[Federal Register: January 14, 2009 (Volume 74, Number 9)]
[Rules and Regulations]
[Page 2157-2197]
[DOCID:fr14ja09-15]

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Part II

Securities and Exchange Commission

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17 CFR Parts 210, 211 et al.

Modernization of Oil and Gas Reporting; Final Rule

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 211, 229, and 249

[Release Nos. 33-8995; 34-59192; FR-78; File No. S7-15-08]
RIN 3235-AK00

Modernization of Oil and Gas Reporting

AGENCY: Securities and Exchange Commission.

ACTION: Final rule; interpretation; request for comment on Paperwork
Reduction Act burden estimates.

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SUMMARY: The Commission is adopting revisions to its oil and gas
reporting disclosures which exist in their current form in Regulation
S-K and Regulation S-X under the Securities Act of 1933 and the
Securities Exchange Act of 1934, as well as Industry Guide 2. The
revisions are intended to provide investors with a more meaningful and
comprehensive understanding of oil and gas reserves, which should help
investors evaluate the relative value of oil and gas companies. In the
three decades that have passed since adoption of these disclosure
items, there have been significant changes in the oil and gas industry.
The amendments are designed to modernize and update the oil and gas
disclosure requirements to align them with current practices and
changes in technology. The amendments concurrently align the full cost
accounting rules with the revised disclosures. The amendments also
codify and revise Industry Guide 2 in Regulation S-K. In addition, they
harmonize oil and gas disclosures by foreign private issuers with the
disclosures for domestic issuers.

DATES: Effective Date: January 1, 2010.
    Comment Date: Comments on the Paperwork Reduction Act Analysis
should be received on or before February 13, 2009.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/proposed.shtml); or
     Send an e-mail to<EMAIL_ADDRESS>Please include
File Number S7-15-08 on the subject line; or
     Use the Federal e-Rulemaking Portal http://
www.regulations.gov. Follow the instructions for submitting comments.

Paper Comments

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

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

FOR FURTHER INFORMATION CONTACT: Ray Be, Special Counsel, Office of
Chief Counsel at<PHONE_NUMBER>; Dr. W. John Lee, Academic Petroleum
Engineering Fellow, or Brad Skinner, Senior Assistant Chief Accountant,
Office of Natural Resources and Food at<PHONE_NUMBER>; Leslie Overton,
Associate Chief Accountant, Office of Chief Accountant for the Division
of Corporation Finance at<PHONE_NUMBER>, Division of Corporation
Finance; or Mark Mahar, Associate Chief Accountant, Jonathan Duersch,
Assistant Chief Accountant, or Doug Parker, Professional Accounting
Fellow, Office of the Chief Accountant at<PHONE_NUMBER>; U.S.
Securities and Exchange Commission, 100 F Street, NE., Washington, DC
20549-3628.

SUPPLEMENTARY INFORMATION: We are adopting amendments to Rule 4-10 \1\
of Regulation S-X \2\ and Items 102, 801 and 802 \3\ of Regulation S-
K.\4\ We also are adding new Subpart 1200, including Items 1201 through
1208, to Regulation S-K.
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    \1\ 17 CFR 210.4-10.
    \2\ 17 CFR 210.
    \3\ 17 CFR 229.102, 17 CFR 229.801, and 17 CFR 229.802.
    \4\ 17 CFR 229.
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Table of Contents

I. Introduction
    A. Background
    B. Issuance of the Concept Release
    C. Overview of the Comment Letters Received on the Proposing
Release
II. Revisions and Additions to the Definition Section in Rule 4-10
of Regulation S-X
    A. Introduction
    B. Pricing Mechanism for Oil and Gas Reserves Estimation
    1. 12-Month Average Price
    2. Prices Used for Disclosure and Accounting Purposes
    3. Alternate Pricing Schemes
    4. Time Period Over Which the Average Price Is To Be Calculated
    C. Extraction of Bitumen and Other Non-Traditional Resources
    1. Definition of ``Oil and Gas Producing Activities''
    2. Disclosure by Final Products
    D. Proved Oil and Gas Reserves
    E. Reasonable Certainty
    F. Developed and Undeveloped Oil and Gas Reserves
    1. Developed Oil and Gas Reserves
    2. Undeveloped Oil and Gas Reserves
    G. Reliable Technology
    1. Definition of the Term ``Reliable Technology''
    2. Disclosure of Technologies Used
    H. Unproved Reserves--``Probable Reserves'' and ``Possible
Reserves''
    1. Probable Reserves
    2. Possible Reserves
    I. Reserves
    J. Other Supporting Terms and Definitions
    1. Deterministic Estimate
    2. Probabilistic Estimate
    3. Analogous Reservoir
    4. Definitions of Other Terms
    5. Proposed Terms and Definitions Not Adopted
    K. Alphabetization of the Definitions Section of Rule 4-10
III. Revisions to Full Cost Accounting and Staff Accounting Bulletin
IV. Updating and Codification of the Oil and Gas Disclosure
Requirements in Regulation S-K
    A. Revisions to Items 102, 801, and 802 of Regulation S-K
    B. Proposed New Subpart 1200 to Regulation S-K Codifying
Industry Guide 2 Regarding Disclosures by Companies Engaged in Oil
and Gas Producing Activities
    1. Overview
    2. Item 1201 (General Instructions to Oil and Gas Industry-
Specific Disclosures)
    a. Geographic Area
    b. Tabular Disclosure
    3. Item 1202 (Disclosure of Reserves)
    a. Oil and Gas Reserves Tables
    i. Disclosure by Final Product Sold
    ii. Aggregation
    iii. Optional Disclosure of Probable and Possible Reserves
    iv. Resources Not Considered Reserves
    b. Optional Reserves Sensitivity Analysis Table
    c. Separate Disclosure of Conventional and Continuous
Accumulations
    d. Preparation of Reserves Estimates or Reserves Audits
    e. Reserve Audits and the Contents of Third Party Reports
    f. Process Reviews
    4. Item 1203 (Proved Undeveloped Reserves)
    5. Item 1204 (Oil and Gas Production)
    6. Item 1205 (Drilling and Other Exploratory and Development
Activities)
    7. Item 1206 (Present Activities)

    8. Item 1207 (Delivery Commitments)
    9. Item 1208 (Oil and Gas Properties, Wells, Operations, and
Acreage)
V. Guidance for Management's Discussion and Analysis for Companies
Engaged in Oil and Gas Producing Activities
VI. Conforming Changes to Form 20-F
VII. Impact of Amendments on Accounting Literature
    A. Consistency With FASB and IASB Rules
    B. Change in Accounting Principle or Estimate
    C. Differing Capitalization Thresholds Between Mining Activities
and Oil and Gas Producing Activities
VIII. Application of Interactive Data Format to Oil and Gas
Disclosures
IX. Implementation Date
    A. Mandatory Compliance
    B. Voluntary Early Compliance
X. Paperwork Reduction Act
    A. Background
    B. Summary of Information Collections
    C. Revisions to PRA Burden Estimates
    D. Request for Comment
XI. Cost-Benefit Analysis
    A. Background
    B. Description of New Rules and Amendments
    C. Benefits
    1. Average Price and First of the Month Price
    2. Probable and Possible Reserves
    3. Reserves Estimate Preparers and Reserves Auditors
    4. Development of Proved Undeveloped Reserves
    5. Disclosure Guidance
    6. Updating of Definitions Related to Oil and Gas Activities
    7. Harmonizing Foreign Private Issuer Disclosure
    D. Costs
    1. Probable and Possible Reserves
    2. Reserves Estimate Preparers and Reserves Auditors
    3. Consistency With IASB
    4. Change of Pricing Mechanism
    5. Disclosure of PUD Development
    6. Increased Geographic Disclosure
    7. Harmonizing Foreign Private Issuer Disclosure
XII. Consideration of Burden on Competition and Promotion of
Efficiency, Competition, and Capital Formation
XIII. Final Regulatory Flexibility Analysis
    A. Reasons for, and Objectives of, the New Rules and Amendments
    B. Significant Issues Raised by Commenters
    C. Small Entities Subject to the New Rules and Amendments
    D. Reporting, Recordkeeping, and Other Compliance Requirements
    E. Agency Action to Minimize Effect on Small Entities
XIV. Update to Codification of Financial Reporting Policies
XV. Statutory Basis and Text of Amendments

I. Introduction

A. Background

    On June 26, 2008, the Commission issued a proposing release
(Proposing Release) seeking public comment on proposed amendments to
the disclosure requirements regarding oil and gas companies.\5\ These
proposals encompassed issues that were previously addressed more
generally in a concept release that the Commission issued on December
12, 2007 (Concept Release),\6\ which solicited comment on possible
revisions to the oil and gas reserves disclosure requirements specified
in Rule 4-10 of Regulation S-X \7\ and Item 102 of Regulation S-K.\8\
The Proposing Release also contained proposals not addressed by the
Concept Release related to the updating and codification of Industry
Guide 2.
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    \5\ Release No. 33-8935 (June 27, 2008) [73 FR 39181].
    \6\ Release No. 33-8870 (Dec. 12, 2007) [72 FR 71610].
    \7\ 17 CFR 210.4-10. See Release No. 33-6233 (Sept. 25, 1980)
[45 FR 63660] (adopting amendments to Regulation S-X, including Rule
4-10). The precursor to Rule 4-10 was Rule 3-18 of Regulation S-X,
which was adopted in 1978. See Accounting Series Release No. 253
(Aug. 31, 1978) [43 FR 40688]. See also Accounting Series Release
No. 257 (Dec. 19, 1978) [43 FR 60404] (further amending Rule 3-18 of
Regulation S-X and revising the definition of proved reserves).
    \8\ Item 102 of Regulation S-K [17 CFR 229.102]. In 1982, the
Commission adopted Item 102 of Regulation S-K. Item 102 contains the
disclosure requirements previously located in Item 2 of Regulation
S-K. See Release No. 33-6383 (March 16, 1982) [47 FR 11380]. The
Commission also ``recast * * * the disclosure requirements for oil
and gas operations, formerly contained in Item 2(b) of Regulation S-
K, as an industry guide.'' See Release No. 33-6384 (Mar. 16, 1982)
[47 FR 11476].
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    We initially adopted our oil and gas disclosure requirements in
1978 and 1982.\9\ Since that time, there have been significant changes
in the oil and gas industry and markets, including technological
advances, and changes in the types of projects in which oil and gas
companies invest their capital.\10\ Prior to our issuance of the
Concept Release and the Proposing Release, many industry participants
had expressed concern that our disclosure rules are no longer in
alignment with current industry practices and therefore limit their
usefulness to the market and investors.\11\
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    \9\ The disclosure requirements were introduced pursuant to a
directive in the Energy Policy and Conservation Act of 1975 (the
``EPCA''). The EPCA directed the Commission to ``take such steps as
may be necessary to assure the development and observance of
accounting practices to be followed in the preparation of accounts
by persons engaged, in whole or in part, in the production of crude
oil or natural gas in the United States.'' See 42 U.S.C. 6201-6422.
    \10\ See, for example, Daniel Yergin and David Hobbs: ``The
Search for Reasonable Certainty in Reserves Disclosure,'' Oil and
Gas Journal (July 18, 2005).
    \11\ See, for example, Greg Courturier, ``Standard & Poor's
Urges SEC to Change Disclosure Rules,'' International Oil Daily
(Dec. 3, 2007); Steve Levine, ``Tracking the Numbers: Oil Firms Want
SEC to Loosen Reserves Rules,'' Wall Street Journal Online (Feb. 7,
2006); Christopher Hope, ``Oil Majors Back Attack on SEC Rules,''
The Daily Telegraph (London) (Feb. 24, 2005); Barrie McKenna,
``Rules undervalue reserves report says: Volumes buried in Canada's
oil sands not counted by SEC's measure,'' The Globe & Mail (Canada)
(Feb. 24, 2005); and ``Deloitte Calls on Regulators to Update Rules
for Oil and Gas Reserves Reporting,'' Business Wire Inc. (Feb. 9,
2005).
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B. Issuance of the Concept Release

    The Concept Release addressed the potential implications for the
quality, accuracy and reliability of oil and gas disclosure if the
Commission were to:
     Revise the definition of ``proved reserves'' in our rules,
in particular, the criteria used to assess and quantify resources that
can be classified as proved reserves; and
     Expand the categories of resources that may be disclosed
in Commission filings to include resources other than proved reserves.

