For purposes of the proposed disclosure, the ``person'' could be
either an individual or an entity. If the person is an entity, then the
disclosures regarding technical qualifications in the paragraphs (3)
and (4) would apply to the individual within the entity who is
responsible for the technical aspects of the reserves estimation or
audit. To the extent that the person does not have all of the technical
qualifications above, the company would be required to discuss the
reasons why it believes that the person is otherwise qualified to
prepare the estimates or conduct the reserves audit, as applicable, and
any risks associated with reserves estimates not

prepared or audited by persons with such qualifications.\123\
---------------------------------------------------------------------------

    \123\ See proposed Item 1202(a)(6)(v).
---------------------------------------------------------------------------

Request for Comments
     Should we require companies to disclose whether the person
primarily responsible for preparing reserves estimates or conducting
reserves audits meets the specified qualification standards, as
proposed? Should we, instead, simply require companies to disclose such
a person's qualifications?
     Should we require disclosure regarding a person's
objectivity when a company prepares its reserves estimates in-house?
Should the proposed disclosures regarding objectivity be required only
if a company hires a third party to prepare its reserve estimates or
conduct a reserves audit, as proposed?
     If a company prepares its reserves estimates in-house,
should we require disclosure of any procedures that the company has
taken to preserve that person's objectivity? Should we require
disclosure of whether the internal person meets specified objectivity
criteria? For example, should we apply the some of the same criteria
that we propose to apply to third party preparers? If so, which ones?
     Consistent with the SPE's auditing guidance regarding
internal auditors, should we require companies to disclose whether that
person (1) is assigned to an internal-audit group which is (a)
accountable to senior level management or the board of directors of the
company and (b) separate and independent from the operating and
investment decision making process of the company and (2) is granted
complete and unrestricted freedom to report, to one or more principal
executives or the board of directors, any substantive or procedural
irregularities of which that person becomes aware?
     Should we require disclosure with other specific
independence or objectivity standards and, if so, what?
     Should we revise any of the proposed provisions regarding
a person's objectivity or technical qualifications? Should the proposal
require disclosure of other criteria that would have bearing on
determining whether the person is objective or qualified?
     Should a company be required to present risk factor
disclosure if its reserves estimates were not prepared by a person
meeting the objectivity and technical qualifications?
     Because of the inherent uncertainty regarding estimates of
probable and possible reserves, should we require the proposed
disclosure only if a company chooses to disclose probable or possible
reserves?
     Should we require that a third party prepare reserves
estimates or conduct a reserves audit if a company chooses to disclose
probable or possible reserves estimates?
     Should we require the proposed disclosure only if the
company is using technologies other than those which are allowed in our
current definitions to establish levels of certainty?
vi. Contents of Third Party Preparer and Reserves Audit Reports
    Currently, if the company represents that it relied on a third
party for a portion of its filing, it must obtain consent from that
third party.\124\ In order to clarify which portion of the disclosures
the third party is expertising, we propose that, if a company
represents that its estimates of reserves are based on estimates
prepared by a third party, the company must file a report of the third
party as an exhibit to the relevant registration statement or
report.\125\ The proposal would require that report to include the
following disclosure:
---------------------------------------------------------------------------

    \124\ See 17 CFR 229.601(b)(23).
    \125\ See proposed Item 1202(a)(7).
---------------------------------------------------------------------------

     The purpose for which the report is being prepared and for
whom it is prepared;
     The effective date of the report and the date on which the
report was completed;
     The proportion of the company's total reserves covered by
the report and the geographic area in which the covered reserves are
located;
     The assumptions, data, methods, and procedures used to
conduct the reserves audit, including the percentage of company's total
reserves reviewed in connection with the preparation of the report, and
a statement that such assumptions, data, methods, and procedures are
appropriate for the purpose served by the report;
     A discussion of primary economic assumptions;
     A discussion of the possible effects of regulation on the
ability of the registrant to recover the estimated reserves;
     A discussion regarding the inherent risks and
uncertainties of reserves estimates;
     A statement that the third party has used all methods and
procedures as it considered necessary under the circumstances to
prepare the report; and
     The signature of the third party.
    Similarly, if the company represents that a third party conducted a
reserves audit of the reserves estimates, the company would be required
to file a report of the third party as an exhibit to the relevant
registration statement or report. We are not proposing that these
reports be the full ``reserves report'' that is often very detailed and
voluminous. Rather these proposed reports would summarize the scope of
work performed by, and conclusions of, the third party. The proposed
contents of these reports mirror the guidance issued by the Society of
Petroleum Evaluation Engineers regarding the preparation of such
reports.
    We propose to define the term ``reserves audit'' as the process of
reviewing certain of the pertinent facts interpreted and assumptions
made that have resulted in an estimate of reserves prepared by others
and the rendering of an opinion about the appropriateness of the
methodologies employed, the adequacy and quality of the data relied
upon, the thoroughness of the reserves estimation process, the
classification of reserves appropriate to the relevant definitions
used, and the reasonableness of the estimated reserves quantities.\126\
The proposed definition would state that, in order to disclose that a
``reserves audit'' has been conducted, the report resulting from this
review must represent an examination of at least 80% of the portion of
the company's reserves covered by the reserves audit. This definition
is largely derived from the SPE's reserves auditing guidelines.\127\
---------------------------------------------------------------------------

    \126\ See proposed Item 1202(a)(9).
    \127\ Consistent with the SPE's auditing guidelines, we note
that a ``reserves audit'' is significantly different from a
financial audit. See SPE Reserves Auditing Standards.
---------------------------------------------------------------------------

    We propose to require that the report associated with such a
reserves audit must include the following disclosure, based on the
Society of Petroleum Evaluation Engineers's audit report guidelines:
     The purpose for which the report is being prepared and for
whom it is prepared;
     The effective date of the report and the date on which the
report was completed;
     The proportion of the company's total reserves covered by
the report and the geographic area in which the covered reserves are
located;
     The assumptions, data, methods, and procedures used to
conduct the reserves audit, including the percentage of company's total
reserves reviewed in connection with the preparation of the report, and
a statement that such assumptions, data, methods, and procedures are
appropriate for the purpose served by the report;

     A discussion of primary economic assumptions;
     A discussion of the possible effects of regulation on the
ability of the registrant to recover the estimated reserves;
     A discussion regarding the inherent risks and
uncertainties of reserves estimates;
     A statement that the third party has used all methods and
procedures as it considered necessary under the circumstances to
prepare the report;
     A brief summary of the third party's conclusions with
respect to the reserves estimates; and
     The signature of the third party.
Request for Comment
     Should we require a company to file reports from third
party reserves preparers and reserves auditors containing the proposed
disclosure when the company represents that a third party prepared its
reserves estimates or conducted a reserves audit? As an alternative,
should we not require that the third party's report be filed, but that
the company must provide a description of the third party's report? If
so, should we specify that the company's description of the third
party's report should contain the information that we propose to
require in the third party's report?
     Should we specify the disclosures that need to be included
in third party reports? If so, is the disclosure that we have proposed
for the reserves estimate preparer's and reserves auditor's reports
appropriate? Should these reports contain more or less information? If
they should include more information, what other information should
they include? If less, what proposed information is not necessary?
     In an audit, should we specify the minimum percentage of
reserves that should be examined and determined to be reasonable? If
so, what should that percentage be? Should it be 50%, 75%, 90% or some
other percentage? If so, why?
     If the company engages multiple third parties to conduct
reserves audits on different portions of its reserves, should the
definition of reserves audit be conditioned on each third party
evaluating at least 80% of the reserves covered by its reserves audit,
as proposed? Is the scope of a reserves audit defined by geographic
areas? If so, should the definition of a reserves audit be based on the
third party's evaluation of 80% of the reserves located in the
geographic areas covered by the reserves audit?
     Would disclosure that a company has hired a third party to
audit only a portion of its reserves be confusing to investors? Is
there a danger that investors will not be able to ascertain the extent
of the reserves audit? Should we require that a company could not
disclose that it has conducted a reserves audit unless 80% of all of
its reserves have been evaluated by a third party or, if the company
hires multiple third parties, by all of the third parties collectively?
     Is the proposed definition of ``reserves audit''
appropriate? Should we revise this proposed definition in any way?
vii. Solicitation of Comments on Process Reviews
    The Society of Petroleum Engineer's reserves auditing standards
reference a third type of review, which it calls a ``process review.''
\128\ It defines a process review as an investigation by a person who
is qualified by experience and training equivalent to that of a
reserves auditor to address the adequacy and effectiveness of an
entity's internal processes and controls relative to reserves
estimation. However, it notes that a process review should not include
an opinion relative to the reasonableness of the reserves quantities
and should be limited to the processes and control system reviewed. The
SPE's standards state that, although such reviews may provide value to
the entity, an external or internal process review is not of sufficient
rigor to establish appropriate classifications and quantities of
reserves and should not be represented to the public as being
equivalent to an audit of reserves. We are not proposing requiring
disclosure of whether a company has conducted a process review, as
defined by the SPE. In so doing, we note the SPE's admonition that such
reviews are not as rigorous as a reserves audit. We are not proposing
to prohibit disclosure of such process reviews because we believe that
they may be beneficial to companies and shareholders. However, in order
to help prevent confusion between the different levels of third-party
participation, companies should clearly disclose the level and scope of
work that was performed. In addition, a company should avoid using
language which may lead investors to erroneously believe that a higher
level of third-party review was performed.
---------------------------------------------------------------------------

    \128\ See SPE Reserves Auditing Standards.
---------------------------------------------------------------------------

Request for Comment
     Should we require disclosure of whether a company has
conducted a process review? Notwithstanding the relative lack of rigor
of a process review compared to a reserves audit, would investors find
such information useful?
     The proposal does not prohibit disclosure of process
reviews. Is there a danger that the public may be confused by such
disclosure? Should we prohibit disclosure of any type of reserves-
related activity other than the preparation of the reserves estimates
or a reserves audit?
4. Proposed Item 1203 (Proved Undeveloped Reserves)
    We are proposing to require disclosure of the aging of proved
undeveloped reserves (PUDs). Some of the commenters responding to the
Concept Release expressed concerns regarding companies that carry
alleged PUDs for lengthy time periods.\129\ Long holding periods of
such reserves raise the question whether the company has a bona fide
intention or the capability to develop those reserves, even though the
company has determined them to be economically producible. Several
commenters recommended that we require a company to remove PUDs that
have remained so classified for five years or longer.\130\ PRMS
guidelines indicate that five years is a benchmark for a reasonable
timeframe to initiate the development of reserves, although they
recognize that this timeframe depends on the specific circumstances.
However, others suggested that a company should be able to characterize
PUDs as such for longer than a five-year period if there are
exceptional circumstances (such as extensive offshore projects) that
justify continued inclusion of such reserves in the proved
category.\131\
---------------------------------------------------------------------------

    \129\ See letters from CIBC, Devon, EIA, D. McBride, Robinson,
D. Ryder, and SPE.
    \130\ See letters from Devon, EIA, D. McBride, D. Olds, SPE, and
Ultra. This is consistent with PRMS guidance. See Section <IP_ADDRESS> of
PRMS.
    \131\ See letters from Denbury, Devon, EIA, D. McBride, D. Olds,
Robinson, SPE, and StatoilHydro.
---------------------------------------------------------------------------

