those
commenters and, as suggested, have adopted a more principles-based
disclosure requirement. Under the adopted rules, a company must
disclose its internal controls over reserves estimations and disclose
the qualifications of the primary technical person in charge of
overseeing the reserves estimations or reserves audit. We believe that
disclosure of the individual qualifications, rather than simple
acknowledgement of meeting certain criteria, which may differ within
countries, will provide investors with better information to compare
companies and the qualifications of persons in charge of the reserves
estimations and reserves audits, which should enable more accurate
assessments of the quality of audit reports. We believe that disclosure
of a company's internal controls over reserves estimates will allow
investors to assess whether a company has implemented appropriate
controls without dictating to companies specified criteria for
establishing those controls.
    Although we do not expect all companies to undertake a third-party
reserves audit because our rules do not require such a reserves audit,
third party participation in the estimation of reserves should add
credibility to a company's public disclosure. The opinion of an
objective, qualified person on the reserves estimates is designed to
increase the reliability of these estimates and investor confidence.
4. Development of Proved Undeveloped Reserves
    The new rules and amendments also require disclosure of a company's
progress in developing undeveloped reserves and the reasons why any
PUDs have remained undeveloped for five years or more. We believe that
such disclosure supplements our amendments that ease the requirements
for recognizing PUDs and thereby should increase the amount of PUDs
disclosed in filings, even though the properties representing such
proved reserves have not yet been developed and therefore do not
provide the company with cash flow. We believe that the disclosure
requirements will increase the accountability of companies that
disclose reserves for extended periods of time without adequate
justification for their failure to develop those reserves.
5. Disclosure Guidance
    The release also provides guidance about the type of information
that companies should consider disclosing in Management's Discussion
and Analysis, and allows companies to include this information with the
relevant tables. Providing the additional guidance should assist
companies in preparing their disclosure, improving the quality and
consistency of this disclosure. Locating this discussion with the
tables themselves should benefit investors by simplifying the
presentation of disclosure, and providing insight into the information
disclosed in the tables.
6. Updating of Definitions Related to Oil and Gas Activities
    The new rules and amendments also update the definition of the term
``oil and gas producing activities'' as well as updating or creating
new definitions for other terms related to such activities, including
``proved oil and gas reserves'' and ``reasonable certainty.'' We
believe that updating these definitions will help companies disclose
oil and gas operations in the same way that companies manage and assess
those operations. This includes resources extracted from nontraditional
sources that companies consider oil and gas activities, which
previously were excluded them from the definition of ``oil and gas
producing activities.'' In addition, adding definitions for terms like
``reasonable certainty'' (which currently is in the definition of
``proved oil and gas reserves,'' but not defined) will provide
companies with added guidance and assist them in providing consistent
disclosures between companies.
7. Harmonizing Foreign Private Issuer Disclosure
    We believe that the harmonization of foreign private issuer
disclosure will help make disclosures of foreign private issuers more
comparable with domestic companies. The oil and gas industry has
changed significantly since the rules were adopted. Today, many
companies have interests that span the globe. In addition, many of
these projects are joint ventures between foreign private issuers and
domestic companies. Having differing levels of disclosure for companies
that may be participating in the same projects harms comparability
between investment choices. The harmonization of foreign private issuer
disclosure is intended to promote comparability among all oil
companies.