In addition, the Concept Release questioned whether our revised
disclosure rules should be modeled on any particular resource
classification framework currently being used within the oil and gas
industry. We also asked how any revised disclosure rules could be made
flexible enough to address future technological innovation and changes
within the oil and gas industry. The Concept Release sought further
comment on whether the Commission should require independent third-
party assessments of reserves estimates that a company includes in its
filings.
    In response to the Concept Release, commenters submitted 80 comment
letters.\12\ We received comment letters from a variety of industry
participants such as accounting firms, engineering consulting firms,
domestic and foreign oil and gas companies, federal government
agencies, individuals, law firms, professional associations, public
interest groups, and rating agencies. We considered these comments and
addressed many of them in issuing the Proposing Release.
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    \12\ The public comments we received are available for
inspection in the Commission's Public Reference Room at 100 F St.,
NE., Washington, DC 20549 in File No. S7-29-07. They are also
available on-line at http://www.sec.gov/comments/s7-29-07/
s72907.shtml.
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C. Overview of the Comment Letters Received on the Proposing Release

    The Proposing Release sought significantly more detailed comment on
issues raised in the Concept Release, as well as proposed amendments to
the disclosure items in our rules and Industry Guide 2. In response to
the Proposing Release, we received 65 comment letters, again from a
variety of constituents with interests in oil and gas industry
disclosure.

    Almost all commenters supported some form of revision to the
current oil and gas disclosure requirements, particularly given the
length of time that has elapsed since the requirements were initially
adopted.\13\ Commenters provided significantly more detailed comments
on the Proposing Release than on the Concept Release, which did not
include specific proposed regulatory text. We discuss those comments in
detail in the relevant sections of this release. However, in general,
commenters focused on several key issues raised by the Proposing
Release. These issues included the following:
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    \13\ See letters from American Association of Petroleum
Geologists (``AAPG''), American Clean Skies Foundation (``American
Clean Skies''), American Petroleum Institute (``API''), AngloGold
Ashanti Ltd. (``AngloGold''), Apache Corporation (``Apache''), BHP
Billiton Petroleum (``BHP''), BP Plc. (``BP''), Brookwood Petroleum
Advisors, Ltd. (``Brookwood''), Canadian Association of Petroleum
Producers (``CAPP''), Canadian Natural Resources Ltd. (``Canadian
Natural''), Center for Audit Quality (``CAQ''), Center for Corporate
Policy (``CCP''), CFA Institute Centre for Financial Market
Integrity (``CFA''), Chesapeake Energy Corporation (``Chesapeake''),
Chevron Corporation (``Chevron''), Coeur d'Alene Mines Corporation
(``Coeur''), Cunningham, Peter (``Cunningham''), Davis, Polk &
Wardwell (``Davis Polk''), Deloitte & Touche (``Deloitte''), Devon
Energy Corporation (``Devon''), EnCana Corporation (``EnCana''),
Energen Corporation (``Energen''), Energy Information Administration
(of DOE) (``EIA''), Eni S.p.A. (``Eni''), Equitable Resources, Inc.
(``Equitable''), Ernst & Young (``E&Y''), Evolution Petroleum
Corporation (``Evolution''), ExxonMobil Corporation
(``ExxonMobil''), Federal Energy Regulatory Commission (``FERC''),
Graff Consulting Group LLC (``Graff Consulting''), Grant Thornton
(``Grant Thornton''), Imperial Oil Ltd. (``Imperial''), Independent
Petroleum Association of America (``IPAA''), KPMG (``KPMG''),
Luscher, Brian (``Luscher''), Magoto, Joseph (``Magoto''), McMoRan
Exploration Co. (``McMoRan''), Newfield Exploration Company
(``Newfield''), Nexen, Inc. (``Nexen''), Peabody Energy Corporation
(``Peabody''), Petro-Canada (``Petro-Canada''), Petroleo Brasileiro
S.A. (``Petrobras''), Petroleos Mexicanos (``PEMEX''), PRA
International Ltd. (``PRA''), PriceWaterhouseCoopers (``PWC''),
Questar Market Resources (``Questar''), RepsolYPF, S.A.
(``Repsol''), Ross Petroleum Ltd. (``Ross''), Ryder Scott Company,
L.P. (``Ryder Scott''), Sasol Ltd. (``Sasol''), Senator Robert
Menendez, Senator Russell D. Feingold, and Senator Bernard Sanders,
U.S. Senate (``Three Senators''), Shearman & Sterling (``Shearman &
Sterling''), Shell International B.V. (``Shell''), Society of
Exploration Geophysicists (``SEG''), Society of Petroleum Engineers
(``SPE''), Society of Petroleum Evaluation Engineers (``SPEE''),
Southwestern Energy Production Company (``Southwestern''), Standard
Advantage (``Standard Advantage''), StatoilHydro (``StatoilHydro''),
Swift Energy Company (``Swift''), Talisman Energy Inc.
(``Talisman''), Total, S.A. (``Total''), van Wyk, Mike (``van
Wyk''), Wagner, Robert (``Wagner''), Zakaib, Geoff (``Zakaib'').
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     The proposal to permit disclosure of probable and possible
reserves;
     The proposed use of average historical prices to represent
existing economic conditions to determine the economic producibility of
oil and gas reserves for disclosure purposes while continuing to use a
single day year-end price to determine the economic producibility of
reserves for accounting purposes;
     The proposed inclusion of bitumen, oil shales, and other
resources in the definition of ``oil and gas producing activities'';
     The proposed provision to broaden the types of technology
that a company may use to establish reserves estimates and categories;
     The proposed change in the definition of proved
undeveloped reserves to eliminate the ``certainty'' requirement; and
     The increased detail of disclosure that would be required
as a result of our proposed definition of ``geographic location.''

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

A. Introduction

    The revisions and additions to the definition section in Rule 4-
10(a) of Regulation S-X \14\ update our reserves definitions to reflect
changes in the oil and gas industry and markets and new technologies
that have occurred in the decades since the current rules were adopted.
Many of the definitions are designed to be consistent with the
Petroleum Resource Management System (PRMS).\15\ Among other things,
the revisions to these definitions address four issues that have been
of particular interest to companies, investors, and securities
analysts:
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    \14\ 17 CFR 210.4-10(a).
    \15\ The Petroleum Resources Management System is a widely
accepted standard for the management of petroleum resources
developed by several industry organizations. See Society of
Petroleum Engineers, the World Petroleum Council, American
Association of Petroleum Geologists, and the Society of Petroleum
Evaluation Engineers, Petroleum Resources Management System, SPE/
WPC/AAPG/SPEE (2007).
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     The use of single-day year-end pricing to determine the
economic producibility of reserves;
     The exclusion of activities related to the extraction of
bitumen and other ``non-traditional'' resources from the definition of
oil and gas producing activities;
     The limitations regarding the types of technologies that
an oil and gas company may rely upon to establish the levels of
certainty required to classify reserves; and
     The limitation in the current rules that permits oil and
gas companies to disclose only their proved reserves.

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

B. Pricing Mechanism for Oil and Gas Reserves Estimation

1. 12-Month Average Price
    The final rules define the term ``proved oil and gas reserves'' in
part as ``those quantities of oil and gas, which, by analysis of
geoscience and engineering data, can be estimated with reasonable
certainty to be economically producible--from a given date forward,
from known reservoirs, and under existing economic conditions,
operating methods, and government regulations--prior to the time at
which contracts providing the right to operate expire, unless evidence
indicates that renewal is reasonably certain, regardless of whether
deterministic or probabilistic methods are used for the estimation.''
The definition states that the economic producibility of a reservoir
must be based on existing economic conditions. It specifies that, in
calculating economic producibility, a company must use a 12-month
average price, calculated as the unweighted arithmetic average of the
first-day-of-the-month price for each month within the 12-month period
prior to the end of the reporting period, unless prices are defined by
contractual arrangements, excluding escalations based upon future
conditions.\16\
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    \16\ See Rule 4-10(a)(22)(v) [17 CFR 210.4-10(a)(22)(v)].
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    Most commenters supported the use of a 12-month average price to
serve as a proxy for existing economic conditions to determine the
economic producibility of reserves.\17\ Some noted that a 12-month
average price is considered to reflect ``current economic conditions''
by PRMS.\18\ They noted that the use of an average price would reduce
the effects of short term volatility \19\ and seasonality,\20\ while