    We propose to address these concerns through disclosure. We believe
that the need for such disclosure is heightened as a result of our
proposed amendments that would ease the requirements for recognizing
PUDs and thereby increase the amount of PUDs disclosed in filings, even
though the properties representing such proved reserves have not yet
been developed and therefore do not provide the company with cash flow.
Proposed Item 1203 would require an oil and gas company to prepare a
table showing, for each of the last five fiscal years and by product
type, proved reserves estimated using current prices and costs in the
following categories:
     Proved undeveloped reserves converted to proved developed
reserves during the year; and

     Net investment required to convert proved undeveloped
reserves to proved developed reserves during the year.\132\
---------------------------------------------------------------------------

    \132\ See proposed Item 1204.
---------------------------------------------------------------------------

    A form of the proposed PUDs development table is set forth below:

                                    Conversion of Proved Undeveloped Reserves
----------------------------------------------------------------------------------------------------------------
                                  Proved undeveloped reserves converted to
                                          proved developed reserves               Investment in conversion of
         Fiscal year          ------------------------------------------------   proved undeveloped reserves to
                                                                  Product A      proved developed reserves ($)
                                Oil  (mbbls)     Gas  (mmcf)      (measure)
----------------------------------------------------------------------------------------------------------------
2004.........................  ..............
2005.........................  ..............
2006.........................  ..............
2007.........................  ..............
2008.........................  ..............
----------------------------------------------------------------------------------------------------------------

    This table would allow investors to assess how a company is
managing its PUDs. In addition, proposed Item 1203 would require
disclosure, by product type, of any PUDs which have remained
undeveloped for five years or more and the reasons for the lack of
development. The proposed item would also require a company to disclose
its plans to develop PUDs and to further develop proved oil and gas
reserves. Finally, the company would be required to discuss any
material changes to PUDs.
Request for Comment
     Should we adopt the proposed table? Alternatively, should
we simply require companies to reclassify their PUDs after five years?
     Should the table require disclosure of other categories of
changes to the status of PUDs, such as acquisitions, removals, and
production? Should we add any categories?
     Some of the abuse related to PUD disclosure may be related
to companies' desire to show proved reserves in light of our
prohibition on disclosure of probable reserves. Would the proposed
rules permitting disclosure of probable reserves reduce the incentive
to categorize reserves as PUDs? If so, is the proposed table necessary?
     Should we require disclosure of the reasons for
maintaining PUDs that have been classified as PUDs for more than five
years, as proposed? If not, why not?
     Should we require a company to disclose its plans to
develop PUDs and to further develop proved oil and gas reserves, as
proposed? If not, why not?
     Should we require the company to discuss any material
changes to PUDs that are disclosed in the table? If not, why not?
5. Proposed Item 1204 (Oil and gas production)
    Item 3 of Industry Guide 2 currently requires disclosure, by
geographic area, of oil and gas production. We propose codifying that
requirement in proposed Item 1204 of Regulation S-K.\133\ In addition,
the proposed Item would require such disclosure to be made in tabular
form for ease of presentation. As a practical matter, it appears that
most companies already provide this disclosure in tabular form. A form
of the proposed table is set forth below:
---------------------------------------------------------------------------

    \133\ See proposed Item 1204.

                                               Oil and Gas Production, Sales Prices, and Production Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                      Oil                                    Gas                                 Product A
                                    --------------------------------------------------------------------------------------------------------------------
              Location                                          Production                             Production               Sales price   Production
                                      Production  Sales price  cost  ($US/   Production  Sales price  cost  ($US/   Production      ($US/    cost  ($US/
                                       (mbbls)      ($US/bbl)      boe)        (mmcf)      ($US/mcf)     mcfe)      (measure)     measure)     measure)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Geographic Area A..................  ...........  ...........  ...........  ...........  ...........  ...........  ...........  ...........  ...........
    2005...........................  ...........  ...........  ...........  ...........  ...........  ...........  ...........  ...........  ...........
    2006...........................  ...........  ...........  ...........  ...........  ...........  ...........  ...........  ...........  ...........
    2007...........................  ...........  ...........  ...........  ...........  ...........  ...........  ...........  ...........  ...........
Geographic Area B..................  ...........  ...........  ...........  ...........  ...........  ...........  ...........  ...........  ...........
Geographic Area C..................  ...........  ...........  ...........  ...........  ...........  ...........  ...........  ...........  ...........
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The disclosure that proposed Item 1204 would require is very
similar to the disclosure called for by existing Industry Guide 2, but
would be modified in two respects. First, proposed Item 1204 would use
the definition of the term ``geographic area'' in proposed Item
1201(d), rather than use the current reference to SFAS 69, which only
requires disclosure by country or, if appropriate, groups of
countries.\134\
---------------------------------------------------------------------------

    \134\ See SFAS 69.
---------------------------------------------------------------------------

    In addition, we propose to eliminate existing instructions to Item
3 of Industry Guide 2 that we believe are no longer necessary. These
instructions relate to the following topics:
     Separate reporting of production through processing plant
ownership;
     Inclusion of only marketable production of gas on an ``as
sold'' basis, including the exclusion of flared gas, injected gas, and
gas consumed in operations;
     Determination of transfer price of oil and gas; and
     Means to calculate average production costs.
    We believe that these instructions are no longer necessary in light
of changes in the oil and gas industry and markets and relate to issues
that are commonly understood and do not require additional instruction.
Several of these instructions have very limited application.

Request for Comments
     Should we adopt the proposed table?
     Should the disclosure be made based on the proposed
definition of ``geographic area,'' or should we continue to follow the
definition set forth in SFAS 69?
     Should we eliminate the instructions listed above, as
proposed? If not, which instructions should we retain? Please explain
why those instructions continue to be useful.
6. Proposed Item 1205 (Drilling and other exploratory and development
activities)
    Item 6 of Industry Guide 2 currently calls for disclosure of
drilling activities by geographic area. We propose to codify this
disclosure as Item 1205 of Regulation S-K, in tabular form.\135\ A form
of the proposed table is set forth below:
---------------------------------------------------------------------------

    \135\ See proposed Item 1205.

                                                                   Drilling Activities
                                                                    [Geographic area]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                              Exploratory wells                       Development wells                       Extension wells
                                  ----------------------------------------------------------------------------------------------------------------------
                                          Gross                Net                Gross                Net                Gross               Net
--------------------------------------------------------------------------------------------------------------------------------------------------------
Oil                                ..................  ..................  ..................  ..................  ..................  .................
    Fiscal Year..................  ..................  ..................  ..................  ..................  ..................  .................
    Fiscal Year-1................  ..................  ..................  ..................  ..................  ..................  .................
    Fiscal Year-2................  ..................  ..................  ..................  ..................  ..................  .................
Natural Gas                        ..................  ..................  ..................  ..................  ..................  .................
    Fiscal Year..................  ..................  ..................  ..................  ..................  ..................  .................
    Fiscal Year-1................  ..................  ..................  ..................  ..................  ..................  .................
    Fiscal Year-2................  ..................  ..................  ..................  ..................  ..................  .................
Product A                          ..................  ..................  ..................  ..................  ..................  .................
    Fiscal Year..................  ..................  ..................  ..................  ..................  ..................  .................
    Fiscal Year-1................  ..................  ..................  ..................  ..................  ..................  .................
    Fiscal Year-2................  ..................  ..................  ..................  ..................  ..................  .................
Suspended                          ..................  ..................  ..................  ..................  ..................  .................
    Fiscal Year..................  ..................  ..................  ..................  ..................  ..................  .................
    Fiscal Year-1................  ..................  ..................  ..................  ..................  ..................  .................
    Fiscal Year-2................  ..................  ..................  ..................  ..................  ..................  .................
Dry                                ..................  ..................  ..................  ..................  ..................  .................
    Fiscal Year..................  ..................  ..................  ..................  ..................  ..................  .................
    Fiscal Year-1................  ..................  ..................  ..................  ..................  ..................  .................
    Fiscal Year-2................  ..................  ..................  ..................  ..................  ..................  .................
                                  ----------------------------------------------------------------------------------------------------------------------
        Total....................  ..................  ..................  ..................  ..................  ..................  .................
--------------------------------------------------------------------------------------------------------------------------------------------------------

    We are also proposing several revisions to the existing
disclosures. First, the existing item calls for disclosure by
geographic area. We propose to clarify that, for purposes of this item,
disclosure should be made pursuant to the definition of ``geographic
area'' set forth in proposed Item 1201(d). Second, we propose to add
two categories of wells:
     Extension wells and
     Suspended wells.

Currently, Industry Guide 2 only calls for disclosure of the drilling
of exploratory and development wells. However, we believe that
distinguishing between extension well drilling and exploratory drilling
is important because exploratory drilling typically is associated with
the discovery of new fields, and thus new sources of oil and gas,
rather than merely the extension of an existing field. Thus, we believe
that disclosure of extension wells should be distinct from disclosure
about exploratory wells.
    Similarly, companies sometimes suspend drilling of a well before
completion. Because the definition of a dry well requires that the
company report the well as abandoned, these suspended drilling projects
are not reflected as drilling activities under the current disclosure
requirements. Although suspension of drilling does not necessarily mean
that the company has abandoned the well, such activities can consume
significant capital resources. Thus, we propose to include this
category of drilling activity in the disclosure item.
    Proposed new Item 1205 would also require disclosure of any other
exploratory or development activities that the company has conducted
over the prior three years, including implementation of mining methods
for the extraction of oil or gas. We recognize that resources in
continuous accumulations often require extraction methods that differ
significantly from the extraction methods used in connection with
traditional oil or gas wells. This proposed new disclosure would
provide investors with information about an oil and gas company's full
spectrum of exploratory and development activities.