D. Costs

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

think this burden is justified because tabular disclosure will increase
comparability and facilitate understanding and analysis by investors.
1. Probable and Possible Reserves
    Allowing disclosure of probable and possible reserves could create
an increased risk of litigation because these categories of reserves
estimates are less certain than proved reserves. Companies may choose
not to disclose such reserves, in part, because of the risk of
incurring litigation costs to defend their disclosures due to the
increased uncertainty of these categories. Disclosure of probable and
possible reserves may also result in revealing competitive information
because it might reveal a company's business strategy, such as the
geographic location and nature of its exploration and discoveries. For
example, if geographical detail can be inferred from estimates of
unproved reserves, this might reveal information about the value of a
company's assets to competitors and could put the producer at a
competitive disadvantage. We have reduced the level of geographical
detail to reduce the burden on companies, while still providing
sufficient information to investors regarding concentrations of risk,
including political risk.
    We expect companies will incur costs in preparing the additional
disclosures such as calculating and aggregating the reserve projections
in a prescribed format. However, if probable and possible categories of
reserves have different extraction cost structures and they are not
disclosed separately from proved reserves, this could result in
increased uncertainty in an investor's assessment of a company's
prospects.
    Companies also expressed concern that mandatory disclosure of
probable and possible reserves could expose them to increased
litigation risk. We believe that making these disclosures voluntary
mitigates these concerns. Companies unwilling to bear the added risk
can simply opt not to provide this disclosure.
2. Reserves Estimate Preparers and Reserves Auditors
    If a company chooses to use a third party to prepare or audit
reserve estimates, it will incur costs to hire these outside
consultants. The new rules and amendments do not require companies to
hire such a person. If enough companies that currently do not use such
consultants begin to hire them, we believe that industry wages could
potentially increase due to increased demand for reserves calculating
specialists unless that demand is compensated by an increase in the
supply of such persons. If wages increased, then all companies, not
just those employing third party consultants, would incur added costs.
    Large companies may be less likely to hire third parties because
they tend to have staff to make reserves estimates. However, if such
large companies chose to hire 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 ability to accurately estimate such reserves than larger companies.
However, we understand that the vast majority of smaller oil and gas
companies already hire third parties to estimate their reserves or
certify their estimates.
3. Consistency With IASB
    Some commenters remarked that the International Accounting
Standards Board is currently preparing a set of guidelines for oil and
gas extractive activities, including definitions of oil and gas
reserves, and recommended that the Commission align its regulations
with those guidelines. We intend to monitor this initiative and work
with the IASB, but our new rules may differ from the guidelines
ultimately established by the International Accounting Standards Board.
This could make it more difficult for investors to compare foreign and
domestic companies.
4. Change in Pricing Mechanism
    We do not anticipate significant costs with the change in pricing
mechanisms for established reserves. Companies simply will apply a
different price scenario to determine the economic producibility of
reserves. It is possible that the use of a 12-month average price may
reduce the cost of disclosure because it should reduce the volatility
of reserves estimates and therefore reduce the need to make significant
adjustments to those estimates on a yearly basis due to daily price
swings.
5. Disclosure of PUD Development
    The required disclosure of a company's progress in developing PUDs
will increase the cost of reporting. However, we believe that companies
regularly track their progress in this arena. Until a company develops
a property, it cannot begin to realize the cash flows from production
and the actual sale of products. Thus, the development of reserves is
of utmost importance to an oil and gas company's business.
6. Increased Geographic Disclosure
    The requirements to provide increased geographic disclosure of
reserves and production, in certain circumstances, may increase the
amount of disclosure that a company must present. However, because the
threshold that we are adopting in the release is 15% of the company's
total reserves, a company would be required to disclose, at most,
reserves and production in six countries. Considering the relatively
large proportion of reserves that must exist in a country before a
company is required to provide country-level disclosure, we believe
that such information is readily available to companies. As noted in
the body of this release, we have attempted to draft this provision to
minimize any competitive harm that such disclosure may cause a company.
7. Harmonizing Foreign Private Issuer Disclosure
    The harmonization of foreign private issuer disclosure regarding
oil and gas activities may increase the burden on foreign private
issuers. However, it is our understanding that the large foreign
private issuers already voluntarily provide disclosure comparable to
the level required from domestic companies. Much of the added new
disclosure relates to the day-to-day business and properties of these
companies, including drilling activities, number of wells and acreage.
This is information that is central to the activities of oil and gas
companies, and therefore is readily known to these companies. We
believe that applying Subpart 1200 to these companies could prompt more
detailed disclosure regarding these activities, which would cause these
companies to incur some cost. The provision permitting foreign private
issuers to omit disclosures if prohibited from making those disclosures
by their home jurisdiction could mitigate some of these costs.

XII. Consideration of Burden on Competition and Promotion of
Efficiency, Competition, and Capital Formation

    Securities Act Section 2(b) \338\ and Section 3(f) of the Exchange
Act \339\ require us, when engaging in rulemaking where we are required
to consider or determine whether an action is necessary or appropriate
in the public interest, to consider, in addition to the protection of
investors, whether the action will promote efficiency, competition, and
capital formation. Section 23(a)(2) of the Exchange Act \340\ requires
us, when adopting rules under the Exchange Act, to consider the impact
that any new rule would have on competition. In addition, Section
23(a)(2) prohibits us from adopting any rule that would impose a burden
on competition not necessary or appropriate in furtherance of the
purposes of the Exchange Act.
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    \338\ 15 U.S.C. 77b(b).
    \339\ 15 U.S.C. 78c(f).
    \340\ 15 U.S.C. 78w(a)(2).
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    We expect the new rules and amendments to increase efficiency and
enhance capital formation, and thereby benefit investors, by providing
the market with better information based on updated technology as well
as increased information covering a broader range of reserves
classifications held by a company and reserves found in non-traditional
sources of oil and gas. Such increased and improved information should
permit investors to better assess a company's prospects. In particular,
the existing prohibitions against disclosing reserves other than proved
reserves, using modern technology to determine the certainty level of
reserves, and including resources from non-traditional sources can lead
to incomplete disclosures about a company's actual resources and
prospects. The new rules and amendments are designed to better align
the disclosure requirements with the way companies make business
decisions.
    We believe that permitting the disclosure of probable and possible
reserves will benefit smaller companies, in particular. Larger issuers
tend to already have large amounts of proved reserves. The new rules
and amendments permit smaller companies, who often participate in a
significant amount of exploratory activity, to better disclose their
business prospects. Consequently, we anticipate that the new rules and
amendments could lead to efficiencies in capital formation, as more
information will be available regarding the prospects of smaller
issuers.
    The effects of the new rules and amendments on competition are
difficult to predict, but it is possible that permitting public issuers
to disclose probable and possible reserves will lead to a reallocation
of capital, as companies that previously could show few proved reserves
will be able to disclose a broader range of its business prospects,
making it easier for these issuers to raise capital and compete with
companies that have large proved reserves. Although our new rules make
disclosure of probable and possible reserves optional, and large oil
and gas producers suggested in their comment letters that such
disclosure would be of limited benefit because of the relative
uncertainty associated with such reserves, we believe that competitive
pressures within the industry might make it beneficial for large
producers to disclose this information. Increased disclosure might, for
example, improve credit quality and lower the cost of debt financing,
or reduce the risk associated with business transactions between the
company and its customers or suppliers.

XIII. Final Regulatory Flexibility Analysis

    We have prepared this Final Regulatory Flexibility Analysis in
accordance with Section 603 of the Regulatory Flexibility Act.\341\
This analysis relates to the modernization of the oil and gas
disclosure requirements. An Initial Regulatory Flexibility Analysis
(IRFA) was prepared in accordance with the Regulatory Flexibility Act
in conjunction with the Proposing Release. The Proposing Release
included, and solicited comment on, the IRFA.
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    \341\ 5 U.S.C. 603.
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A. Reasons for, and Objectives of, the New Rules and Amendments