maintaining comparability of disclosures among companies.\21\
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    \17\ See letters from AngloGold, Apache, API, BHP, BP, Canadian
Natural, CAPP, Chesapeake, Chevron, Devon, EIA, EnCana, Equitable,
Evolution, ExxonMobil, Newfield, Nexen, Petrobras, Petro-Canada,
PWC, Questar, Repsol, Ryder Scott, Sasol, Shell, Southwestern, SPE,
Total, and Wagner.
    \18\ See letters from AngloGold, BHP, Equitable, Ryder Scott,
and SPE.
    \19\ See letters from Apache, API, BHP, BP, Canadian Natural,
CAPP, Chesapeake, EIA, EnCana, Equitable, Evolution, ExxonMobil,
Imperial, IPAA, Newfield, Petrobras, Petro-Canada, Repsol, Ryder
Scott, SPE, Total, and Wagner.
    \20\ See letters from Apache, Canadian Natural, Devon, EnCana,
Evolution, IPAA, Petro-Canada, Repsol, and Ryder Scott.
    \21\ See letters from BHP, Canadian Natural, CAPP, Deloitte,
Devon, IPAA, Newfield, Petro-Canada, Total, and Wagner.
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    Seven commenters recommended the use of first-of-the-month prices
\22\ instead of the proposed use of end-of-the-month prices because the
use of first-of-the-month prices would provide companies with more time
to estimate their reserves \23\ and they thought that these prices
better reflect the actual price received under typical natural gas
contracts.\24\ Conversely, six commenters recommended the use of a 12-
month daily average price \25\ because they thought that a daily
average price would be more appropriate than a monthly average price.
These commenters noted that oil sales contracts often are based on
daily averages.\26\ Two commenters expressed concern that end-of-the-
month prices are not representative of actual prices because commodity
traders often ``clear their books'' at the end of the month.\27\
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    \22\ See letters from Apache, BP, Chesapeake, Chevron, Devon,
Repsol, and Shell.
    \23\ See letters from Chesapeake, Devon, and Shell.
    \24\ See letters from Apache, Newfield, and Repsol.
    \25\ See letters from Canadian Natural, CAPP, EnCana, Nexen,
Petro-Canada, and Repsol.
    \26\ See letter from Newfield.
    \27\ See letters from Apache and Shell.
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    One commenter opposed the use of average prices stating that,
conceptually, the use of average prices is poor regulatory policy and
may encourage the market to pressure standard setters to use historical
average prices for financial instruments and other assets and
liabilities associated with volatile markets.\28\ It noted that
volatility reflects the underlying economics of the oil and gas
industry.\29\
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    \28\ See letter from CFA.
    \29\ See letter from CFA.
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    The objective of reserves estimation is to provide the public with
comparable information about volumes, not fair value, of a company's
reserves available to enable investors to compare the business
prospects of different companies. The use of a 12-month average
historical price to determine the economic producibility of reserves
quantities increases comparability between companies' oil and gas
reserve disclosures, while mitigating any additional variability that a
single-day price may have on reserve estimates. Although oil and gas
prices themselves are subject to market-based volatility, the
estimation of reserves quantities based on any historical price
assumption determines those reserves quantities as if the oil or gas
already has been produced, even though they have not, and these
measures do not attempt to portray a reflection of their fair value. If
the objective of reserve disclosures were to provide fair value
information, we believe a pricing system that incorporates assumptions
about estimated future market prices and costs related to extraction
could be a more appropriate basis for estimation.
    In order to provide disclosures which are more consistent with the
objective of comparability, the amendments state that the existing
economic conditions for determining the economic producibility of oil
and gas reserves include the 12-month average price, calculated as the
unweighted arithmetic average of the first-day-of-the-month price for
each month within the 12-month period prior to the end of the reporting
period.\30\ For example, a company with a reporting year end of
December 31 would determine its reserves estimates for its annual
report based on the average of the prices for oil or gas on the first
day of every month from January through December. Therefore, the use of
a 12-month average price provides companies with the ability to
efficiently prepare useful reserve information without sacrificing the
objective of comparability. We believe that the revised definition of
the term ``proved oil and gas reserves'' will provide investors with
improved reserves information thereby enhancing their ability to
analyze the disclosures.
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    \30\ See new Rule 4-10(a)(22)(v) of Regulation S-X [17 CFR
210.4-10(a)(22)(v)].
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2. Prices Used for Disclosure and Accounting Purposes
    A proposal that resulted in significant comment was the use of a
12-month average price to estimate reserves for disclosure purposes,
but a single-day, year-end price for accounting purposes.\31\ All
commenters addressing the issue of using different prices to determine
reserves for disclosure and accounting opposed the proposal.\32\ We are
not adopting this aspect of the proposal. Instead, we are revising both
our disclosure rules and our full-cost accounting rules related to oil
and gas reserves to use a single price based on a 12-month average.\33\
We also will continue to communicate with the FASB staff to align their
accounting standards with these rules.
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    \31\ Currently, companies use a single-day, year-end price to
determine the quantity of its proved reserves. From an accounting
perspective, the quantity of those reserves, while not included on
the balance sheet, is used to determine the depreciation, depletion
and amortization of certain capitalized costs included on the
balance sheet. If the final rule retained a single-day, year-end
price for determining reserves for accounting purposes (i.e. , for
determining depreciation, depletion and amortization), then
companies would effectively be required to calculate reserves twice,
using two different pricing assumptions--once for disclosure
purposes and once for accounting purposes. Similarly, under the full
cost rules, the full cost ceiling test, as described in Section III
of this release, would have similar implications.
    \32\ See letters from Apache, API, Audit Quality, BHP, BP,
Canadian Natural, CAPP, CFA, Chesapeake, Chevron, Deloitte, Devon,
E&Y, EnCana, Energen, Eni, Equitable, Evolution, ExxonMobil, Grant
Thornton, Imperial, KPMG, McMoRan, Newfield, Nexen, PEMEX,
Petrobras, Petro-Canada, PWC, Questar, Repsol, Ross, Ryder Scott,
Sasol, Shell, Southwestern, SPEE, StatoilHydro, Swift, Talisman,
Total, and Wagner.
    \33\ See Rule 4-10.
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    Commenters pointed out that the use of two different prices for
disclosure and accounting purposes could:
     Confuse investors and other users of financial
statements.\34\
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    \34\ See letters from Audit Quality, BHP, Canadian Natural,
CAPP, Chesapeake, Deloitte, Devon, Evolution, ExxonMobil, Imperial,
Newfield, Nexen, Petrobras, Petro-Canada, PWC, Questar, Repsol,
Ryder Scott, Shell, Swift, Talisman, Total, and Wagner.
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     Create misleading information; \35\
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    \35\ See letters from BP, CFA, Devon, Eni, Nexen, Repsol, and
Wagner.
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     Harm comparability; \36\
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    \36\ See letters from Apache, Canadian Natural, CAPP, Questar,
StatoilHydro, and Wagner.
---------------------------------------------------------------------------

     Decrease transparency; \37\
---------------------------------------------------------------------------

    \37\ See letters from Canadian Natural, CAPP, ExxonMobil, Shell,
Swift, and Wagner.
---------------------------------------------------------------------------

     Increase costs and burden significantly; \38\
---------------------------------------------------------------------------

    \38\ See letters from Apache, Audit Quality, BHP, Canadian
Natural, CAPP, Chevron, Deloitte, Devon, Eni, Equitable, Evolution,
ExxonMobil, Imperial, McMoRan, Newfield, Nexen, Petrobras, Questar,
Petro-Canada, PWC, Ryder Scott, Shell, Swift, Total, and Wagner.
---------------------------------------------------------------------------

     Increase the complexity of disclosures; \39\
---------------------------------------------------------------------------

    \39\ See letters from CAPP, CFA, and Devon.
---------------------------------------------------------------------------

     Double recordkeeping burden; \40\
---------------------------------------------------------------------------

    \40\ See letters from Apache, Chesapeake, Eni, Equitable, and
Imperial.
---------------------------------------------------------------------------

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

    \41\ See letters from CAPP, Devon, Eni, ExxonMobil, Imperial,
and Wagner.
---------------------------------------------------------------------------

     Break the connection between disclosures and
accounting.\42\
---------------------------------------------------------------------------

    \42\ See letters from Apache, Audit Quality, CAPP, CFA,
Deloitte, E&Y, Energen, Eni, ExxonMobil, Imperial, KPMG, Newfield,
PWC, Repsol, and Total.
---------------------------------------------------------------------------

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

not inconsistent with the principles and objectives of financial
reporting in authoritative accounting guidance.
---------------------------------------------------------------------------

    \43\ See letters from API, CAPP, and Shell.
    \44\ See letters from API, Canadian Natural, EnCana, ExxonMobil,
and Total.
---------------------------------------------------------------------------

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

    \45\ See letters from Apache, BHP, Canadian Natural, CAPP, CFA,
Deloitte, McMoRan, Newfield, Nexen, Questar, Southwestern, Talisman,
and Total.
---------------------------------------------------------------------------

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

    \46\ See letters from CFA, Deloitte, Grant Thornton, and
McMoRan.
    \47\ See letters from CFA and Deloitte.
    \48\ See letters from CFA, Grant Thornton, and McMoRan.
    \49\ See letter from Deloitte.
    \50\ See letters from Deloitte and McMoRan.
    \51\ See letter from McMoRan.
    \52\ See letter from CFA.
---------------------------------------------------------------------------

    However, other commenters argued that futures prices are not
available for all reserves locations \53\ and that applying
differentials to prices would require subjective estimates and reduce
comparability among companies.\54\ Two commenters noted that standard
prices are not consistently available in some geographic regions.\55\
Similarly, two commenters were concerned that futures price estimates
would have to be accompanied by estimates of future costs, which they
thought would be very subjective and not comparable for determining
future economic conditions.\56\ One commenter asserted that the use of
future prices would require companies to document assumptions about
future costs, or else the disclosure would be very inconsistent among
reporting companies.\57\ Three commenters believed that futures prices
are more subject to market perceptions than market realities and are
seldom used in actual physical trading of oil and gas.\58\
---------------------------------------------------------------------------

    \53\ See letters from ExxonMobil and Wagner.
    \54\ See letters from EnCana, Evolution, ExxonMobil, Newfield,
Ryder Scott, and Total.
    \55\ See letters from Ryder Scott and Total.
    \56\ See letters from SPE and Total.
    \57\ See letter from SPE.
    \58\ See letters from Evolution, Ryder Scott, and Wagner.
---------------------------------------------------------------------------

    We share the concerns of many of these commenters that
determinations of expected future prices could require significant
estimations which could fall into a wide, albeit reasonable, range. For
example, in many situations and parts of the world, natural gas is sold
through longer term contracts where observable market inputs are not
widely available. As a result, there could be less comparability among
different companies depending on their assumptions, which are inherent
in determining futures prices. Difference in assumptions between
companies could reduce the comparability of reserves information
between those companies.
    We believe that the purpose of disclosing reserves estimates is to
provide investors with information that is both meaningful and
comparable. The reserves estimates in our disclosure rules, however,
are not designed to be, nor are they intended to represent, an
estimation of the fair market value of the reserves. Rather, the
reserves disclosures are intended to provide investors with an
indication of the relative quantity of reserves that is likely to be
extracted in the future using a methodology that minimizes the use of
non-reserves-specific variables. By eliminating assumptions underlying
the pricing variable, as any historical pricing method would do,
investors are able to compare reserves estimates where the differences
are driven primarily by reserves-specific information, such as the
location of the reserves and the grade of the underlying resource. We
recognize that energy markets are continuing to develop. Therefore, we
are not adopting a rule that requires companies to use futures prices
to estimate reserves at this time.
4. Time Period Over Which the Average Price Is To Be Calculated
    Numerous commenters on the Proposing Release recommended that the
12-month period used to calculate the average price for estimating
reserves should not coincide with the fiscal year, as we proposed.\59\
Most of these commenters recommended a 12-month period running from the
beginning of the fourth quarter of the prior fiscal year through the
end of the third quarter of the present fiscal year. For example, for a
company with a fiscal year end of December 31, the relevant 12-month
period would span from October 1 of the prior year to September 30 of
the fiscal year covered by the annual report.\60\ Several commenters
suggested that we provide a two-month buffer between the end of the
measurement period and the end of the company's fiscal year so that
reserves estimates would be based on prices from November 1 through
October 31 by a company with a fiscal year ending on December 31.\61\
Commenters attributed the need for a buffer period to the accelerated
filing dates for annual reports \62\ and stated that they expected that
the additional time would result in better, more accurate
disclosure.\63\ Others noted that some agreements, like production
sharing contracts and other complex concession agreements, can make
calculations difficult.\64\ One commenter also noted that shifting the
relevant measurement period so that it ends three-months prior to the
fiscal-year end would align economic calculations with technical
calculations, which typically occur at the end of the third
quarter.\65\
---------------------------------------------------------------------------

    \59\ See letters from Apache, API, BP, Canadian Natural, CAPP,
EnCana, Eni, ExxonMobil, PEMEX, Petro-Canada, Repsol, Ryder Scott,
Sasol, Shell, Total, van Wyk, and Wagner.
    \60\ See letters from Apache, API, BP, Canadian Natural, CAPP,
Devon, Eni, ExxonMobil, PEMEX, Petro-Canada, Repsol, Ryder Scott,
Sasol, Shell, Total, van Wyk, and Wagner.
    \61\ See letters from Canadian Natural, CAPP, Eni, Nexen, and
Petro-Canada.
    \62\ See letters from API, Canadian Natural, CAPP, Devon,
Evolution, PEMEX, Petrobras, Ryder Scott, Sasol, Shell, Total, and
Wagner.
    \63\ See letters from Canadian Natural, CAPP, Nexen, Petrobras,
Petro-Canada, Ryder Scott, Sasol, and Wagner.
    \64\ See letters from API and Shell.
    \65\ See letter from Shell.
---------------------------------------------------------------------------

    As noted above, we have considered all of these recommendations. We
are adopting a pricing formula based on the average of prices at the
beginning of each month in the 12-month period prior to the end of the
reporting period. A number of commenters believed that the use of
first-of-the-month prices essentially would provide companies with one
month more to prepare the reserves disclosures,\66\ while still

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

    \66\ See letters from API, Devon, Eni, Evolution, ExxonMobil,
PEMEX, Petrobras, PWC, Repsol, and Total.
    \67\ See letters from Devon and ExxonMobil.
---------------------------------------------------------------------------

C. Extraction of Bitumen and Other Non-Traditional Resources

1. Definition of ``Oil and Gas Producing Activities''
    Our current definition of ``oil and gas producing activities''
explicitly excludes sources of oil and gas from ``non-traditional'' or
``unconventional'' sources, that is, sources that involve extraction by
means other than ``traditional'' oil and gas wells.\68\ These other
sources include bitumen extracted from oil sands, as well as oil and
gas extracted from coal and shales, even though some of these resources
are sometimes extracted through wells, as opposed to mining and surface
processing. However, such sources are increasingly providing energy
resources to the world due in part to advancements in extraction and
processing technology.\69\ Therefore, the rules we adopt today revise
the definition of ``oil and gas producing activities'' to include such
activities.\70\
---------------------------------------------------------------------------