Request for Comment

     Should we adopt the proposed table? Should the disclosures
be made based on the definition of ``geographic area'' in proposed Item
1201(d)?
     Should we require separate disclosure about the two new
proposed categories of wells-extension wells and suspended wells? Does
distinguishing these types of wells from exploratory wells and dry
wells provide enough clarity regarding the types of exploratory or
development activities?
7. Proposed Item 1206 (Present activities)
    Proposed Item 1206 would codify existing Item 7 of Industry Guide
2, which calls for disclosure of present activities, including the
number of wells in the process of being drilled

(including wells temporarily suspended), waterfloods in process of
being installed, pressure maintenance operations, and any other related
activities of material importance.\136\ We are proposing no substantive
changes to the existing disclosure item except clarification that the
meaning of the term ``geographical area'' would be based on the
proposed definition of that term in proposed Item 1201(d).\137\
---------------------------------------------------------------------------

    \136\ See proposed Item 1206.
    \137\ See proposed Item 1206(a).
---------------------------------------------------------------------------

Request for Comment
     Should the disclosure of present activities be made based
on the definition of ``geographic area'' in proposed Item 1201(d)?
     Should we adopt any other changes to the disclosures
currently set forth in existing Item 7 of Industry Guide 2 that we
propose to codify in Item 1206?
8. Proposed Item 1207 (Delivery Commitments)
    Proposed Item 1207 would codify existing Item 8 of Industry Guide
2, which calls for disclosure of arrangements under which the company
is required to deliver specified amounts of oil or gas and how the
company intends to meet such commitments.\138\ We are not proposing any
substantive changes to the disclosure currently called for by Item 8.
However, we are proposing a significant amount of restructuring and
rewording of the disclosure item to make it easier to understand. These
proposed changes largely involve separating embedded lists into
separate subparagraphs and general plain English revisions but are not
intended to change the substance of the disclosures.
---------------------------------------------------------------------------

    \138\ See proposed Item 1207.
---------------------------------------------------------------------------

Request for Comment
     Are the proposed revisions appropriate? Do the proposed
revisions make any unintended substantive changes to the existing
disclosures?
     Should we adopt any substantive changes to the disclosures
currently set forth in Item 8 of Industry Guide 2 that we propose to
codify in Item 1207?
     Is this disclosure requirement still necessary? Do oil and
gas companies still enter into such delivery commitments? Are they
material?
9. Proposed Item 1208 (Oil and gas properties, wells, operations, and
acreage)
    Proposed Item 1208 would codify existing Items 4 and 5 of Industry
Guide 2. The proposed item also would require new disclosures not
currently called for by Industry Guide 2 that are described below.
i. Enhanced Description of Properties Disclosure Requirement
    Item 102 of Regulation S-K provides a very broad, general
description of the properties and facilities that a company must
disclose in its filings. We propose to add a paragraph to Item 1208
that better illustrates the types of properties and the types of
disclosures for those properties that apply to oil and gas
companies.\139\ The proposed paragraph would require a company to do
the following:
---------------------------------------------------------------------------

    \139\ See proposed Item 1208(a).
---------------------------------------------------------------------------

     Identify and describe generally its material properties,
plants, facilities, and installations;
     Identify the geographic area in which they are located;
     Indicate whether they are located onshore or offshore; and
     Describe any statutory or other mandatory relinquishments,
surrenders, back-ins, or changes in ownership.
Request for Comment
     Are the proposed disclosure enhancements regarding oil and
gas properties appropriate? Would this enhanced disclosure be helpful
to investors?
     Should the disclosures be made based on the definition of
``geographic area'' in proposed Item 1201(d)?
     Do we need to define any of the terms in the proposed
language?
ii. Wells and Acreage
    Proposed Item 1208 would require separate tabular disclosure of the
number of the registrant's producing wells, expressed in terms of both
gross wells and net wells, by geographic area.\140\ These disclosures
are currently called for by Items 4 and 5 of Industry Guide 2. This
proposed table would illustrate oil wells and gas wells in both
conventional and continuous accumulations and other wells for products
from continuous accumulations. A form of the proposed table is set
forth below:
---------------------------------------------------------------------------

    \140\ See proposed Item 1208(b) and (c).

                                  Wells
------------------------------------------------------------------------
                                               Producing wells
              Location              ------------------------------------
                                           Gross               Net
------------------------------------------------------------------------
Geographic Area A:                   .................  ................
    Oil Wells......................  .................  ................
    Natural Gas Wells..............  .................  ................
    Product A Wells................  .................  ................
                                    ------------------------------------
        Total......................  .................  ................
========================================================================
Geographic Area B:
    Oil Wells......................  .................  ................
    Natural Gas Wells..............  .................  ................
    Product A Wells................  .................  ................
                                    ------------------------------------
        Total......................  .................  ................
------------------------------------------------------------------------

    Similarly, it would require tabular disclosure, by geographic area,
of the company's total gross and net developed acres (that is, acres
spaced or assignable to productive wells) and undeveloped acres,
including leases and concessions.\141\ A form of the proposed table is
set forth below:
---------------------------------------------------------------------------

    \141\ See proposed Item 1208(e) and (f).

                                                     Acreage
----------------------------------------------------------------------------------------------------------------
                                               Developed acres                       Undeveloped acres
                                  ------------------------------------------------------------------------------
                                          Gross                Net                Gross               Net
----------------------------------------------------------------------------------------------------------------
Geographic Area A................  ..................  ..................  ..................  .................
Geographic Area B................  ..................  ..................  ..................  .................
Geographic Area C................  ..................  ..................  ..................  .................
                                  ------------------------------------------------------------------------------
        Total....................  ..................  ..................  ..................  .................
----------------------------------------------------------------------------------------------------------------

Request for Comment
     Is the proposed table appropriate? Is there a better way
to disclose such information?
     Should the disclosures be made based on the definition of
``geographic area'' in proposed Item 1201(d)?
     Is it necessary to disclose wells and acreage in
conventional accumulations separate from wells and acreage in
continuous accumulations, as proposed?
     Is this disclosure requirement still necessary? Is
disclosure of the number of wells and acreage material? Should we
require the disclosures related to wells and acreage only if there is a
high concentration of production or reserves attributable to a few
wells or limited acreage? If so, should we specify what that
concentration would be?
iii. New Proposed Disclosures Regarding Extraction Techniques and
Acreage
    As noted previously, some oil and gas resources require extraction
techniques other than traditional oil and gas wells. Because we are
adding non-traditional resources, such as bitumen, to the definition of
oil and gas producing activities, we believe that it is appropriate for
companies to describe the techniques that the company is using to
extract the resources if it is not using a well. Thus, we are proposing
to add a new requirement for companies extracting hydrocarbons through
means other than wells to provide a discussion of such operations.\142\
This disclosure requirement has been drafted broadly to allow for
unanticipated developments in extraction technologies.
---------------------------------------------------------------------------

    \142\ See proposed Item 1208(d).
---------------------------------------------------------------------------

    Proposed Item 1208 also would require a company to disclose, for
unproved properties:
     The existence, nature (including any bonding
requirements), timing, and cost (specified or estimated) of any work
commitments; and
     By geographic area, the net area of unproved property for
which the registrant expects its rights to explore, develop, and
exploit to expire within one year.\143\
---------------------------------------------------------------------------

    \143\ See proposed Item 1208(g).
---------------------------------------------------------------------------

    Finally, the proposed Item would continue to require disclosure of
areas of acreage concentration, and, if material, the minimum remaining
terms of leases and concessions.\144\
---------------------------------------------------------------------------

    \144\ See proposed Item 1208(h).

Request for Comment
     Should we require more specific disclosure regarding
extraction activities that do not involve wells? Should this proposed
item remain open-ended to permit description of unanticipated
technologies?
     Is the proposed disclosure for unproved properties
appropriate? Should the proposed disclosure for unproved properties be
set forth in proposed Item 1208? Should we move such disclosure to the
reserves table in proposed Item 1202, where reserves are discussed?
10. Proposed Item 1209 (Discussion and Analysis for Registrants Engaged
in Oil and Gas Activities)
    We propose to add new Item 1209, which would provide topics that a
company should address either as part of Management's Discussion and
Analysis of Financial Condition and Results of Operations (MD&A) \145\
or in a separate section. First, the proposed Item would require
companies to discuss material changes in proved reserves and, if
disclosed, probable and possible reserves, and the sources to which
such changes are attributable, including changes made due to:
---------------------------------------------------------------------------

    \145\ See 17 CFR 229.303.
---------------------------------------------------------------------------

     Changes in prices;
     Technical revisions; and
     Changes in the status of any concessions held (such as
terminations, renewals, or changes in provisions).

We note that SFAS 69 currently requires reconciliation of changes to
reserves estimates. This proposal is intended to supplement the SFAS 69
disclosure because SFAS 69 currently does not provide for these
categories of changes. We believe such disclosure would be helpful
because developments in the oil and gas industry and markets, including
more liquid commodities markets and expansion of interests in foreign
countries involving concessions, have made distinguishing changes
resulting from these factors more important.
    The proposed Item also would require companies to discuss
technologies used to establish the appropriate level of certainty for
any material additions to, or increases in, reserves estimates.
Finally, the proposed Item would list matters that a company should
consider in discussing known trends, demands, commitments,
uncertainties, and events that are reasonably likely to have a material
effect on the company. These matters include, but are not limited to,
the following:
     Prices and costs;
     Performance of currently producing wells, including water
production from such wells and the need to use enhanced recovery
techniques to maintain production from such wells;
     Performance of any mining-type activities for the
production of hydrocarbons;
     The registrant's recent ability to convert proved
undeveloped reserves to proved developed reserves, and, if disclosed,
probable reserves to proved reserves and possible reserves to probable
or proved reserves;
     Anticipated capital expenditures directed toward
conversion of proved undeveloped reserves to proved developed reserves,
and, if disclosed, probable reserves to proved reserves and possible
reserves to probable or proved reserves;
     Anticipated exploratory activities, well drilling, and
production;
     The minimum remaining terms of leases and concessions;
     Material changes to any line item in the tables described
in Items 1202 through 1208 of Regulation S-K; and
     Potential effects of different forms of rights to
resources, such as production sharing contracts, on operations.
    The MD&A is typically presented in a self-contained section of the
registration statement or report. However, the disclosure requirements
that would comprise proposed new Subpart 1200 of Regulation S-K would
cause a substantial amount of an oil and gas company's disclosure to
appear in tabular format, providing an outline of much of a company's
operations. Because the tables will present many of the types of
changes that management often discusses in its MD&A, we believe it may
be more helpful to investors to locate such discussion close to the
tables themselves. Thus, to the extent that any discussion or analysis
of known trends, demands, commitments, uncertainties, and events that
are reasonably likely to have a material effect on the company is
directly relevant to a particular disclosure required by Subpart 1200,
the company would be able to include that discussion or analysis with
the relevant table, with appropriate cross-references, rather than
including it in its general MD&A section.\146\
---------------------------------------------------------------------------

    \146\ See proposed Item 1209(b).
---------------------------------------------------------------------------

Request for Comment
     Proposed Item 1209 is not intended to increase a company's
disclosure requirements, but specify disclosures already required
generally by MD&A. Is such an item helpful?
     Are the proposed topics that an oil and gas company should
consider discussing as part of MD&A, whether in the main MD&A section
or in conjunction with the relevant table,

appropriate? Are there other topics that an oil and gas company should
consider discussing?
     Should we permit such discussions in conjunction with the
relevant table as proposed? Would this aid comparability of the
disclosures? Or should we keep MD&A as a self-contained section?

IV. Proposed Conforming Changes to Form 20-F

    Form 20-F is the form on which foreign private issuers file their
annual reports and Exchange Act registration statements. Currently,
Form 20-F contains instructions that are similar to those in Item 102
of Regulation S-K. However, rather than referring to Industry Guide 2
for disclosures regarding oil and gas producing activities, Form 20-F
contains its own ``Appendix A to Item 4.D--Oil and Gas'' (Appendix A)
that provides guidance for oil and gas disclosures for foreign private
issuers.\147\ Appendix A is significantly shorter, and provides far
less guidance regarding disclosures, than proposed Subpart 1200 or
Industry Guide 2.
---------------------------------------------------------------------------

    \147\ See Appendix A to Item 4.D--Oil and Gas of Form 20-F [17
CFR 249.220f].
---------------------------------------------------------------------------

    We believe that the proposed Subpart 1200 would be appropriate
disclosure for all public companies engaged in oil and gas producing
activities, including foreign private issuers. The added guidance in
Subpart 1200 should promote more consistent and comparable disclosures
among oil and gas companies. It is our understanding that many of the
larger foreign private issuers already provide disclosure in their
filings with the Commission comparable to the disclosure provided by
domestic companies. Thus, we are proposing to revise Form 20-F to
incorporate Subpart 1200 with respect to oil and gas disclosures and
delete Appendix A to Item 4.D in that form.\148\ We propose to revise
the Instructions to Item 4 of Form 20-F to refer to Subpart 1200
instead of Appendix A.\149\
---------------------------------------------------------------------------

    \148\ We are not proposing changes to Form 40-F, which is the
form on which Canadian companies reporting under the multi-
jurisdictional disclosure system file Exchange Act registration
statements and annual reports with the Commission, because the
disclosures regarding oil and gas activities for those companies are
not currently governed by our rules.
    \149\ See proposed Instruction 2 to Item 4.
---------------------------------------------------------------------------

    Thus, the proposal would continue to require the same type of
disclosure currently required by Appendix A regarding reserves and
production. In addition, the proposal would require foreign private
issuers to comply with the following disclosures currently in Industry
Guide 2 that we propose to codify in Subpart 1200 of Regulation S-K:
     Drilling and other exploratory and development activities
(Item 1205);
     Present activities (Item 1206);
     Delivery commitments (Item 1207); and
     Oil and gas properties, wells, operations, and acreage
(Item 1208).
    Finally, applying the proposed Subpart 1200 on foreign private
issuers would impose the completely new disclosures that we are
proposing for domestic companies in this release, including the
following:
     Reserves from non-traditional sources (i.e., bitumen,
shale, coalbed methane);
     Optional disclosure of probable and possible reserves;
     Optional disclosure of oil and gas reserves' sensitivity
to price;
     Proved undeveloped reserves held for five years or more
and an explanation of why they should continue to be considered proved;
     Technologies used to establish additions to reserves
estimates;
     Material changes due to technology, prices, and concession
conditions;
     The objectivity and qualifications of any third party
primarily responsible for preparing or auditing the reserves estimates,
if the company represents that it has enlisted a third party to conduct
a reserves audit;
     The qualifications and measures taken to ensure the
independence and objectivity of any employee primarily responsible for
preparing or auditing the reserves estimates; and
     Filing of the report of a third party if a company
represents that it is relying on a third party to prepare the reserves
estimates or conduct a reserves audit.
    Appendix A currently allows a foreign private issuer to exclude
required disclosures about reserves and agreements if its home country
prohibits the disclosures. Because these considerations still apply to
such foreign private issuers, we propose to move that provision from
Appendix A, which we propose to delete, to the Instructions to Item 4
of Form 20-F.\150\
---------------------------------------------------------------------------

    \150\ Id.
---------------------------------------------------------------------------

    Also, similar to our revisions to Item 102 of Regulation S-K, we
propose to limit the Instruction to Item 4.D of Form 20-F to extractive
enterprises conducting activities other than oil and gas producing
activities because Subpart 1200 would cover companies conducting oil
and gas producing activities.\151\
---------------------------------------------------------------------------

    \151\ See proposed Instruction 4.D of Form 20-F.
---------------------------------------------------------------------------

Request for Comment
     Should we delete Appendix A and refer to Subpart 1200 with
respect to Form 20-F, as proposed? Why? Should we expand the
requirements of Form 20-F to require more disclosure than currently
required by Appendix A, as proposed? Conversely, should we only update
Appendix A to reflect the proposed new definitions and formats for
disclosing reserves and production?
     Would the proposed reference to Subpart 1200 in Form 20-F
significantly change the information currently disclosed by foreign
private issuers? If so how? Would such a change be appropriate?
     Is the proposed exception for foreign laws that prohibit
disclosure about reserves and agreements appropriate? Do such laws
affect domestic companies as well? Should Subpart 1200 have a general
instruction with respect to such foreign laws?
     Are the proposed revisions to Instructions to Item 4.D
appropriate with respect to foreign private issuers that have
extractive activities other than oil and gas producing activities?

V. Impact of Proposed Amendments on Accounting Literature

A. Consistency With FASB and IASB Rules

    Several commenters noted that changing the definition of the term
``proved reserves'' in Rule 4-10(a) of Regulation S-X would affect both
the full cost accounting treatment of Rule 4-10(c) and the successful
efforts accounting treatment of Statement of Financial Accounting
Standard No. 19 (SFAS 19).\152\ One commenter suggested the Commission
consider the impact on the required immediate expensing of seismic
tests under SFAS 19.\153\ In addition, a revised definition could
affect the primary inputs to the standardized measure, such as static
operating conditions, year-end prices and costs and the 10% discount
rate, which would affect the full cost ceiling under the full cost
accounting treatment.\154\ These changes could also affect how costs
are expensed.\155\ Companies should clearly explain the changes in
their filings.\156\ Commenters recommended that the Commission
coordinate corresponding rule changes with the FASB and IASB to ensure

consistency of the rules.\157\ Some commenters remarked that the IASB
is currently considering establishing a set of guidelines for oil and
gas extractive activities, including a definition of oil and gas
reserves, and recommended that the Commission align its regulations
with those guidelines. We intend to discuss our rulemaking project with
the FASB and IASB and work with them to harmonize the rules upon
effectiveness of the proposed rules, if adopted.
---------------------------------------------------------------------------

    \152\ See letters from D&T, Grant Thornton, and KPMG.
    \153\ See letter from Audit Quality.
    \154\ See letters from Audit Quality, KPMG, and PWC.
    \155\ See letter from KPMG.
    \156\ Id.
    \157\ See letters from Audit Quality, CFA, KPMG, and PWC.
---------------------------------------------------------------------------

B. Change in Accounting Principle or Estimate

    One commenter noted that the proposals would raise the question of
whether a change in the definition of proved reserves is a change in
accounting principle (which requires retroactive revision of past
years) or a change in an estimate caused by a change in accounting
principle under SFAS 154.\158\ The proposed change in the definition of
proved reserves and the change from using single-day year-end price to
an average price should be viewed as a change in accounting principle,
or a change in the method of applying an accounting principle, that is
inseparable from a change in accounting estimate. Therefore, this
change would be considered a change in accounting estimate pursuant to
Statement of Financial Accounting Standard No. 154 ``Accounting Changes
and Error Corrections'' (SFAS 154) and would be accounted for
prospectively.
---------------------------------------------------------------------------

    \158\ See letter from Audit Quality.
---------------------------------------------------------------------------

Request for Comment
     Are the proposed changes more properly characterized as a
change in accounting principle or a change in estimate under SFAS 154?
     Would it be appropriate to consider the changes as a
change in accounting principle, but specify that no retroactive
revision of past years would be required?
     If we required retroactive revision of past years, would
companies have the historical engineering and scientific data to make
such revisions? If not, are there alternatives to retroactive revision
that we should consider?

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

    As noted elsewhere in this release, extraction of products such as
bitumen would be considered oil and gas producing activities, and not
mining activities, if we adopt the proposals. Under current U.S.
accounting guidance, costs associated with proven plus probable mining
reserves may be capitalized for operations extracting products through
mining methods, like bitumen. Under the proposed rules, bitumen
extraction and operations that produce oil or gas through mining
methods would be included under oil and gas accounting rules, which
only permit capitalization of costs associated with proved
reserves.\159\ Moreover, the mining guidelines do not provide specified
percentages for establishing levels of certainty for proven or probable
reserves for mining activities. It is possible that these differences
could result in changing reserves estimates for these resources during
the transition to the new rules, if adopted.
---------------------------------------------------------------------------

    \159\ See Rule 4-10(c) of Regulation S-X [17 CFR 210.4-10(c)].
---------------------------------------------------------------------------

Request for Comment
     How should we address these inconsistencies between oil
and gas accounting rules and mining accounting rules?
     Should we permit companies that extract, through mining
methods, materials from which oil and gas can be produced to continue
to capitalize costs under mining rules, or should we require them to
capitalize costs based on oil and gas rules? Are there circumstances
involved with mining operations, different from oil and gas operations,
that justify capitalization of costs of proved plus probable reserves,
as opposed to only costs of proved reserves?

D. Price Used To Determine Proved Reserves for Purposes of Capitalizing
Costs

    Statement of Financial Accounting Standard No. 19 ``Financial
Accounting and Reporting by Oil and Gas Producing Companies'' (SFAS 19)
requires the units-of-production method to be used for amortizing
acquisition costs of proved properties and development costs. As noted
above, we are not proposing to change the use of the period end price
assumption when determining reserves for accounting purposes. Changes
in the definition of reserves and the price used to determine whether
resources are reserves (i.e., whether they are economically producible)
would impact the determination of the quantity of reserves, and
therefore would impact the amount of amortization expense that is
recorded in the income statement. It is expected that, for most
companies, based on the relationship between the amount of proved
reserves and the production in a given period, the impact of such a
change on the financial statements would not be significant and would
not have a significant impact on comparability between periods.
Request for Comment
     Would the effect of such changes be material or have a
material effect on historical amortization levels?
     Would the effect of such changes be material or have a
material effect on comparability? Please provide any empirical evidence
to support your conclusion.
     Would it be appropriate to continue to require the use of
the year-end price for purposes of determining reserves for purposes of
amortization expense while using a different price for purposes of
disclosing reserves estimates in Commission filings? This would result
in a different value associated with the use of the term ``proved
reserves'' for purposes of disclosure, as opposed to the use of that
term for purposes of accounting. Would this be confusing? Should we use
a different term? Should we otherwise clarify the two different
meanings of that term in different contexts?

VI. Impact of the Proposed Codification of Industry Guide 2 on Other
Industry Guides

    There currently are six Securities Act Industry Guides:
     Guide 2--Disclosure of oil and gas operations;
     Guide 3--Statistical disclosure by bank holding companies;
     Guide 4--Prospectuses relating to interests in oil and gas
programs;
     Guide 5--Preparation of registration statements relating
to interests in real estate limited partnerships;
     Guide 6--Disclosures concerning unpaid claims and claim
adjustment expenses of property-casualty insurance underwriters; and
     Guide 7--Description of property by issuers engaged, or to
be engaged, in significant mining operations.
    There also are four Exchange Act Industry Guides:
     Guide 2--Disclosure of oil and gas operations;
     Guide 3--Statistical disclosure by bank holding companies;
     Guide 4--Disclosures concerning unpaid claims and claim
adjustment expenses of property-casualty underwriters; and
     Guide 7--Description of property by issuers engaged, or to
be engaged, in significant mining operations.
    As discussed above, the specific disclosures that relate to oil and
gas operations currently are set forth in both Securities Act and
Exchange Act

Industry Guide 2, as well as Securities Act Industry Guide 4. The
codification of the Industry Guide 2 disclosures that we are proposing
in this release should not have any impact on the manner in which the
other Industry Guides are applied to company disclosures. Those guides
will remain in effect in their current form and companies in the
industries to which the guides relate will continue to include
disclosure in response to the guides in their Securities Act and
Exchange Act filings. In the future, the staff plans to review and
update each of the Industry Guides; as part of the initiative to update
a particular guide, we would propose to codify it as a new subpart of
Regulation S-K.
Request for Comment
     Is it appropriate to codify Industry Guide 2 separately
from the other industry guides? Should we merely amend Industry Guide 2
and codify it with all of the other industry guides when they have been
updated?
     Would the codification of Industry Guide 2 overrule or
otherwise affect any of the disclosures required in the other Industry
Guides?