    \68\ See Rule 4-10(a)(1)(ii)(D) [17 CFR 210.4-10(a)(1)(ii)(D)].
    \69\ Commenters noted that unconventional resources currently
represent 45% of natural gas production in the U.S. See letters from
American Clean Skies and IPAA.
    \70\ See Rule 4-10(a)(16) [17 CFR 210.4-10(a)(16)].
---------------------------------------------------------------------------

    All commenters on this issue supported including the extraction of
unconventional resources as oil and gas producing activities.\71\ They
believed that such inclusion would greatly improve the quality and
completeness of the disclosures.\72\ Eight commenters noted that
inclusion would better align disclosure with the way that companies
view their operations.\73\ Some noted that, although the distinction
was reasonable decades ago when traditional resources dominated oil and
gas production, the reality of today is that such unconventional
resources are mainstream and companies invest significant amounts of
capital to develop these resources.\74\
---------------------------------------------------------------------------

    \71\ See letters from American Clean Skies, Apache, API,
Canadian Natural, CAPP, CAQ, CFA, Davis Polk, Devon, E&Y, EnCana,
ExxonMobil, FERC, Imperial, IPAA, KPMG, Nexen, Petrobras, Petro-
Canada, PRA, PWC, Repsol, Ryder Scott, Sasol, Shell, SPE,
StatoilHydro, Talisman, Total, and Wagner.
    \72\ See letters from API, CAPP, CAQ, ExxonMobil, Imperial, PWC,
Repsol, Ryder Scott, Total, and Wagner.
    \73\ See letters from API, CAQ, E&Y, ExxonMobil, Imperial,
Petro-Canada, PWC, and Total.
    \74\ See letters from Imperial, IPAA, Repsol, and Total.
---------------------------------------------------------------------------

    The revised definition of ``oil and gas producing activities'' that
we adopt today includes the extraction of the non-traditional resources
described above.\75\ This amendment is intended to shift the focus of
the definition of ``oil and gas producing activities'' to the final
product of such activities, regardless of the extraction technology
used. The amended definition states specifically that oil and gas
producing activities include the extraction of saleable hydrocarbons,
in the solid, liquid, or gaseous state, from oil sands, shale,
coalbeds, or other nonrenewable natural resources which are intended to
be upgraded into synthetic oil or gas, and activities undertaken with a
view to such extraction.\76\
---------------------------------------------------------------------------

    \75\ See Rule 4-10(a)(16) [17 CFR 210.4-10(a)(16)].
    \76\ A hydrocarbon product is saleable if it is in a state in
which it can be sold even if there is no ready market for that
hydrocarbon product in the geographic location of the project. The
absence of a market does not preclude the activity from being
considered an oil and gas producing activity. However, in order to
claim reserves for that hydrocarbon product from a particular
location, there must be a market, or a reasonable expectation of a
market, for that product.
---------------------------------------------------------------------------

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

    \77\ See letters from CAPP, ExxonMobil, Ryder Scott, Sasol,
Shell, StatoilHydro, and Wagner.
    \78\ See letters from CAPP, ExxonMobil, Shell, StatoilHydro, and
Wagner.
    \79\ See letter from ExxonMobil.
---------------------------------------------------------------------------

2. Disclosure by Final Products
    We proposed that disclosure of reserves would be organized based on
the pre-processed resource extracted from the ground. For example,
under the proposal, a company that extracted bitumen and processed that
bitumen into synthetic crude oil in its own processing plant would have
had to base its reserves disclosure on the amount of bitumen that was
economically producible, not taking into account the economics of the
processing plant. This proposal was consistent with our traditional
separation of ``upstream'' activities such as drilling and producing
oil and gas from ``downstream'' activities such as refining.
Distinguishing between traditional resources and unconventional
resources can be significant to investors because unconventional
resources often involve significantly different economics and company
resources than oil and gas from traditional wells.
    Several commenters disagreed with our proposal, recommending that
the determining factor should be the final product.\80\ They believed
that a company should be able to consider the prices of self-processed
resources when estimating oil and gas reserves because the economics of
the processing plant are critical to the registrant's evaluation of the
economic producibility of the resources.\81\ One commenter was
concerned that distinguishing bitumen or other intermediate product
from traditional oil and gas creates a false and misleading sense of
comparability because producers that upgrade bitumen and sell synthetic
crude do not face the same risks and rewards as do producers who sell
the bitumen itself.\82\
---------------------------------------------------------------------------

    \80\ See letters from Apache, Nexen, Petrobras, and Ryder Scott.
    \81\ See letters from Apache, CAQ, and Nexen.
    \82\ See letter from Nexen.
---------------------------------------------------------------------------

    We are persuaded by these commenters. However, we believe that the
distinction between a company's traditional and unconventional
activities is an important one from an investor's perspective because
many of the unconventional activities are costlier and, therefore, have
a much higher threshold of economic producibility. Therefore, we are
revising the proposed table in Item 1202 to require separation of
reserves based on final product, but distinguishing between final
products that are traditional oil or gas from final products of
synthetic oil or gas. We believe that with this separate disclosure,
investors will be able to identify resources in projects that produce
synthetic oil or gas that may be more sensitive to economic conditions
from other resources.
    In addition, as proposed, we are amending the definition of ``oil
and gas producing activities'' to include activities relating to the
processing or upgrading of natural resources from which synthetic oil
or gas can be

extracted. However, the definition would continue to exclude:
     Transporting, refining, processing (other than field
processing of gas to extract liquid hydrocarbons by the company and the
upgrading of natural resources extracted by the company other than oil
or gas into synthetic oil or gas) or marketing oil and gas;
     The production of natural resources other than oil, gas,
or natural resources from which synthetic oil and gas can be extracted;
and
     The production of geothermal steam.

D. Proved Oil and Gas Reserves

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

    \83\ See Rule 4-10(a)(22) [17 CFR 210.4-10(a)(22)].
---------------------------------------------------------------------------

    One commenter recommended against using an average price to
calculate existing economic conditions if the price is set by
contractual arrangements.\84\ We agree that under such circumstances,
the appropriate price to use for establishing economic producibility is
the price set by those contractual arrangements. Therefore, we have
revised the definition to reflect that situation.\85\
---------------------------------------------------------------------------

    \84\ See letter from SPE.
    \85\ See Rule 4-10(a)(22)(v) [17 CFR 210.4-10(a)(22)(v)].
---------------------------------------------------------------------------

    The existing definition of the term ``proved oil and gas reserves''
incorporates certain specific concepts such as ``lowest known
hydrocarbons'' which limit a company's ability to claim proved reserves
in the absence of information on fluid contacts in a well
penetration,\86\ notwithstanding the existence of other engineering and
geoscientific evidence.\87\ We proposed revisions to the definition
that would permit the use of new reliable technologies to establish the
reasonable certainty of proved reserves. The proposed revisions to the
definition of ``proved oil and gas reserves'' also included provisions
for establishing levels of lowest known hydrocarbons and highest known
oil through reliable technology other than well penetrations. We are
adopting those revisions as proposed.
---------------------------------------------------------------------------

    \86\ In certain circumstances, a well may not penetrate the area
at which the oil makes contact with water. In these cases, the
company would not have information on the fluid contact and must use
other means to estimate the lower boundary depths for the reservoir
in which oil is located.
    \87\ See previous Rule 4-10(a)(2)(i) [17 CFR 210.4-10(a)(2)(i)].
---------------------------------------------------------------------------

    We also are adopting, as proposed, revisions that permit a company
to claim proved reserves beyond those development spacing areas that
are immediately adjacent to developed spacing areas if the company can
establish with reasonable certainty that these reserves are
economically producible.\88\ These revisions are designed to permit the
use of alternative technologies to establish proved reserves in lieu of
requiring companies to use specific tests. In addition, they establish
a uniform standard of reasonable certainty that applies to all proved
reserves, regardless of location or distance from producing wells.
---------------------------------------------------------------------------

    \88\ See Rule 4-10(a)(22) [17 CFR 210.4-10(a)(22)]. See Section
II.G for a more detailed discussion regarding this provision.
---------------------------------------------------------------------------

E. Reasonable Certainty

    Both the existing definition of the term ``proved oil and gas
reserves,'' and the definition of that term that we are adopting in
this release, rely on the term ``reasonable certainty,'' which
previously was not defined in Rule 4-10. In the Proposing Release, we
proposed to define the term ``reasonable certainty'' as ``much more
likely to be achieved than not'' to avoid ambiguity in that term's
meaning. However, several commenters recommended that the rules mirror
the PRMS definition more closely.\89\ Four commenters were concerned
that a different definition from the PRMS would cause confusion. They
recommended using the PRMS standard of ``high degree of confidence that
the quantities will be recovered.'' \90\ One commenter recommended
that, because the proposed definition is new, the Commission should
adopt a safe harbor, to avoid potential uncertainty until a court
interprets the phrase.\91\ But others believed that the proposed
definition is consistent with the PRMS definition.\92\ One commenter
opined that the concept of estimated ultimate recovery (EUR) is
appropriate to establish proved oil and gas reserves.\93\
---------------------------------------------------------------------------

    \89\ See letters from EIA, ExxonMobil, and Zakaib.
    \90\ See letters from Apache, EIA, Energen, and SPE.
    \91\ See letter from Evolution.
    \92\ See letters from EnCana, ExxonMobil, Petrobras, and Ryder
Scott.
    \93\ Total.
---------------------------------------------------------------------------

    We believe that the terms ``high degree of confidence'' from the
PRMS and ``much more likely to be achieved than not'' in our proposal
have the same meaning. Our proposed language was not intended to change
the level of certainty required to establish reasonable certainty.
However, we agree that the use of terminology that is consistent with
the PRMS will assist in the understanding of those terms. Therefore, we
are adopting the ``high degree of confidence'' standard that exists in
the PRMS. We also are clarifying that having a ``high degree of
confidence'' means that a quantity is ``much more likely to be achieved
than not, and, as changes due to increased availability of geoscience
(geological, geophysical, and geochemical), engineering, and economic
data are made to estimated ultimate recovery (EUR) with time,
reasonably certain EUR is much more likely to increase or remain
constant than to decrease'' to provide elaboration to the definition of
reasonable certainty.
    We are adopting a definition of ``reasonable certainty'' that
addresses, and permits the use of, both deterministic methods and
probabilistic methods for estimating reserves, as proposed. Nine
commenters supported permitting the use of either deterministic methods
or probabilistic methods.\94\ One commenter believed that each method
may be more appropriate for different situations.\95\ Other commenters
also supported the proposed alignment of the definitions of those terms
with the definitions in the PRMS definitions.\96\ The definition that
we are adopting states that, if deterministic methods are used,
reasonable certainty means a high degree of confidence that the
quantities will be recovered.\97\ Consistent with the PRMS definition,
if probabilistic methods are used, there should be at least a 90%
probability that the quantities actually recovered will equal or exceed
the estimate.
---------------------------------------------------------------------------

    \94\ See letters from Apache, Devon, Evolution, Petro-Canada,
Ryder Scott, Shell, SPE, Total, and Wagner.
    \95\ See letter from Wagner.
    \96\ See letters from AAPG, SPE, and Southwestern.
    \97\ See Rule 4-10(a)(24) [17 CFR 210.4-10(a)(24)].
---------------------------------------------------------------------------