VII. Solicitation of Comment Regarding the Application of Interactive
Data Format to Oil and Gas Disclosures

    Many oil and gas companies already present much of their oil and
gas disclosure in tabular form. In this release, we propose to require
that disclosure in tabular form. Such tabular disclosure appears to be
conducive to presentation in an interactive data format that uses a
standard list of electronic tags that a variety of software
applications can recognize and process. We recently proposed to require
that financial statement information be presented in interactive data
format in addition to the currently required format.\160\ We seek
comment on the desirability of rules that would permit, or require, oil
and gas companies to present the tabular disclosures in proposed
Subpart 1200 in interactive data format in addition to the currently
required format. We note that at this time, there is no well-developed
standard list of electronic tags for the tabular disclosure proposed in
this release.
---------------------------------------------------------------------------

    \160\ See Release No. 33-8924 (May 30, 2008) [73 FR 32794].
---------------------------------------------------------------------------

Request for Comment
     Should we adopt rules that require oil and gas disclosures
to be provided in interactive data format? Instead of requiring such
formatting, should we only permit the filing of oil and gas disclosures
in interactive data format? What are the principal factors that we
should consider in making these decisions?
     If we require oil and gas disclosures to be filed in
interactive data format, should we provide for a voluntary phase-in
period to create a well-developed standard list of electronic tags?
Without a requirement, would the development of products for using
interactive data meet the needs of investors, analysts, and others who
seek to use interactive data? Would a large percentage of oil and gas
companies provide interactive data voluntarily and follow the same
standard, if not required to do so?
     Would investors, analysts, and others find presentation of
oil and gas disclosures helpful if presented in interactive data
format? In what ways would such users of the information find such a
format beneficial?
     As we note above, there is not currently a well-developed
standard list of electronic tags for the oil and gas disclosures. Are
there any obstacles to creating a useful standard list of electronic
tags for the oil and gas disclosures? Is the type of data presented in
the proposed table conducive to interactive data format? Would it be
particularly difficult to create standard electronic tags for any of
the proposed data? Would there be any obstacles to providing comparable
data in interactive format?
     Would it be useful for the data in the proposed tables to
interact with other data in Commission filings? If so, which data?
     If we adopt rules requiring oil and gas disclosures in
interactive data format, should we require the use of the eXtensible
Business Reporting Language (XBRL) standard? Are any other standards
becoming more widely used or otherwise superior to XBRL? What would the
advantages of any such other standards be over XBRL?

VIII. Proposed Implementation Date

    We propose to require companies to begin complying with the
proposed disclosure requirements, if adopted, for registration
statements filed on or after January 1, 2010, and for annual reports on
Forms 10-K and 20-F for fiscal years ending on December 31, 2009, and
after. We believe that this time period would be appropriate to enable
companies to familiarize themselves with the new rules. We would
require that all companies begin complying with the disclosure
requirements at the same time to maximize comparability of disclosure.
Therefore, we would not permit early adoption of the proposed
disclosure requirements.
Request for Comment
     Should we provide a delayed compliance date, as proposed
above? If so, is the proposed date appropriate? Should we provide more
or less time for companies to familiarize themselves with the proposed
amendments?
     If we provide a delayed compliance date, should we permit
early adoption by companies?

IX. General Request for Comment

    We request and encourage any interested person to submit comments
regarding:
     The proposed rule changes and additions that are the
subject of this release;
     Additional or different changes; or
     Other matters that may have an effect on the proposals
contained in this release.
    We request comment from the point of view of registrants,
investors, and other users of information about the disclosures that
should be required with regard to oil and gas companies and the
corresponding definitions of terms used in those disclosure
requirements.

X. Paperwork Reduction Act

A. Background

    The proposed rules and amendments contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995.\161\ We are submitting these to the Office of
Management and Budget for review and approval in accordance with the
Paperwork Reduction Act.\162\ The titles for this information are:
---------------------------------------------------------------------------

    \161\ 44 U.S.C. 3501 et seq.
    \162\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

    (1) ``Regulation S-K'' (OMB Control No. 3235-0071); \163\
---------------------------------------------------------------------------

    \163\ The paperwork burden from Regulation S-K and the Industry
Guides is imposed through the forms that are subject to the
disclosures in Regulation S-K and the Industry Guides and is
reflected in the analysis of those forms. To avoid a Paperwork
Reduction Act inventory reflecting duplicative burdens, for
administrative convenience we estimate the burdens imposed by each
of Regulation S-K and the Industry Guides to be a total of one hour.
---------------------------------------------------------------------------

    (2) ``Industry Guides'' (OMB Control No. 3235-0069);
    (4) ``Form S-1'' (OMB Control No. 3235-0065);
    (5) ``Form S-4'' (OMB Control Number 3235-0324);
    (6) ``Form F-1'' (OMB Control Number 3235-0258);
    (7) ``Form F-4'' (OMB Control Number 3235-0325);
    (8) ``Form 10'' (OMB Control No. 3235-0064);

    (9) ``Form 10-K'' (OMB Control No. 3235-0063); and
    (10) ``Form 20-F'' (OMB Control No. 3235-0063).
    We adopted all of the existing regulations and forms pursuant to
the Securities Act and the Exchange Act. These regulations and forms
set forth the disclosure requirements for annual reports \164\ and
registration statements that are prepared by issuers to provide
investors with the information they need to make informed investment
decisions in registered offerings and in secondary market transactions.
---------------------------------------------------------------------------

    \164\ The pertinent annual reports are those on Forms 10-K and
20-F.
---------------------------------------------------------------------------

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

B. Summary of Information Collections

    The proposals would increase existing disclosure burdens for annual
reports on Forms 10-K \165\ and 20-F and registration statements on
Forms 10, 20-F, S-1, S-4, F-1, and F-4 by creating the following new
disclosure requirements, many of which were requested by industry
participants:
---------------------------------------------------------------------------

    \165\ The proposed disclosure requirements regarding oil and gas
properties and activities are in Form 10-K as well as the annual
report to security holders required pursuant to Rule 14a-3(b) [17
CFR 240.14a-3(b)]. Form 10-K permits the incorporation by reference
of information in the Rule 14a-3(b) annual report to security
holders to satisfy the disclosure requirements of Form 10-K. The
analysis that follows assumes that companies would either provide
the proposed disclosure in a Form 10-K only, if the company is not
subject to the proxy rules, or would incorporate the required
disclosure into the Form 10-K by reference to the Rule 14a-3(b)
annual report to security holders if the company is subject to the
proxy rules. This approach takes into account the burden from the
proposed disclosure requirements that are included in both the Form
10-K and in Regulation 14A or 14C.
---------------------------------------------------------------------------

     Disclosure of reserves from non-traditional sources (i.e.,
bitumen, shale, coalbed methane) as oil and gas reserves;
     Optional disclosure of probable and possible reserves;
     Optional disclosure of oil and gas reserves' sensitivity
to price;
     Disclosure of the development of proved undeveloped
reserves, including those that are held for five years or more and an
explanation of why they should continue to be considered proved;
     Disclosure of technologies used to establish additions to
reserves estimates;
     Disclosure regarding material changes due to technology,
prices, and concession conditions;
     The objectivity and qualifications of any third party
primarily responsible for preparing or auditing the reserves estimates,
if the company represents that it has enlisted a third party to conduct
a reserves audit;
     The qualifications and measures taken to assure the
independence and objectivity of any employee primarily responsible for
preparing or auditing the reserves estimates;
     If a company represents that it is relying on a third
party to prepare the reserves estimates or conduct a reserves audit,
filing a report prepared by the third party; and
     Disclosure based on a new definition of the term ``by
geographic area.''
    In addition, the amendments would harmonize the disclosure
requirements that apply to foreign private issuers with the disclosure
requirements that apply to domestic issuers with respect to oil and gas
activities. In particular, the proposal would require foreign private
issuers to disclose the information required by proposed Items 1205
through 1208 of Regulation S-K regarding drilling activities, present
activities, delivery commitments, wells, and acreage, which they are
not required to provide currently under Appendix A to Form 20-F. These
proposed disclosure items present the substantive disclosures currently
called for by Items 4 through 8 of Industry Guide 2, but are not
included specifically in Appendix A to Form 20-F, although much of this
disclosure may be included in the more general discussions of business
and property on that form.

C. Paperwork Reduction Act Burden Estimates

    For purposes of the Paperwork Reduction Act, we estimate the total
annual increase in the paperwork burden for all affected companies to
comply with our proposed collection of information requirements to be
approximately 7,472 hours of in-house company personnel time and to be
approximately $1,659,000 for the services of outside
professionals.\166\ These estimates include the time and the cost of
preparing and reviewing disclosure, filing documents, and retaining
records. Our methodologies for deriving the above estimates are
discussed below.
---------------------------------------------------------------------------

    \166\ For administrative convenience, the presentation of the
totals related to the paperwork burden hours have been rounded to
the nearest whole number and the cost totals have been rounded to
the nearest thousand.
---------------------------------------------------------------------------

    Our estimates represent the burden for all oil and gas companies
that file annual reports or registration statements with the
Commission. Based on filings received during the Commission's last
fiscal year, we estimate that 241 oil and gas companies file annual
reports and 67 oil and gas companies file registration statements. Most
of the information called for by the new proposed disclosure
requirements, including the optional disclosure items, is readily
available to oil and gas companies and includes information that is
regularly used in their internal management systems. These proposed
disclosures include:

     Information on the company's development of proved
undeveloped reserves;
     Technologies that the company used to establish additions
to reserves estimates;
     Material changes to reserves estimates due to technology,
prices, and concession conditions;
     The objectivity and qualifications of any third party
primarily responsible for preparing or auditing the reserves estimates,
if the company represents that it has enlisted a third party to conduct
a reserves audit;
     The qualifications and measures taken to assure the
independence and objectivity of any employee primarily responsible for
preparing or auditing the reserves estimates;
     The report of a third party preparer or reserves auditor,
if one is used;
     Disclosure of reserves by geographic area; and
     Optional disclosure of probable and possible reserves and
a sensitivity analysis.

We estimate that, on average, companies will incur a burden of 35 hours
to prepare these disclosures in an annual report or registration
statement.
    The proposed amendments would not require, or request, companies to
disclose probable and possible reserves. Rather, the proposed rules
only would remove the current prohibition on companies from disclosing
this information in their filings with the Commission. As we have
noted, many companies already disclose this information on their Web
sites. Similarly, commenters on the Concept Release noted that many
companies already use such estimates in their business decisions. Our
rules also do not dictate how companies generate estimates for probable
and possible reserves. Thus, we have not included an estimate of the
burden and cost of preparing probable and possible reserves estimates
in this PRA analysis, but we have included the burden and cost of
disclosing such information.
    The proposed amendments would apply several disclosure items to
foreign private issuers that previously did not apply to them. As noted
above, many of these disclosure items, such as drilling activities,
wells and acreage, would require the issuer to provide more specificity
about its business and property. Foreign private issuers that do not
currently provide such specificity would incur an added burden to
present such disclosures in their filings. We estimate that this burden
would be 20 hours per foreign private issuer.
    The proposed amendments would include reserves from non-traditional
sources (e.g., bitumen and oil shale) as oil and gas reserves. Such
reserves currently are required to be disclosed as reserves related to
mining operations. Although there are differences in the way such
reserves may be calculated, such as different levels of certainty, the
processes involved in estimating such reserves do not differ
significantly. We believe that there would be no change in the relative
burden for estimating these reserves under the oil and gas rules, as
opposed to the mining rules.
    Consistent with current Office of Management and Budget estimates
and recent Commission rulemakings, we estimate that 25% of the burden
of preparation of registration statements on Forms S-1, S-4, F-1, F-4,
10, and 20-F is carried by the company internally and that 75% of the
burden is carried by outside professionals retained by the issuer at an
average cost of $400 per hour.\167\ We estimate that 75% of the burden
of preparation of annual reports on Form 10-K or Form 20-F is carried
by the company internally and that 25% of the burden is carried by
outside professionals retained by the company at an average cost of
$400 per hour. The portion of the burden carried by outside
professionals is reflected as a cost, while the portion of the burden
carried by the company internally is reflected in hours. The following
tables summarize the changes to the PRA estimates:
---------------------------------------------------------------------------

    \167\ In connection with other recent rulemakings, we have had
discussions with several private law firms to estimate an hourly
rate of $400 as the average cost of outside professionals that
assist issuers in preparing disclosures and conducting registered
offerings.
    \168\ The burden estimates for Form 10-K assume that the
proposed requirements are satisfied by either including information
directly in the annual reports or incorporating the information by
reference from the Rule 14a-3(b) annual report to security holders.

                     Table 1.--Calculation of Incremental Paperwork Reduction Act Burden Estimates for Exchange Act Periodic Reports
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                $400
                          Form                                Annual        Incremental     Incremental     75% Issuer          25%        Professional
                                                             responses      hours/form        burden                       Professional        cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     (A)             (B)   (C) = (A)*(B)  (D) = (C)*0.75  (E) = (C)*0.25  (F) = (E)*$300
--------------------------------------------------------------------------------------------------------------------------------------------------------
10-K\168\...............................................             206              35           7,210           5,408           1,803         721,000
20-F....................................................              35              55           1,925           1,444             481         192,500
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................             241  ..............           9,135           6,851           2,284         913,500
--------------------------------------------------------------------------------------------------------------------------------------------------------

 Table 2.--Calculation of Incremental Paperwork Reduction Act Burden Estimates for Securities Act Registration Statements and Exchange Act Registration
                                                                       Statements
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                $400
                          Form                                Annual        Incremental     Incremental     25% Issuer          75%        Professional
                                                             responses      hours/form        burden                       Professional        cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     (A)             (B)   (C) = (A)*(B)  (D) = (C)*0.25  (E) = (C)*0.75  (F) = (E)*$300
--------------------------------------------------------------------------------------------------------------------------------------------------------
10......................................................               5              35             175              44             131          52,500
20-F....................................................               2              55             110              28              83          33,000
S-1.....................................................              38              35           1,330             333             998         399,000
S-4.....................................................              17              35             595             149             446         178,500
F-1.....................................................               2              55             110              28              83          33,000
F-4.....................................................               3              55             165              41             124          49,500
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................              67  ..............           2,485             621            1864         745,500
--------------------------------------------------------------------------------------------------------------------------------------------------------

D. Request for Comment

    We request comment in order to evaluate the accuracy of our
estimate of the burden of the collections of information. Any member of
the public may direct to us any comments concerning the accuracy of
these burden estimates. Persons who desire to submit comments on the
collection of information requirements should direct their comments to
the OMB, Attention: Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Washington,
DC 20503, and should send a copy of the comments to Secretary,
Securities and Exchange Commission, 100 F Street, NE., Washington, DC
20549-1090, with reference to File No. S7-15-08. Requests for materials
submitted to the OMB by us with regard to this collection of
information should be in writing, refer to File No. S7-15-08, and be
submitted to the Securities and Exchange Commission, Records Management
Branch, 100 F Street, NE., Washington, DC 20549-1110. Because OMB is
required to make a decision concerning the collections of information
between 30 and 60 days after publication, your comments are best
assured of having their full effect if OMB receives them within 30 days
of publication.

XI. Cost-Benefit Analysis

A. Background

    We are proposing revisions to the oil and gas reserves disclosure
requirements of Regulation S-K and Regulation S-X under the Securities
Act of 1933 and the Securities Exchange Act of 1934 and Industry Guide
2. The proposed revisions are intended to modernize and update the
Commission's oil and gas disclosure requirements because modern
technologies enables better estimates, and therefore more helpful
disclosure to investors. The oil and gas industry has experienced
significant changes since the Commission initially adopted its current
rules and disclosure requirements between 1978 and 1982, including
advancements in technology and changes in the types of projects in
which oil and gas companies invest. The proposed revisions also are
intended to provide investors with improved disclosure about an oil and
gas company's business and prospects without sacrificing clarity and
comparability, which provide protection and transparency to investors.

B. Description of Proposal

    Currently, Industry Guide 2 specifies many of the disclosure
guidelines for oil and gas companies. The Industry Guide calls for
disclosure relating to reserves, production, property, and operations
in addition to that which is required by Regulation S-K. Although the
Industry Guide itself does not appear in Regulation S-K or in the Code
of Federal Regulations, it is referenced in an instruction to Item 102
of Regulation S-K (Description of Property) and also is included in the
listing of Industry Guides in Items 801 and 802 of Regulation S-K.
Generally, the proposal would codify the existing disclosures of
Industry Guide 2 into a new Subpart 1200 of Regulation S-K, while at
the same time updating such disclosures, clarifying the level of detail
required to be disclosed, and requiring disclosure in a tabular
presentation. The proposed changes would accomplish the following:
     Disclosure of reserves from non-traditional sources (e.g.,
bitumen and oil shale) as oil and gas reserves;
     Optional disclosure of probable and possible reserves;
     Optional disclosure of oil and gas reserves' sensitivity
to price;
     Disclosure of the development of proved undeveloped
reserves, including those that are held for five years or more and an
explanation of why they should continue to be considered proved;
     Disclosure of technologies used to establish additions to
reserves estimates;
     Disclosure regarding material changes due to technology,
prices, and concession conditions;
     The objectivity and qualifications of any third party
primarily responsible for preparing or auditing the reserves estimates,
if the company represents that it has enlisted a third party to conduct
a reserves audit;
     The qualifications and measures taken to assure the
independence and objectivity of any employee primarily responsible for
preparing or auditing the reserves estimates;
     If a company represents that it is relying on a third
party to prepare the reserves estimates or conduct a reserves audit,
filing a report prepared by the third party; and
     Disclosure based on a new definition of the term ``by
geographic area.''
    The proposal also would make revisions and additions to the
definitions section of Rule 4-10 of Regulation S-X. These revisions
would update and extend reserves definitions to reflect changes in the
oil and gas industry and new technologies. The revisions are intended
to address perceived inadequacies in existing definitions while
maintaining standards of clarity and comparability that provide
protection and transparency to investors. In particular, the proposal
would:
     Expand the definition of ``oil and gas producing
activities'' to include the extraction of hydrocarbons from oil sands,
shale, coalbeds, or other natural resources and activities undertaken
with a view to such extraction;
     Add a definition of ``reasonable certainty'' to provide
better guidance regarding the meaning of that term;
     Add a definition of ``reliable technology'' to permit the
use of new, widely accepted technologies to establish proved reserves;
     Define probable and possible reserves estimates; and
     Add definitions to explain new terms used in the revised
definitions.
    In addition, the amendments would harmonize the disclosure
requirements that apply to foreign private issuers with the disclosure
requirements that apply to domestic issuers with respect to oil and gas
activities. In particular, the proposal would require foreign private
issuers to disclose the information required by proposed Items 1205
through 1208 regarding drilling activities, present activities,
delivery commitments, wells, and acreage, which they are not required
to provide currently under Appendix A to Form 20-F. These proposed
disclosure items present the substantive disclosures currently called
for by Items 4 through 8 of Industry Guide 2, but are not included
specifically in Appendix A to Form 20-F, although much of this
disclosure may be included in the more general discussions of business
and property on that form.

C. Benefits

    We expect that the proposed rules would increase transparency in
disclosure by oil and gas companies by providing improved reporting
standards. The proposed revisions to the definitions should align our
disclosure rules with the realities of the modern oil and gas markets.
For example, we believe that the inclusion of bitumen and other
resources from continuous accumulations as oil and gas producing
activities is consistent with company practice to treat these
operations as part of, rather than separate from, their traditional oil
and gas producing activities. Similarly, the proposed expansion of
permissible technologies for determining certainty levels of reserves
recognizes that companies now take advantage of these technological
advances to make business decisions. We expect these proposals to
improve disclosure by aligning the required