F. Developed and Undeveloped Oil and Gas Reserves

    We proposed to revise the definitions of the terms ``proved
developed oil and gas reserves'' and ``proved undeveloped oil and gas
reserves.'' One commenter noted that the terms ``developed'' and
``undeveloped'' are not restricted to proved oil and gas reserves, but
could apply to all classifications of reserves, including probable and
possible reserves.\98\ We agree with that

commenter. Although the development of a prospect may provide the
company with more information and data to determine reserves amounts
more accurately, companies may estimate proved, probable, and possible
volumes regardless of the development stage. In the past, these terms
were linked to the concept of proved reserves because our disclosure
rules permitted the disclosure only of proved reserves. In light of our
revision to allow disclosure of probable and possible reserves, the
final rules define the terms ``developed oil and gas reserves'' and
``undeveloped oil and gas reserves'' to indicate that the development
status of the reserves is relevant to all classifications of oil and
gas reserves.\99\
---------------------------------------------------------------------------

    \98\ See letter from SPE. We note that with respect to oil and
gas reserves, the term ``classification'' is used to indicate the
level of certainty that estimated amounts will be recovered. Thus,
although the terms ``developed'' and ``undeveloped'' may be
considered means in which to generically ``classify'' reserves, for
clarity, we use that term to be consistent with industry usage.
    \99\ See Rules 4-10(a)(6) and (31) [17 CFR 210.4-10(a)(6) and
(31)].
---------------------------------------------------------------------------

1. Developed Oil and Gas Reserves
    Other than the change discussed above to eliminate ``proved'' from
the term being defined, we are adopting a definition of ``developed oil
and gas reserves'' substantially as proposed. We proposed to define the
term ``proved developed oil and gas reserves'' as proved reserves that:
     In projects that extract oil and gas through wells, can be
expected to be recovered through existing wells with existing equipment
and operating methods; and
     In projects that extract oil and gas in other ways, can be
expected to be recovered through extraction technology installed and
operational at the time of the reserves estimate.
    Two commenters suggested that, consistent with the PRMS, reserves
should be considered developed if the cost of any required equipment is
relatively minor compared to the cost of a new well or the installed
equipment.\100\ Again, we agree that consistency with PRMS would
improve compliance with our rules. In addition, such a revision is
consistent with our existing definition of the term ``proved
undeveloped reserves'' which includes reserves on which a well exists,
but a relatively ``major'' expenditure is required for
recompletion.\101\ Therefore, the final rules provide that reserves
also are developed if the cost of any required equipment is relatively
minor compared to the cost of a new well.\102\
---------------------------------------------------------------------------

    \100\ See letters from SPE and Total.
    \101\ See previous Rule 4-10(a)(4) [17 CFR 210.4-10(a)(4)].
    \102\ See Rule 4-10(a)(6) [17 CFR 210.4-10(a)(6)].
---------------------------------------------------------------------------

2. Undeveloped Oil and Gas Reserves
    In the Proposing Release, we proposed a significantly revised
definition of the term ``proved undeveloped oil and gas reserves.'' The
most significant aspect of the proposed revision was the replacement of
the existing ``certainty'' test for areas beyond one offsetting
drilling unit \103\ from a productive well with a ``reasonable
certainty'' test. Currently, the definition of the term ``proved
undeveloped reserves'' imposes a ``reasonable certainty'' standard for
reserves in drilling units immediately adjacent to the drilling unit
containing a producing well and a ``certainty'' standard for reserves
in drilling units beyond the immediately adjacent drilling units.\104\
All commenters on this issue supported the proposal.\105\ Three
commenters noted that a single standard-reasonable certainty-should
apply to all proved reserves.\106\ We are adopting this aspect of the
definition as proposed.
---------------------------------------------------------------------------

    \103\ As noted later in this section of the release, we are
replacing the term ``drilling unit'' with the term ``development
spacing area'' in the final rules. However, for purposes of
discussing the proposal and the existing rules, we continue to use
the term ``drilling unit'' because that is the term used in the
proposal and the existing rules.
    \104\ See previous Rule 4-10(a)(4) [17 CFR 210.4-10(a)(4)]. A
drilling unit refers to the spacing between wells required by some
local jurisdictions to prevent wasting resources and optimize
recovery.
    \105\ See letters from American Clean Skies, Apache, API,
Canadian Natural, CAPP, Chesapeake, Devon, Evolution, ExxonMobil,
McMoRan, Petro-Canada, Questar, Repsol, Southwestern, Shell, SPE,
Total, and Wagner.
    \106\ See letters from Devon, EnCana, and Equitable.
---------------------------------------------------------------------------

    Many commenters opposed the proposed language that would have
imposed a five-year limit on maintaining undeveloped reserves unless
``unusual'' circumstances existed.\107\ They asserted that large
projects, projects in remote areas, and projects in continuous
accumulations, such as oil sands, typically take more than five years
to develop, but they do not view such projects as ``unusual.'' \108\
One commenter noted that the proposed rule is not consistent with the
PRMS, which uses the term ``specific circumstances,'' rather than
``unusual circumstances.'' \109\ Other commenters suggested that we
require the company to explain why it has not developed any undeveloped
reserves for more than five years.\110\ The intent of the proposal was
not to exclude projects that typically take more than five years to
develop from being considered reserves. We agree that the rule should
allow the recognition of reserves in projects that are expected to run
more than five years, regardless of whether ``unusual'' circumstances
exist. Therefore, we have revised the rule to replace the term
``unusual'' with the term ``specific.'' \111\ We note that, as
proposed, Item 1203 of Regulation S-K would require disclosure
regarding why such undeveloped reserves have not been developed.\112\
---------------------------------------------------------------------------

    \107\ See letters from American Clean Skies, Apache, CAPP,
Chesapeake, EnCana, ExxonMobil, Luscher, Newfield, Nexen, Petrobras,
Petro-Canada, Ryder Scott, Shell, SPE, and Total.
    \108\ See letters from American Clean Skies, CAPP, Chesapeake,
EnCana, ExxonMobil, Newfield, Nexen, Petrobras, Petro-Canada, Ryder
Scott, Shell, and Total.
    \109\ See letter from SPE.
    \110\ See letters from Devon, Ryder Scott, and Wagner.
    \111\ See Rule 4-10(a)(31) [17 CFR 210.4-10(a)(31)].
    \112\ See Item 1203(d) [17 CFR 229.1203(d)].
---------------------------------------------------------------------------

    We also proposed to broaden the definition of the term ``proved
undeveloped reserves'' to permit a company to include, in its
undeveloped reserves estimates, quantities of oil that can be recovered
through improved recovery projects and to expand the technologies that
a company can use to establish reserves. Under the existing definition,
a company can include such quantities only if techniques have been
proved effective by actual production from projects in the area and in
the same reservoir. As proposed, we are expanding this definition of
the term ``undeveloped oil and gas reserves'' to permit the use of
techniques that have been proved effective by actual production from
projects in the same reservoir or an analogous reservoir or ``by other
evidence using reliable technology that establishes reasonable
certainty.'' \113\
---------------------------------------------------------------------------

    \113\ See Rule 4-10(a)(31) [17 CFR 210.4-10(a)(31)].
---------------------------------------------------------------------------

    We also are making other, less substantive revisions to the
definition of ``undeveloped oil and gas reserves.'' First, commenters
suggested that we use the term ``development spacing'' \114\ or
``drainage areas'' \115\ instead of ``drilling units'' because the term
``drilling units'' is only relevant in jurisdictions that establish
such units. They noted that many foreign jurisdictions do not establish
such units. We concur with those commenters and have replaced the term
``drilling units'' with the term ``development spacing areas.''
---------------------------------------------------------------------------

    \114\ See letter from Total.
    \115\ See letter from SPE.
---------------------------------------------------------------------------

    One commenter also noted that the PRMS guidance on the use of
analogs for improved recovery projects does not limit such use to
``within the immediate area'' and recommended that we delete this
phrase from the definition.\116\ Again, we agree that consistency with
PRMS would be beneficial in this instance and have deleted that phrase

from the definition. We also have eliminated two paragraphs of the
proposed definition because they were largely repetitive of other
aspects of the definition and were unnecessary.\117\
---------------------------------------------------------------------------

    \116\ See letter from SPE.
    \117\ These paragraphs would have clarified (1) in a
conventional accumulation, offsetting productive units must lie
within an area in which economic producibility has been established
by reliable technology to be reasonably certain and (2) proved
reserves can be claimed in a conventional or continuous accumulation
in a given area in which engineering, geoscience, and economic data,
including actual drilling statistics in the area, and reliable
technology show that, with reasonable certainty, economic
producibility exists beyond immediately offsetting drilling units.
We do not believe that these statements, based on the terms
``conventional accumulation'' and ``continuous accumulation'' which
are no longer being defined continue to serve a helpful purpose. See
Section II.J.5 of this release.
---------------------------------------------------------------------------

G. Reliable Technology

1. Definition of the Term ``Reliable Technology''
    We are adopting, substantially as proposed, a new definition of
``reliable technology'' that would broaden the types of technologies
that a company may use to establish reserves estimates and categories.
All commenters on this topic supported the proposed principles-based
definition for reliable technology.\118\
---------------------------------------------------------------------------

    \118\ See letters from AAPG, American Clean Skies, Apache, CFA,
Davis Polk, Devon, EnCana, ExxonMobil, Petrobras, Ryder Scott,
Sasol, Shell, SPE, Southwestern, and Wagner.
---------------------------------------------------------------------------

    The current rules limit the use of alternative technologies as the
basis for determining a company's reserves disclosures. For example,
under the current rules, a company must use actual production or flow
tests to meet the ``reasonable certainty'' standard necessary to
establish the proved status of its reserves.\119\ Similarly, the
current rules provide bright line tests for determining fluid contacts,
such as lowest known hydrocarbons and highest known oil, which
establish the volume of the hydrocarbons in place.
---------------------------------------------------------------------------

    \119\ However, in the past, the Commission's staff has
recognized that flow tests can be impractical in certain areas, such
as the Gulf of Mexico, where environmental restrictions effectively
prohibit these types of tests. The staff has not objected to
disclosure of reserves estimates for these restricted areas using
alternative technologies.
---------------------------------------------------------------------------

    We recognize that technologies have developed, and will continue to
develop, improving the quality of information that can be obtained from
existing tests and creating entirely new tests that we cannot yet
envision. Thus, the new definition of the term ``reliable technology''
permits the use of technology (including computational methods) that
has been field tested and has demonstrated consistency and
repeatability in the formation being evaluated or in an analogous
formation. This new standard will permit the use of a new technology or
a combination of technologies once a company can establish and document
the reliability of that technology or combination of technologies.
    We are adopting certain revisions to our proposed definition of the
term ``reliable technology.'' The proposal also would have required
reliable technology to be ``widely accepted.'' However, some commenters
were concerned that this requirement would exclude proprietary
technologies that companies develop internally that have proven to be
reliable.\120\ We concur with these commenters and have removed the
``widely accepted'' requirement from the final rule.
---------------------------------------------------------------------------

    \120\ See letters from Chesapeake, ExxonMobil, Shell, and Total.
---------------------------------------------------------------------------

    We also proposed to define the term ``reliable technology,''
expressed in probabilistic terms, as technology that has been proven
empirically to lead to correct conclusions in 90% or more of its
applications. Several commenters expressed concern that this proposed
90% threshold would be difficult to verify and support on an ongoing
basis.\121\ We agree that a bright line test would be difficult to
apply to a particular technology or mix of technologies to determine
their reliability. Therefore, we are not adopting the 90% threshold as
part of the definition.
---------------------------------------------------------------------------

    \121\ See letters from AAPG, Apache, EIA, Evolution, Ryder
Scott, Shell, SPE, and Wagner.
---------------------------------------------------------------------------

2. Disclosure of Technologies Used
    The proposal would have required a company to disclose the
technology used to establish reserves estimates and categories for
material properties in a company's first filing with the Commission and
for material additions to reserves estimates in subsequent filings
because, under the proposal, a company would be able to select the
technology or mix of technologies that it uses to establish reserves.
Two commenters supported the proposal because they believed that
disclosure of the technologies used is reasonable if the definition of
``reliable technology'' is principles-based.\122\ However, many other
commenters were concerned that the proposed requirement to disclose the
technologies used to establish levels of certainty for reserves
estimates would lead to very complex, technical disclosures that would
have little meaning to investors.\123\ Others were concerned that
disclosure of the technology, or the mix of technologies, might cause
competitive harm.\124\
---------------------------------------------------------------------------