disclosure more closely with the way companies conduct their business.
    Allowing companies to disclose probable and possible reserves is
designed to improve investors' understanding of a company's unproved
reserves. For those companies that already disclose such reserves on
their Web sites, the proposals would permit them to make such
disclosures more accessible to investors. Disclosure of these
categories of reserves beyond proved reserves may foster better company
valuations by investors, creditors, and analysts, thus improving
capital allocation and reducing investment risk. Because some of the
proposed disclosure requirements are optional, the amount of increased
transparency will depend on the extent to which companies elect to
provide the additional disclosure afforded by the proposal. If
companies elect not to provide the optional disclosure, then the
benefits from increased transparency would be limited to the extent
that the new rules improve the transparency of proved reserves
disclosure. We expect that replacing the Industry Guide with new
Regulation S-K items would provide greater certainty because the
disclosure requirements would be in rules established by the
Commission.
    By permitting increased disclosure, the proposal provides a
mechanism for oil and gas companies to seek more favorable financing
terms through more disclosure and increased transparency. Investors may
be able to request such additional disclosure in Commission filings
during negotiations regarding bond and debt covenants. Thus, we expect
that, as a result of competing factors in the marketplace, the proposal
would result in increased transparency, either because companies elect
to voluntarily provide increased disclosure, or because investors may
discount companies that do not do so. We believe that the benefits and
costs of disclosing unproved reserves ultimately will be determined by
market conditions, rather than regulatory requirements.
    We expect that permitting companies to disclose probable and
possible reserves would increase market transparency, provide investors
with more reserves information, and allow for more accurate production
forecasts. By correlating deterministic criteria to comparable
probabilistic thresholds for establishing a given level of certainty,
the proposed rules should result in increased standardization in
reporting practices which would promote comparability of reserves
across companies. The proposal would define the term ``reliable
technology'' to permit oil and gas companies to prepare their reserves
estimates using new types of technology that companies are not
permitted to use under the current rules. This proposed definition is
designed to encompass new technologies as they are developed in the
future and become widely accepted, thereby providing investors and the
market with a more comprehensive understanding of a company's estimated
reserves.
1. Average Price
    The proposal to change the price used to calculate reserves from a
year-end single-day price to an historical average price over the
company's most recently ended fiscal year is expected to reduce the
effects of seasonality and facilitate comparability between companies.
Many of the commenters to the Concept Release supported the use of an
historical price, even though this approach is less useful with respect
to a company's future prospects compared to a futures market price. We
believe investors are concerned not only about the quantity of a
company's reserves, but also about the profitability of those reserves.
We recognize that some reserves will be of more value than others due
to extraction and transportation costs. As a result, since our proposal
would require the use of a single price to estimate reserves, the
proposal also gives companies the option of providing a sensitivity
analysis and reporting reserves based on additional price estimates. If
companies elect to provide a sensitivity analysis, we expect this to
benefit investors by allowing them to formulate better projections of
company prospects that are more consistent with management's planning
price and prices higher and lower that may reasonably be achieved. We
expect that companies would be more likely to adopt a sensitivity
analysis approach if investors and other market participants determine
that this information would reduce investment risk, or if companies
believe such disclosure will reduce the cost of capital formation. The
proposal would result in increased price stability in determining
whether reserves are economically producible. This should mitigate
seasonal effects, resulting in reserves estimates that more closely
reflect those used by management in planning and investment decisions.
We expect this to allow for more accurate company valuations and
improve projections of company prospects.
2. Probable and Possible Reserves
    We anticipate that disclosure of probable and possible reserves, if
companies elect to do so, would allow investors, creditors, and other
users to better assess a company's reserves. The proposed tabular
format for disclosing probable and possible reserves should reduce
investor search costs by making it easier to locate reserves
disclosures and facilitating comparability among oil and gas companies.
    While we recognize that many companies already communicate with
investors about their unproved and other reserves through alternative
means, such as company Web sites or press releases, some commenters
remarked that an objective comparison among companies is difficult
because different companies have defined such reserves classifications
differently. We believe that permitting disclosure of this information
in Commission filings would provide a more consistent means of
comparison. Although our proposal would make disclosure of probable and
possible reserves optional, and large oil and gas producers suggested
in their comment letters that such disclosure would be of limited
benefit, we believe that competitive pressures within the industry
might make it beneficial for large producers to disclose this
information. Increased disclosure might, for example, improve credit
quality and lower the cost of debt financing, or reduce the risk
associated with business transactions between the company and its
customers or suppliers.
3. Reserves Estimate Preparers and Reserves Auditors
    We believe that investors would benefit from a greater level of
assurance with respect to the reliability of reserve estimates. The
proposed disclosure requirements relating to the objectivity and
qualifications of any third party primarily responsible for preparing
or auditing the reserves estimates, if the company represents that it
has enlisted a third party to conduct a reserves audit, and the
qualifications and measures taken to assure the independence and
objectivity of any employee primarily responsible for preparing or
auditing the reserves estimates should provide greater confidence with
respect to the accuracy of reserves estimates. Unproved reserves are
inherently less certain than proved reserves. Although not all
companies would choose to undertake a reserves audit, because the
proposal would not require such a reserves audit, third party
participation in the estimation of reserves should add credibility to a
company's public disclosure. The opinion of an objective, qualified
person on the reserves estimates is designed to increase the
reliability of these estimates and investor confidence.

4. Development of Proved Undeveloped Reserves
    The proposal would require tabular disclosure of the aging of
proved undeveloped reserves. We believe that such disclosure
supplements our proposed amendments that would ease the requirements
for recognizing PUDs and thereby increase the amount of PUDs disclosed
in filings, even though the properties representing such proved
reserves have not yet been developed and therefore do not provide the
company with cash flow.
5. Disclosure Guidance
    The proposal also provides guidance about the type of information
that companies should consider disclosing in Management's Discussion
and Analysis, and would allow companies to include this information
with the relevant tables. Locating this discussion with the tables
themselves should benefit investors by simplifying the presentation of
disclosure, and providing insight into the information disclosed in the
tables. Providing the additional guidance should assist companies in
preparing their disclosure, improving the quality and consistency of
this disclosure.
6. Updating of Definitions Related to Oil and Gas Activities
    The proposal also updates the definition of the term ``oil and gas
producing activities'' as well as updating or creating new definitions
for other terms related to such activities, including ``proved oil and
gas reserves'' and ``reasonable certainty.'' We believe that updating
these definitions will help companies disclose oil and gas operations
in the same way that companies manage those operations. This includes
resources extracted from nontraditional sources that companies consider
oil and gas activities, although our definitions have excluded them
from the definition of ``oil and gas producing activities.'' In
addition, adding definitions for terms like ``reasonable certainty''
(which currently is in the definition of ``proved oil and gas
reserves,'' but not defined) will provide companies with added guidance
and assist them in providing consistent disclosures between companies.
7. Harmonizing Foreign Private Issuer Disclosure
    We believe that the proposals to harmonize foreign private issuer
disclosure would help make disclosures of foreign private issuers more
comparable with domestic companies. The oil and gas industry has
changed significantly since the rules were adopted. Today, many
companies have interests that span the globe. In addition, many of
these projects are joint ventures between foreign private issuers and
domestic companies. Having differing levels of disclosure for companies
that may be participating in the same projects harms comparability
between investment choices. The proposal to harmonize foreign private
issuer disclosure is intended to promote comparability among all oil
companies.

D. Costs

    We expect that the proposed amendments would result in some initial
and ongoing costs to oil and gas companies. Although we are proposing
to add a new subpart to Regulation S-K to set forth the disclosure
requirements that are unique to oil and gas companies, the proposed
subpart, for the most part, codifies the substantive disclosure called
for by Industry Guide 2. The proposed disclosure requirements have been
updated and clarified, and require the disclosure to be presented in a
tabular format. Although many companies already present this
information in tabular form, for companies that do not, this proposed
requirement could impose a burden on companies as they transition from
a narrative to tabular disclosure format. We expect, however, that any
increased preparation costs would be highest in the first year after
adoption, but would decline in subsequent years as companies adjust to
the new format. We think this burden is justified because tabular
disclosure will increase comparability and facilitate understanding and
analysis by investors.
1. Probable and Possible Reserves
    Allowing disclosure of probable and possible reserves could create
an increased risk of litigation because these categories of reserves
estimates are less certain than proved reserves. Companies may choose
not to disclose such reserves, in part, because of the risk of
incurring litigation costs to defend their disclosures due to the
increased risk and uncertainty of these categories. Disclosure of
probable and possible reserves may also result in revealing competitive
information because it might reveal a company's business strategy, such
as the geography and nature of their exploration and discovery. For
example, if geographical detail can be inferred from estimates of
unproved reserves, this might reveal information about the value of a
company's assets to competitors and could put the producer at a
competitive disadvantage. We expect companies would incur costs in
preparing the additional disclosures such as calculating and
aggregating the reserve projections in a prescribed format. If probable
and possible categories of reserves have different extraction cost
structures, particularly with respect to time, and they are not
sufficiently separated from proved reserves, this could result in
increased uncertainty in an investor's assessment of a company's
prospects. We believe that making these disclosures voluntary mitigates
these concerns. Companies unwilling to bear the added risk can simply
opt not to provide this disclosure.
2. Reserves Estimate Preparers and Reserves Auditors
    If a company chooses to use a third party to prepare or audit
reserve estimates, it would incur costs to hire these outside
consultants. The proposed amendments would not require companies to
hire such a person. If enough companies that currently do not use such
consultants begin to hire them, we believe that industry wages could
potentially increase due to increased demand for reserves calculating
specialists unless that demand is compensated by an increase in the
supply of such persons. If wages increased, then all companies, not
just those employing third party consultants, would incur added costs.
    Large companies may be less likely to hire third parties because
they tend to have staff to make reserves estimates. However, if such
large companies chose to hire third party consultants, third parties
would expend significantly more effort on such projects than for
smaller companies because larger companies have more properties to
evaluate. Thus, we expect third party fees, and the time required to
conduct such projects, would scale upwards with the quantity of company
reserves.
    Disclosure of unproved reserves without third party certification
may present a risk with respect to smaller oil and gas producers.
Because smaller companies are likely to have less in-house expertise,
and less market reputation, than larger companies, this could increase
the need for certification. We believe that making the third party
involvement optional is similar to the current approach. Current
disclosures of proved reserves do not require a third party to audit
the reserves estimates, and oil and gas producers already release, as
discussed above, unproved reserve information through other means.
Thus, even if companies do not choose to use a third party to audit
their reserves estimates, the disclosure of

unproved reserves with improved standards on how such reserves should
be reported, should benefit investors.
3. Average Price
    While the use of an historical average price to calculate reserves
should enhance comparability, it would provide investors with less
forward-looking information than if we were to adopt a price standard
based on futures prices. Forward-looking prices based on futures,
however, are not necessarily available for all products in all
geographic areas and would require adjustments.
4. Consistency With IASB
    Some commenters remarked that the International Accounting
Standards Board is currently preparing a set of guidelines for oil and
gas extractive activities, including a definition of oil and gas
reserves, and recommended that the Commission align its regulations
with those guidelines. We intend to monitor this initiative and work
with the IASB, but our proposal may differ from the guidelines
ultimately established by the International Accounting Standards Board.
This could make it more difficult for investors to compare foreign and
domestic companies.
5. Harmonizing Foreign Private Issuer Disclosure
    The proposal to harmonize foreign private issuer disclosure
regarding oil and gas activities would increase the burden on foreign
private issuers. However, it is our understanding that the large
foreign private issuers already voluntarily provide disclosure
comparable to the level required from domestic companies. Much of the
added new disclosures relate to the day-to-day business and properties
of these companies, including drilling activities, number of wells and
acreage. This is information that is central to the activities of oil
and gas companies, and therefore is readily known to these companies.
We believe that applying the proposed Subpart 1200 to these companies
could prompt more detailed disclosure regarding these activities, which
would cause these companies to incur some cost. The provision
permitting foreign private issuers to omit disclosures if prohibited
from making those disclosures by their home jurisdiction could mitigate
some of these costs.

E. Request for Comments

    We request comment on all aspects of the Cost-Benefit Analysis,
including identification of any additional costs or benefits of, or
suggested alternatives to, the proposed amendments. We also request
that those submitting comments provide, to the extent possible,
empirical data and other factual support for their views.