    \122\ See letters from Davis Polk and Sasol.
    \123\ See letters from API, Devon, Eni, ExxonMobil, PEMEX,
Petro-Canada, Questar, Repsol, Ryder Scott, Shell, Southwestern,
StatoilHydro, and Total.
    \124\ See letters from API, Devon, Evolution, ExxonMobil, Ryder
Scott, StatoilHydro, and Total.
---------------------------------------------------------------------------

    As an alternative, some commenters recommended that the rule
require a more general overview of the technologies used.\125\ We are
clarifying that the required disclosure would be limited to a concise
summary of the technology or technologies used to create the
estimate.\126\ A company would not be required to disclose proprietary
technologies, or a proprietary mix of technologies, at a level of
specificity that would cause competitive harm. Rather, the disclosure
may be more general. For example, a company may disclose that it used a
combination of seismic data and interpretation, wireline formation
tests, geophysical logs, and core data to calculate the reserves
estimate. As noted, however, the Commission's staff, as part of the
review and comment process, may continue to request companies to
provide supplemental data, consistent with current practice,\127\
which, under the new rules, may include information sufficient to
support a company's conclusion that a technology or mix of technologies
used to establish reserves meets the definition of ``reliable
technology.''
---------------------------------------------------------------------------

    \125\ See letters from EnCana, Eni, Evolution, Ryder Scott, and
Shell.
    \126\ See Item 1202(a)(6) [17 CFR 229.1202(a)(6)].
    \127\ Currently, the Commission's staff requests supplemental
data pursuant to Instruction 4 to Item 102 of Regulation S-K [17 CFR
229.102], Rule 418 [17 CFR 230.418], and Rule 12b-4 [17 CFR 240.12b-
4]
---------------------------------------------------------------------------

    Two commenters supported the proposal to limit the disclosures to
technologies used to establish reserves in a company's first filing
with the Commission and material additions to reserves.\128\ We are
adopting this limitation as proposed.\129\ If the company has not
previously disclosed reserves estimates in a filing with the Commission
or is disclosing material additions to its reserves estimates, the
company must disclose the technologies used to establish the
appropriate level of certainty for reserves estimates from material
properties included in the total reserves disclosed and the particular
properties do not need to be identified. We believe that requiring such
disclosure when reserves, or material additions to reserves, are
reported for the first time will discourage the use of questionable
technologies to establish reserves. However, we do not believe it is
necessary to require a company to disclose the technology or
technologies

relied upon to establish reserves previously disclosed under our rules
because the permitted technologies have been limited to those permitted
by our existing rule. In addition, we believe that ongoing disclosure
of the technologies used to establish all of a company's reserves would
become unnecessarily cumbersome.
---------------------------------------------------------------------------

    \128\ See letters from Southwestern and Wagner.
    \129\ See Item 1202(a)(6) [17 CFR 229.1202(a)(6)].
---------------------------------------------------------------------------

H. Unproved Reserves--``Probable Reserves'' and ``Possible Reserves''

    As discussed more fully in Section IV.B.3 of this release
addressing the disclosure requirements of new Subpart 1200, we are
adopting the proposal to permit disclosure of probable and possible
reserves. Therefore, we are adopting the proposed definitions of the
terms ``probable reserves'' and ``possible reserves'' as proposed.
    When producing an estimate of the amount of oil and gas that is
recoverable from a particular reservoir, a company can make three types
of estimates:
     An estimate that is reasonably certain;
     An estimate that is as likely as not to be achieved; and
     An estimate that might be achieved, but only under more
favorable circumstances than are likely.

These three types of estimates are known in the industry as (1) proved,
(2) proved plus probable, and (3) proved plus probable plus possible
reserves estimates.
1. Probable Reserves
    We are adopting the definition of the term ``probable reserves'' as
proposed. It states that ``probable reserves'' are those additional
reserves that are less certain to be recovered than proved reserves but
which, in sum with proved reserves, are as likely as not to be
recovered.\130\ This definition provides guidance for the use of both
deterministic and probabilistic methods. The definition clarifies that,
when deterministic methods are used, it is as likely as not that actual
remaining quantities recovered will equal or exceed the sum of
estimated proved plus probable reserves. Similarly, when probabilistic
methods are used, there must be at least a 50% probability that the
actual quantities recovered will equal or exceed the proved plus
probable reserves estimates. This definition was derived from the PRMS
definition of the term ``probable reserves.'' Several commenters agreed
with the proposed definition of this term, noting that it is roughly
consistent with PRMS.\131\
---------------------------------------------------------------------------

    \130\ See Rule 4-10(a)(18) [17 CFR 210.4-10(a)(18)].
    \131\ See letters from Devon, EnCana, SPE, and StatoilHydro.
---------------------------------------------------------------------------

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

    \132\ See Rule 4-10(a)(17) [17 CFR 210.4-10(a)(17)].
    \133\ See letters from Devon, EnCana, SPE, and StatoilHydro.
    \134\ See letter from Evolution.
---------------------------------------------------------------------------

I. Reserves

    We proposed to add a definition of the term ``reserves'' to our
rules. The proposed definition would have described the criteria that
an accumulation of oil, gas, or related substances must satisfy to be
considered reserves (of any classification), including non-technical
criteria such as legal rights. Specifically, we proposed to define
reserves as the estimated remaining quantities of oil and gas and
related substances anticipated to be recoverable, as of a given date,
by application of development projects to known accumulations based on:
     Analysis of geoscience and engineering data;
     The use of reliable technology;
     The legal right to produce;
     Installed means of delivering the oil, gas, or related
substances to markets, or the permits, financing, and the appropriate
level of certainty (reasonable certainty, as likely as not, or possible
but unlikely) to do so; and
     Economic producibility at current prices and costs.

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

    \135\ See letters from API, CAQ, Grant Thornton, and KPMG.
---------------------------------------------------------------------------

    Our final rules define the term ``reserves'' as the estimated
remaining quantities of oil and gas and related substances anticipated
to be economically producible, as of a given date, by application of
development projects to known accumulations.\136\ In addition, there
must exist, or there must be a reasonable expectation that there will
exist, the legal right to produce or a revenue interest in the
production of oil and gas, installed means of delivering oil and gas or
related substances to market, and all permits and financing required to
implement the project.
---------------------------------------------------------------------------

    \136\ See Rule 4-10(a)(26) [17 CFR 210.4-10(a)(26)].
---------------------------------------------------------------------------

    A note to the definition clarifies that reserves should not be
assigned to adjacent reservoirs isolated by major, potentially sealing,
faults until those reservoirs are penetrated and evaluated as
economically producible and that reserves should not be assigned to
areas that are clearly separated from a known accumulation by a non-
productive reservoir (i.e., absence of reservoir, structurally low
reservoir, or negative test results). Such areas may contain
prospective resources (i.e., potentially recoverable resources from
undiscovered accumulations).\137\
---------------------------------------------------------------------------

    \137\ See Note to Rule 4-10(a)(26) [17 CFR 210.4-10(a)(26)].
---------------------------------------------------------------------------

    One notable difference between our final definition of ``reserves''
and the PRMS definition is that our definition is based on ``economic
producibility'' rather than ``commerciality.'' One commenter believed
that reserves must be ``commercial,'' as stated in the PRMS
definition.\138\ However, commerciality introduces a subjective aspect
to the price used to establish existing economic conditions by
factoring in the rate of return required by a particular company before
it will commit resources to the project. This rate of return will vary
among companies, reducing the comparability among disclosures.
Therefore, the adopted definition of the term ``reserves'' relies on
economic producibility, as proposed.
---------------------------------------------------------------------------

    \138\ See letter from StatoilHydro.

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

J. Other Supporting Terms and Definitions

    We also proposed to define several other terms primarily to support
and clarify the definitions of the key terms. We are adopting most of
those supporting definitions as discussed in further detail below.
1. Deterministic Estimate
    A company can derive two different types of reserves estimates
depending on the method used to calculate the estimates. These two
types of estimates are known as ``deterministic estimates'' and
``probabilistic estimates.'' \139\ In the Proposing Release, we
proposed to define the term ``deterministic estimate'' as an estimate
based on a single value for each parameter (from the geoscience,
engineering, or economic data) in the reserves calculation that is used
in the reserves estimation procedure. We are adopting that definition
as proposed.
---------------------------------------------------------------------------

    \139\ See Rules 4-10(a)(5) and (a)(19) [17 CFR 210.4-10(a)(5)
and (a)(19)]. These definitions are based on the Canadian Oil and
Gas Evaluation Handbook (COGEH). This handbook was developed by the
Calgary Chapter of the Society of Petroleum Evaluation Engineers and
the Petroleum Society of CIM to establish standards to be used
within the Canadian oil and gas industry in evaluating oil and gas
reserves and resources.
---------------------------------------------------------------------------

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

    \140\ See Rule 4-10(a)(19) [17 CFR 210.4-10(a)(19)].
    \141\ See letter from Shell.
---------------------------------------------------------------------------

3. Analogous Reservoir
    We proposed a definition of the term ``analogous formation in the
immediate area.'' As noted above, we received comment indicating that
the use of appropriate analogs should not be limited to the immediate
area in which the reserves are being estimated.\142\ Therefore, we have
changed the defined term to ``analogous reservoir.'' \143\ In addition,
based on commenters' remarks, we are defining the term ``analogous
reservoir'' in a manner that is more consistent with the PRMS, which
addresses more specifically the types of reservoirs that may be used as
analogues. The new definition of the term ``analogous reservoir''
states that analogous reservoirs, as used in resources assessments,
have similar rock and fluid properties, reservoir conditions (depth,
temperature, and pressure) and drive mechanisms, but are typically at a
more advanced stage of development than the reservoir of interest and
thus may provide concepts to assist in the interpretation of more
limited data and estimation of recovery.\144\ When used to support
proved reserves, an ``analogous reservoir'' refers to a reservoir that
shares the following characteristics with the reservoir of interest:
---------------------------------------------------------------------------

    \142\ See letter from SPE.
    \143\ See Rule 4-10(a)(2) [17 CFR 210.4-10(a)(2)].
    \144\ See Rule 4-10(a)(2) [17 CFR 210.4-10(a)(2)].
---------------------------------------------------------------------------

     Same geological formation (but not necessarily in pressure
communication with the reservoir of interest);
     Same environment of deposition;
     Similar geological structure; and
     Same drive mechanism.

As proposed, the new definition includes an instruction that clarifies
that reservoir properties must, in the aggregate, be no more favorable
in the analog than in the reservoir of interest. The new definition
also clarifies that, although an analogous reservoir must be in the
same geological formation as the reservoir of interest, it need not be
in pressure communication with the reservoir of interest.
4. Definitions of Other Terms
    We received no comment with regard to several of the proposed
supporting definitions. We are adopting those definitions substantially
as proposed without material changes. They include the following terms:
     ``Condensate''; \145\
     ``Development project''; \146\
     ``Economically producible''; \147\
     ``Estimated ultimate recovery,'' \148\
     ``Exploratory well''; \149\
     ``Extension well''; \150\ and
     ``Resources.'' \151\
---------------------------------------------------------------------------

    \145\ See Rule 4-10(a)(4) [17 CFR 210.4-10(a)(4)].
    \146\ See Rule 4-10(a)(8) [17 CFR 210.4-10(a)(8)].
    \147\ See Rule 4-10(a)(10) [17 CFR 210.4-10(a)(10)].
    \148\ See Rule 4-10(a)(11) [17 CFR 210-4-10(a)(11)].
    \149\ See Rule 4-10(a)(13) [17 CFR 210.4-10(a)(13)].
    \150\ See Rule 4-10(a)(14) [17 CFR 210.4-10(a)(14)].
    \151\ See Rule 4-10(a)(28) [17 CFR 210.4-10(a)(28)].
---------------------------------------------------------------------------

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

    \152\ See letter from SPE.
---------------------------------------------------------------------------

    We are defining the term ``bitumen'' as ``petroleum in a solid or
semi-solid state in natural deposits. In its natural state, it usually
contains sulfur, metals, and other non-hydrocarbons. Bitumen has a
viscosity greater than 10,000 centipoise measured at original
temperature in the deposit and atmospheric pressure, on a gas free
basis.'' \153\ This definition is similar to the PRMS definition of
``natural bitumen.''
---------------------------------------------------------------------------

    \153\ See Rule 4-10(a)(3) [17 CFR 210.4-10(a)(3)].
---------------------------------------------------------------------------

5. Proposed Terms and Definitions Not Adopted
    We proposed definitions for the terms ``continuous accumulations''
and ``conventional accumulations'' to assist companies in disclosing
segregated reserves based on these two types of accumulations. As noted
elsewhere in this release, the final rules do not require disclosure
based on the type of accumulation in which the reserves are found.\154\
Therefore, there is no need to define these terms and we are not
adopting the proposed definitions.
---------------------------------------------------------------------------

    \154\ See Section III.B.3.c.
---------------------------------------------------------------------------

    Similarly, we proposed a definition for the term ``sedimentary
basin'' because it would have been part of our definition of the term
``by geographic area.'' As noted elsewhere in this release, we have
substantially revised the definition of the term ``by geographic area''
\155\ and the term ``sedimentary basin'' is no longer needed, so we are
not adopting this proposed term and definition.
---------------------------------------------------------------------------

    \155\ See Section III.B.2.a.
---------------------------------------------------------------------------

    As noted above, one commenter recommended that we adopt a large
glossary of terms and definitions that correspond with the PRMS
definitions.\156\ Rather than defining an extensive glossary of terms
in our rules

and attempting to constantly update those definitions, we advise
companies to look to definitions that are commonly accepted within the
oil and gas industry to the extent such definitions are not in, or
inconsistent with, our rules.
---------------------------------------------------------------------------

    \156\ See letter from SPE.
---------------------------------------------------------------------------

K. Alphabetization of the Definitions Section of Rule 4-10

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

III. Revisions to Full Cost Accounting and Staff Accounting Bulletin

    As we noted in Section II.B.2 of this release, commenters
unanimously opposed our proposal to use different prices for disclosure
and accounting purposes. We agree with those commenters and are
revising our proposal to use a 12-month average price for accounting
purposes. These revisions primarily will appear under the full cost
accounting method described in Rule 4-10(c) \157\ of Regulation S-X.
The full cost accounting method permits certain oil and gas extraction
costs to accumulate on a company's balance sheet subject to a
limitation test or a ``ceiling'' as described in Rule 4-10(c)(3)(4).
Like reserve disclosures, these capitalized costs and the related
limitation test are not fair value based measurements. Rather the
capitalized costs represent the accumulated historical acquisition,
exploration and development costs (net of any previously recorded
depletion, amortization or ceiling test write downs) incurred for oil
and gas producing activities, limited to a standardized mathematical
calculation (the full cost ceiling) adopted over 25 years ago. Costs
that do not exceed the limitation are deferred and amortized over time.
The limitation test calculation on capitalized costs is not designed or
intended to represent a fair valuation of the related oil and gas
assets.\158\
---------------------------------------------------------------------------

    \157\ 17 CFR 210.4-10(c).
    \158\ While not intended to represent fair value, costs that are
written down because they exceed the ceiling limitation are
accounted for in the same manner as impairments recognized under
accounting generally. That is, once the asset is written down, it
becomes the new historical cost basis and cannot be reinstated for
subsequent increases in the ceiling. See Rule 4-10(c)(4)(i) of
Regulation S-X [17 CFR 210-4-10(c)(4)(i)].
---------------------------------------------------------------------------

    Similar to the single-day, year-end pricing used under the
successful efforts method,\159\ the application of the full cost method
of accounting in Rule 4-10(c) has used ``current prices,'' interpreted
as single-day, year-end prices, as the basis for calculating the
limitation on costs that may be capitalized under the full cost method.
In order to further the objective of providing comparable oil and gas
reserve quantities, our final rule clarifies that the term ``current
prices'' as used in Rule 4-10(c) is consistent with the 12-month
average price as calculated in Rule 4-10(a)(22)(v).\160\
---------------------------------------------------------------------------

    \159\ The accounting guidance refers to our definition of proved
reserves under existing Rule 4-10(a)(2), which currently uses a
single-day, year-end price to establish reserves amounts.
    \160\ See Rule 4-10(c)(8) [17 CFR 210.4-10(c)(8)].
---------------------------------------------------------------------------

    However, since these calculations are not designed to result in a
calculation of fair value and since the change to the full cost
accounting method would effectively eliminate the anomalies caused by
the single-day, year-end price currently used in the limitation test,
the SEC staff will eliminate portions of Staff Accounting Bulletin
(SAB) Topic 12:D.3.c that permit consideration of the impact of price
increases subsequent to the period end on the ceiling limitation test.
    The combination of adopting a 12-month average pricing mechanism
and eliminating portions of SAB Topic 12:D.3.c could have the effect of
requiring a company using the full cost accounting method to record a
ceiling test write-down in income during periods of rising oil and gas
prices. In that situation, it is possible that using a 12-month average
price in the ceiling test calculation might result in a write-down that
would not otherwise have been required had the full cost company been
permitted to use the single-day, year-end price. Conversely, it is also
possible that in periods of declining oil and gas prices, the
application of this rule could result in the deferral of ceiling test
write-downs. In that situation, it is possible that using a 12-month
average price in the ceiling limitation test calculation might not
result in a write-down in situations where a write down would have
otherwise been required had the full cost company been required to use
a single-day, year-end price in its ceiling limitation test
calculation.
    Because the application of the ceiling limitation test is not a
fair-value-based calculation but rather a limit on the amount of
certain oil and gas related exploration costs that can be capitalized,
portions of which would have resulted in write-downs in prior periods
under other methods of accounting, we believe the benefits of using a
single pricing mechanism justify the potential changes to the timing of
those ceiling test write-downs or amortizations amounts. However, as
discussed in Section V of this release, we believe that the company
should discuss such situations, if material, particularly when pricing
trends indicate the possibility of future write-downs, in Management's
Discussion and Analysis and, where appropriate, the notes to the
financial statements.

IV. Update and Codification of the Oil and Gas Disclosure Requirements
in Regulation S-K

    The Proposing Release proposed to update and codify Securities Act
and Exchange Act Industry Guide 2: Disclosure of Oil and Gas Operations
(Industry Guide 2).\161\ Industry Guide 2 currently sets forth most of
the disclosures that an oil and gas company provides regarding its
reserves, production, property, and operations. Regulation S-K
references Industry Guide 2 in Instruction 8 to Item 102 (Description
of Property), Item 801 (Securities Act Industry Guides), and Item 802
(Exchange Act Industry Guides). However, Industry Guide 2 itself does
not appear in Regulation S-K or in the Code of Federal Regulations. The
rules that we adopt today codify the contents of Industry Guide 2 in a
new Subpart 1200 of Regulation S-K.
---------------------------------------------------------------------------

    \161\ Exchange Act Industry Guide 2 merely references, and
therefore is identical to, Securities Act Industry Guide 2.
---------------------------------------------------------------------------

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

    The instructions to Item 102 of Regulation S-K, as well as Items
801 and 802 of Regulation S-K, currently reference the industry guides.
Because we are codifying the Industry Guide 2 disclosures in a new
Subpart 1200 of Regulation S-K, we are revising the instructions to
Item 102 to reflect this change.\162\ We also are eliminating the
references in Items 801 and 802 to Industry Guide 2 because that
industry guide will cease to exist upon effectiveness of the amendments
we adopt today.\163\
---------------------------------------------------------------------------

    \162\ See revised Instructions 4 and 8 to Item 102 [17 CFR
229.102].
    \163\ See revised Item 801 and 802 [17 CFR 229.801 and 802].
---------------------------------------------------------------------------

    In addition, Instruction 5 to Item 102 of Regulation S-K currently
prohibits the disclosure of reserves other than proved oil and gas
reserves. Because we are adopting rules to permit disclosure of
probable and possible oil and gas reserves, we are revising Instruction
5 to limit its applicability to extractive enterprises other than oil
and gas producing activities, such as mining activities.\164\
Similarly, Instruction 3 of

Item 102, regarding production, reserves, locations, development and
the nature of the company's interests, will no longer apply to oil and
gas producing activities, so we also are limiting that instruction to
mining activities.\165\
---------------------------------------------------------------------------

    \164\ See revised Instruction 5 to Item 102 [17 CFR 229.102].
Extractive enterprises include enterprises such as mining companies
that extract resources from the ground.
    \165\ See revised Instruction 3 to Item 102 [17 CFR 229.102].
---------------------------------------------------------------------------

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

    \166\ 17 CFR 230.418.
    \167\ 17 CFR 240.12b-4.
---------------------------------------------------------------------------

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

1. Overview
    We are adding a new Subpart 1200 to Regulation S-K that codifies
the disclosure requirements related to companies engaged in oil and gas
producing activities. This new subpart largely includes the existing
requirements of Industry Guide 2. However, we have revised these
requirements to update them, provide better clarity with respect to the
level of detail required in oil and gas disclosures, including the
geographic areas by which disclosures need to be made, and provide
formats for tabular presentation of these disclosures. In addition,
Subpart 1200 contains the following new disclosure requirements, many
of which have been requested by industry participants:
     Disclosure of reserves from non-traditional sources (e.g.,
bitumen, shale, coal) as oil and gas reserves;
     Optional disclosure of probable and possible reserves;
     Optional disclosure of oil and gas reserves' sensitivity
to price;
     Disclosure of the development of proved undeveloped
reserves;
     Disclosure of technologies used to establish additions to
reserves estimates;
     Disclosure of a company's internal controls over reserves
estimation and the qualifications of the business entity or individual
preparing or auditing the reserves estimates; and
     Disclosure based on a new definition of the term ``by
geographic area.''
    We discuss each of these proposed new Items below.
2. Item 1201 (General Instructions to Oil and Gas Industry-Specific
Disclosures)
    We are adding new Item 1201 to Regulation S-K. This item sets forth
the general instructions to Subpart 1200. The new item contains three
paragraphs that perform the following tasks:
     Instruct companies for which oil and gas producing
activities are material to provide the disclosures specified in Subpart
1200; \168\
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    \168\ This paragraph would maintain the existing exclusion in
Industry Guide 2 for limited partnerships and joint ventures that
conduct, operate, manage, or report upon oil and gas drilling or
income programs, that acquire properties either for drilling and
production, or for production of oil, gas, or geothermal steam or
water.
---------------------------------------------------------------------------