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

    Securities Act section 2(b) \169\ requires us, when engaging in
rulemaking where we are required to consider or determine whether an
action is necessary or appropriate in the public interest, to consider,
in addition to the protection of investors, whether the action will
promote efficiency, competition, and capital formation. Section
23(a)(2) of the Exchange Act \170\ requires us, when adopting rules
under the Exchange Act, to consider the impact that any new rule would
have on competition. In addition, section 23(a)(2) prohibits us from
adopting any rule that would impose a burden on competition not
necessary or appropriate in furtherance of the purposes of the Exchange
Act. Section 3(f) of the Exchange Act \171\ requires us, when engaging
in rulemaking that requires us to consider or determine whether an
action is necessary or appropriate in the public interest, to consider,
in addition to the protection of investors, whether the action will
promote efficiency, competition and capital formation.
---------------------------------------------------------------------------

    \169\ 15 U.S.C. 77b(b).
    \170\ 15 U.S.C. 78w(a)(2).
    \171\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    We expect the proposed amendments, if adopted, to increase
efficiency and enhance capital formation, and thereby benefit
investors, by providing the market with better information based on
updated technology as well as increased information covering a broader
range of reserves classifications held by a company and reserves found
in non-traditional sources of oil and gas. Such increased and improved
information would permit investors to better assess a company's
prospects. In particular, the existing prohibitions against disclosing
reserves other than proved reserves, using modern technology to
determine the certainty level of reserves, and including resources from
non-traditional sources can lead to incomplete disclosures about a
company's actual resources and prospects. The proposals are designed to
better align the disclosure requirements with the way companies make
business decisions.
    We believe that permitting the disclosure of probable and possible
reserves will benefit smaller companies, in particular. Larger issuers
tend to already have large amounts of proved reserves. The proposals
would permit smaller companies, who often participate in a significant
amount of exploratory activity, to better disclose their business
prospects. Consequently, we anticipate that the proposal, if adopted,
could lead to efficiencies in capital formation, as more information
would be available regarding the prospects of smaller issuers.
    The effects of the proposed amendments on competition are difficult
to predict, but it is possible that permitting public issuers to
disclose probable and possible reserves will lead to a reallocation of
capital, as companies that previously could show few proved reserves
would be able to disclose a broader range of its business prospects,
making it easier for these issuers to raise capital and compete with
companies that have large proved reserves. Although our proposal would
make disclosure of probable and possible reserves optional, and large
oil and gas producers suggested in their comment letters that such
disclosure would be of limited benefit, we believe that competitive
pressures within the industry might make it beneficial for large
producers to disclose this information. Increased disclosure might, for
example, improve credit quality and lower the cost of debt financing,
or reduce the risk associated with business transactions between the
company and its customers or suppliers.
    We request comment on whether the proposals, if adopted, would
promote efficiency, competition, and capital formation or have an
impact or burden on competition. Commenters are requested to provide
empirical data and other factual support for their views, if possible.

XIII. Initial Regulatory Flexibility Analysis

    This Initial Regulatory Flexibility Act Analysis has been prepared
in accordance with 5 U.S.C. 603. It relates to proposed revisions to
disclosure items for oil and gas companies.

A. Reasons for, and Objectives of, the Proposed Action

    The Commission adopted the current disclosure regime for oil and
gas producing companies in 1978 and 1982, respectively. Since that
time, there have been significant changes in the oil and gas industry
and markets, including technological advances, and changes in the types
of projects in which oil and

gas companies invest their capital. On December 12, 2007, the
Commission published a Concept Release on possible revisions to the
disclosure requirements relating to oil and gas reserves.\172\ Prior to
our issuance of the Concept Release, many industry participants had
expressed concern that our disclosure rules are no longer in alignment
with current industry practices and therefore have limited usefulness
to the market and investors.
---------------------------------------------------------------------------

    \172\ See Release No. 33-8870 (Dec. 12, 2007) [72 FR 71610].
---------------------------------------------------------------------------

    Our proposed amendments to these existing forms are intended to
modernize and update our reserves definitions to reflect changes in the
oil and gas industry and markets and new technologies that have
occurred in the decades since the current rules were adopted, including
expanding the scope of permissible technologies for establishing
certainty levels of reserves, reserves classifications that a company
can disclose in a Commission filing, and the types of resources that
can be included in a company's reserves, as well as providing
information regarding the objectivity and qualifications of any third
party primarily responsible for preparing or auditing the reserves
estimates, if the company represents that it has enlisted a third party
to conduct a reserves audit, and the qualifications and measures taken
to assure the independence and objectivity of any employee primarily
responsible for preparing or auditing the reserves estimates. The
proposals also are intended to codify, modernize and centralize the
disclosure items for oil and gas companies into Regulation S-K.
Finally, the proposals are intended to harmonize oil and gas
disclosures by foreign private issuers with disclosures by domestic
companies. Overall, the proposed amendments attempt to provide improved
disclosure about an oil and gas company's business and prospects
without sacrificing clarity and comparability, which provide protection
and transparency to investors.

B. Legal Basis

    We are proposing the amendments pursuant to sections 3(b), 6, 7, 10
and 19(a) of the Securities Act and sections 12, 13, 14(a), 15(d), and
23(a) of the Exchange Act, as amended.

C. Small Entities Subject to the Proposed Amendments

    The proposals would affect small entities that are engaged in oil
and gas producing activities, the securities of which are registered
under Section 12 of the Exchange Act or that are required to file
reports under section 15(d) of the Exchange Act. The proposals also
would affect small entities that file, or have filed, a registration
statement that has not yet become effective under the Securities Act
and that has not been withdrawn. Securities Act Rule 157 \173\ and
Exchange Act Rule 0-10(a) \174\ define an issuer to be a ``small
business'' or ``small organization'' for purposes of the Regulatory
Flexibility Act if it had total assets of $5 million or less on the
last day of its most recent fiscal year. We believe that the proposals
would affect small entities that are operating companies. Based on
filing in 2007, we estimate that there are approximately 28 oil and gas
companies that may be considered small entities.
---------------------------------------------------------------------------

    \173\ 17 CFR 230.157.
    \174\ 17 CFR 240.0-10(a).
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D. Reporting, Recordkeeping, and Other Compliance Requirements

    The proposed amendments to Regulation S-K would expand some
existing disclosures, and eliminate others. In particular, the proposed
new disclosure requirements, many of which were requested by industry
participants, include the following:
     Disclosure of reserves from non-traditional sources (e.g.,
bitumen and shale) as oil and gas reserves;
     Optional disclosure of probable and possible reserves;
     Optional disclosure of oil and gas reserves' sensitivity
to price;
     Disclosure of the development of proved undeveloped
reserves, including those that are held for 5 years or more and an
explanation of why they should continue to be considered proved;
     Disclosure of technologies used to establish additions to
reserves estimates;
     Disclosure regarding material changes due to technology,
prices, and concession conditions;
     Disclosure of the objectivity and qualifications of any
third party primarily responsible for preparing or auditing the
reserves estimates, if the company represents that it has enlisted a
third party to conduct a reserves audit;
     Disclosure of the qualifications and measures taken to
assure the independence and objectivity of any employee primarily
responsible for preparing or auditing the reserves estimates;
     If a company represents that it is relying on a third
party to prepare the reserves estimates or conduct a reserves audit,
filing a report prepared by the third party; and
     Disclosure based on a new definition of the term ``by
geographic area.''

There would be no mandatory retention period for the information
disclosed, and the information disclosed would be made publicly
available on the EDGAR filing system.

E. Duplicative, Overlapping, or Conflicting Federal Rules

    We believe that there are no federal rules that conflict with or
duplicate the proposed rules.

F. Significant Alternatives

    The Regulatory Flexibility Act directs us to consider significant
alternatives that would accomplish the stated objectives, while
minimizing any significant adverse impact on small entities. In
connection with the proposals, we considered the following
alternatives:
    (1) Establishing different compliance or reporting requirements
which take into account the resources available to smaller entities;
    (2) Exempting smaller entities from coverage of the disclosure
requirements, or any part thereof;
    (3) The clarification, consolidation, or simplification of
disclosure for small entities; and
    (4) Use of performance standards rather than design standards.
    With regard to Alternatives 1 and 2, we believe that separate
disclosure requirements for small entities that would differ from the
proposed reporting requirements, or exempting them from these
disclosures, would not achieve our disclosure objectives. In
particular, we believe the changes that are reflected in the proposed
amendments would balance the informational needs of investors in
smaller companies with the burdens imposed on such companies by the
disclosure requirements. We note that a number of the proposed new
disclosure items are voluntary. We believe that small entities are more
likely to take advantage of these permitted disclosures, particularly
regarding probable and possible reserves, than larger companies, which
typically already have significant proved reserves. A wholesale
exemption for small entities would thwart our intent to make uniform
the application of the disclosure and other requirements that would be
amended.
    Regarding Alternative 3, we believe the amendments would clarify
and consolidate the requirements for all public companies into
Regulation S-K, which may make such requirements easier to access. This
may simplify the process of preparing a company's annual report or
registration statement. In addition, the proposed tabular format

for making the disclosures may lead to systemization of the
disclosures, making such information simpler to organize.
    Regarding Alternative 4, we have used design rather than
performance standards in connection with the proposals for two reasons.
First, based on our past experience, we believe the proposed disclosure
would be more useful to investors if there were specific informational
requirements. The proposed mandated disclosures are intended to result
in more focused and comprehensive disclosure. Second, the specific
disclosure requirements in the proposals would promote more comparable
disclosure among public companies because they would provide greater
certainty as to the scope of required disclosure.

G. Solicitation of Comment

    We encourage the submission of comments with respect to any aspect
of this Initial Regulatory Flexibility Analysis. In particular, we
request comments regarding: (i) The number of small entity issuers that
may be affected by the proposed revisions; (ii) the existence or nature
of the potential impact of the proposed revisions on small entity
issuers discussed in the analysis; and (iii) how to quantify the impact
of the proposed revisions. Commenters are asked to describe the nature
of any impact and provide empirical data supporting the extent of the
impact. Such comments will be considered in the preparation of the
Final Regulatory Flexibility Analysis, if the proposed revisions are
adopted, and will be placed in the same public file as comments on the
proposed amendments.

XIV. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996,\175\ a rule is ``major'' if it has resulted, or is likely
to result in:
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    \175\ Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996).
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     An annual effect on the U.S. economy of $100 million or
more;
     A major increase in costs or prices for consumers or
individual industries; or
     Significant adverse effects on competition, investment or
innovation.
    We request comment on whether our proposals would be a ``major
rule'' for purposes of the Small Business Regulatory Enforcement
Fairness Act. We solicit comment and empirical data on: (a) The
potential effect on the U.S. economy on an annual basis; (b) any
potential increase in costs or prices for consumers or individual
industries; and (c) any potential effect on competition, investment, or
innovation.

XV. Statutory Basis and Text of Proposed Amendments

    We are proposing the amendments pursuant to sections 3(b), 6, 7, 10
and 19(a) of the Securities Act and sections 12, 13, 14(a), 15(d), and
23(a) of the Exchange Act, as amended.

Text of Proposed Amendments

List of Subjects

17 CFR Part 210

    Accountants, Accounting, Reporting and recordkeeping requirements,
Securities.

17 CFR Parts 229 and 249

    Reporting and recordkeeping requirements, Securities.

    For the reasons set out in the preamble, title 17, chapter II of
the Code of Federal Regulations is proposed to be amended as follows:

PART 210--FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL
STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF
1934, PUBLIC UTILITY HOLDING COMPANY ACT OF 1935, INVESTMENT
COMPANY ACT OF 1940, INVESTMENT ADVISERS ACT OF 1940, AND ENERGY
POLICY AND CONSERVATION ACT OF 1975

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

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