     Clarify that, although a company must present specified
Subpart 1200 information in tabular form, the company may modify the
format of the table for ease of presentation, to add additional
information or to combine two or more required tables;
     State that the definitions in Rule 4-10(a) of Regulation
S-X apply to Subpart 1200; and
     Define the term ``by geographic area.''
a. Geographic Area
    We received significant comments regarding the proposed definition
of the term ``by geographic area.'' We proposed to require disclosure
by continent, country containing 15% of more of the company's reserves,
and sedimentary basin or field containing 10% or more of the company's
reserves. Several commenters were concerned that the proposed
definition would add too much detail to the disclosures, particularly
at the basin or field level.\169\ They were concerned that this amount
of detail would make disclosures too complex and incoherent.\170\ They
were particularly concerned with the extension of this standard to
disclosures other than reserves, such as production, wells, and
acreage.\171\ Commenters also believed that the disclosures, in
particular by field, could cause competitive harm in future property
sales transactions, unitization agreements, and other asset
transfers.\172\
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    \169\ See letters from Apache, CAPP, Devon, ExxonMobil,
Imperial, Nexen, Repsol, Shell, and StatoilHydro.
    \170\ See letters from Apache, CAPP, ExxonMobil, Imperial,
Nexen, and Repsol.
    \171\ See letters from ExxonMobil, Imperial, and Total.
    \172\ See letters from Apache, API, BHP, Canadian Natural, CAPP,
Devon, EnCana, Eni, Newfield, Nexen, Petro-Canada, Shell,
StatoilHydro, and Total.
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    Some commenters also believed that some of these disclosures may be
prohibited by foreign governments.\173\ One commenter noted that
separate determination of field or basin reserves within a larger
production sharing agreement may not be possible due to concession-wide
cost sharing terms.\174\ Eight commenters recommended that the
determination of appropriate geographic disclosure should remain with
management, consistent with Statement of Financial Accounting Standard
No. 69 (SFAS 69).\175\ However, two commenters indicated that a
country-by-country breakdown would be adequate.\176\
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    \173\ See letters from Apache, API, CAPP, Eni, Newfield, Petro-
Canada, and Total.
    \174\ See letter from Apache.
    \175\ See letters from Apache, API, Canadian Natural, CAPP, Eni,
ExxonMobil, Imperial, and Petro-Canada.
    \176\ See letters from ExxonMobil and Nexen.
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    Four commenters supported the proposed percentage thresholds for
geographic disclosure, stating that they would increase understanding
of the total energy supply, leading to better decisions by policy
makers.\177\ One commenter supported the 15% threshold for
countries.\178\
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    \177\ See letters from AAPG, CFA, Chesapeake, and E&Y.
    \178\ See letter from Shell.
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    As we noted in the Proposing Release, there have been differing
interpretations among oil and gas companies as to the level of
specificity required when a company is breaking out its reserves
disclosures based on geographic area as required by Instruction 3 of
Item 102 of Regulation S-K.\179\ Some companies currently broadly
organize their reserves only by hemisphere or continent. SFAS 69
requires reserves disclosure to be separately disclosed for the
company's home country and foreign geographic areas. It defines
``foreign geographic areas'' as ``individual countries or groups of
countries as appropriate for meaningful disclosure in the
circumstances.'' Since SFAS 69 was issued, the operations of oil and
gas companies have become much more diversified globally. For many
large U.S. oil and gas producers, the majority of reserves are now
overseas, with material amounts in individual countries and even
individual fields or basins.
---------------------------------------------------------------------------

    \179\ 17 CFR 229.102.
---------------------------------------------------------------------------

    We think that greater specificity than simply disclosing reserves
within ``groups of countries'' would benefit investors and, in certain
cases, may be necessary to meet the requirements of Item 102 of
Regulation S-K. Some countries in which many of these companies operate
and may have significant reserves are subject to unique risks, such as
political instability.

However, we recognize that disclosure that is too detailed may detract
from the overall disclosure. Thus, we have revised the definition of
the term ``by geographic area'' to mean, as appropriate for meaningful
disclosure under a company's particular circumstances:
    (1) By individual country;
    (2) By groups of countries within a continent; or
    (3) By continent.\180\
---------------------------------------------------------------------------

    \180\ See Item 1201(d) [17 CFR 229.1201(d)].
---------------------------------------------------------------------------

    This definition is substantially the same as the definition
currently provided in SFAS 69. However, as proposed, we are adopting
specific percentage thresholds to the geographic breakdowns of reserves
estimates and production. With respect to production, the final rules
require disclosure of production in each country or field containing
15% or more of the company's proved reserves unless prohibited by the
country in which the reserves are located. We are raising the proposed
10% threshold for field disclosure of production to 15% to make the
threshold consistent. However, rather than requiring disclosure based
on a percentage of the amount of the company's reserves of an
individual product, as proposed, the final rules require disclosure
based on a percentage of a company's total global oil and gas proved
reserves, based on barrels of oil equivalent.\181\
---------------------------------------------------------------------------

    \181\ See Item 1204(a) [17 CFR 229.1204(a)].
---------------------------------------------------------------------------

    With respect to reserves estimates, the final rules require
disclosure of reserves in countries containing more than 15% of the
company's proved reserves. As with the production disclosure, this 15%
threshold would be based on the company's total global oil and gas
proved reserves, rather than on individual products, as proposed.\182\
A registrant need not provide disclosure of the reserves in a country
containing 15% or more of the registrant's proved reserves if that
country's government prohibits disclosure of reserves in that country.
---------------------------------------------------------------------------

    \182\ See Item 1202(a)(2) [17 CFR 229.1202(a)(2)].
---------------------------------------------------------------------------

    We are not adopting the requirement that we proposed to disclose
reserves by sedimentary basin or field. We share commenters' concerns
that there is potential for competitive harm from such disclosure in
future property sales transactions, unitization agreements, and other
asset transfers. Moreover, we recognize that there may be situations in
which a particular field may encompass a significant portion of a
company's reserves in a foreign country. To avoid compelling a company
to provide, in effect, field disclosure, the rule does not require
disclosure of reserves in a country containing 15% of the company's
reserves if that country prohibits disclosure of reserves in a
particular field and disclosure of reserves in that country would have
the effect of disclosing reserves in particular fields.\183\ For
example, if a company has 25% of its reserves in Country A and Country
A's government prohibits disclosure of reserves by field within Country
A, if almost all of that company's reserves in Country A are located in
a single field, the company would not be required to specify the amount
of its reserves located in Country A.
---------------------------------------------------------------------------

    \183\ See Instruction 4 to Item 1202(a)(2).
---------------------------------------------------------------------------

b. Tabular Disclosure
    We proposed to require much of the reserves disclosures and other
disclosures in Industry Guide 2 to be presented in tabular format. Two
commenters encouraged using a standardized table for reserves
disclosure.\184\ Another believed that companies should be able to
reorganize, supplement, or combine tables for better presentation of
the company's strategy.\185\ However, two commenters believed that the
rules should not propose a specified tabular format in general.\186\
These commenters believed that companies should have the flexibility to
present data in a format that is most relevant and meaningful to
investors, whether it is tabular or narrative.\187\ We continue to
believe that in certain circumstances, the required disclosures lend
themselves to a tabular disclosure format. We believe that
standardizing such tables will improve the readability and
comparability of disclosures among companies. However, in response to
comments received, we have made several revisions to the individual
disclosure items, including whether the disclosure item must be
presented in tabular format. We discuss each below.
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    \184\ See letters from Devon and Petrobras.
    \185\ See letter from Petro-Canada.
    \186\ See letters from Apache and ExxonMobil.
    \187\ See letters from Apache and ExxonMobil.
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3. Item 1202 (Disclosure of Reserves)
    Existing Instruction 3 to Item 102 of Regulation S-K requires
disclosure of an extractive enterprise's proved reserves. With respect
to oil and gas producing companies, we are replacing this Instruction
by adding a new Item 1202 to Regulation S-K that contains a similar
disclosure requirement regarding a company's proved reserves.\188\
However, new Item 1202 expands on the requirements of Item 102 by
specifically permitting the disclosure of probable and possible
reserves and permitting the disclosure of reserves from non-traditional
sources. In addition, because we are no longer distinguishing between
types of accumulations, the item contains only one table with separate
columns for different final products, specifically, oil, gas, synthetic
oil, synthetic gas, and other natural resources sold by the company.
---------------------------------------------------------------------------

    \188\ See Item 1202 [17 CFR 229.1202].
---------------------------------------------------------------------------

a. Oil and Gas Reserves Tables
    New Item 1202 requires disclosure, in the aggregate and by
geographic area, of reserves estimates using prices and costs under
existing economic conditions, for each product type, in the following
categories:
     Proved developed reserves;
     Proved undeveloped reserves;
     Total proved reserves;
     Probable developed reserves (optional);
     Probable undeveloped reserves (optional);
     Possible developed reserves (optional); and
     Possible undeveloped reserves (optional).
    A form of this table is set forth below:

            Summary of Oil and Gas Reserves as of Fiscal-Year End Based on Average Fiscal-Year Prices
----------------------------------------------------------------------------------------------------------------
                                                                             Reserves
                                                ----------------------------------------------------------------
               Reserves category                                            Synthetic
                                                     Oil      Natural gas      oil       Synthetic    Product A
                                                   (mbbls)       (mmcf)      (mbbls)    gas  (mmcf)   (measure)
----------------------------------------------------------------------------------------------------------------
PROVED
Developed:
    Continent A................................  ...........  ...........  ...........  ...........  ...........

    Continent B................................  ...........  ...........  ...........  ...........  ...........
    Country A..................................  ...........  ...........  ...........  ...........  ...........
    Country B..................................  ...........  ...........  ...........  ...........  ...........
    Other Countries in Continent...............  ...........  ...........  ...........  ...........  ...........
Undeveloped:
    Continent A................................  ...........  ...........  ...........  ...........  ...........
    Continent B................................  ...........  ...........  ...........  ...........  ...........
    Country A..................................  ...........  ...........  ...........  ...........  ...........
    Country B..................................  ...........  ...........  ...........  ...........  ...........
    Other Countries in Continent B.............  ...........  ...........  ...........  ...........  ...........
                                                ----------------------------------------------------------------
        TOTAL PROVED...........................  ...........  ...........  ...........  ...........  ...........
PROBABLE
    Developed..................................  ...........  ...........  ...........  ...........  ...........
    Undeveloped................................  ...........  ...........  ...........  ...........  ...........
POSSIBLE
    Developed..................................  ...........  ...........  ...........  ...........  ...........
    Undeveloped................................  ...........  ...........  ...........  ...........  ...........
----------------------------------------------------------------------------------------------------------------

i. Disclosure by Final Product Sold
    The table requires disclosure by final product sold by the company,
specifically, oil, gas, synthetic oil, synthetic gas, or other natural
resource. Thus, if the company processes a natural resource that it has
extracted, such as bitumen, into synthetic oil or gas prior to selling
the product, it may include such reserves under the synthetic oil or
gas columns. As noted below, we have revised the proposal that would
have required disclosure by type of accumulation. In addition, in
response to commenters, we have revised the definition of ``oil and gas
producing activities'' so that a company can use the price of that
synthetic oil or gas to determine the economic producibility of the
reserves because the economics of the processing activity are relevant
to the determination of whether to extract the underlying
resource.\189\
    However, if a company extracts a resource other than oil or gas,
such as bitumen, and sells the product without processing it into
synthetic oil or gas, it must disclose reserves of that other natural
resource. Although that company's extractive activities would be
considered an oil and gas producing activity under the definition of
that term, such a company would not benefit from the economics of
processing of that resource because the price that determines whether
such a company extracts the resource is the price of the unprocessed
resource and therefore the company may not establish reserves estimates
based on the price of the upgraded product. Similarly, if the company
does not itself extract the natural resource, but purchases the natural
resource for processing or is paid to process the natural resource, it
may not claim reserves either of the resource or of the processed
product.
---------------------------------------------------------------------------

    \189\ See Section II.C.2 of this release.
---------------------------------------------------------------------------

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

    \190\ See letters from Devon, Evolution, ExxonMobil, Ryder
Scott, Shell, SPE, Talisman, and Wagner.
---------------------------------------------------------------------------

iii. Optional Disclosure of Probable and Possible Reserves
    A company may, but is not required to, disclose probable or
possible reserves in these tables. If a company discloses probable or
possible reserves, it must provide the same level of geographic detail
as it must with respect to proved reserves and must state whether the
reserves are developed or undeveloped. In addition, Item 1202 requires
the company to disclose the relative uncertainty associated with these
classifications of reserves estimations. By permitting disclosure of
all three of these classifications of reserves, our objective is to
enable companies to provide investors with more insight into the
potential reserves base that managements of companies may use as their