Undeveloped Reserves and the Five-Year Time Limit: Can Different Interpretations Coexist?
Authors: Morales E.. , Lee W.J.. J. 
Published: August 2014

Summary
A key element in determining a project's commercial maturity is the evidence of a firm intent to proceed with development within a reasonable time frame. The Petroleum Resource Management System (PRMS) (SPE 2007) recommends 5 years as a benchmark, although a longer time can be applied in some cases. The U.S. Securities and Exchange Commission (SEC) also provides specific guidance and requirements on undeveloped reserves and the 5-year-maturation time limit.
Despite the apparent clarity in the PRMS and SEC regulations regarding project maturity, this paper describes actual examples in the public domain in which different levels of commercial maturity were introduced within a project for proved and probable reserves as a result of the 5-year time limit. This has resulted in projects with their proved reserves reclassified as probable reserves because they will not be developed within the 5-year time limit. This paper reviews SPE standards and SEC wording on commercial maturity requirements and the 5-year time limit, providing clarity on whether a project's recoverable volumes should be classified as reserves or contingent resources if its undeveloped reserves are not matured into developed reserves within 5 years of their first reporting, and specific circumstances for a longer maturation time frame do not exist.
When referring to projects with proved undeveloped reserves falling outside the 5-year time limit, the SEC uses different wording throughout the Final Rule document issued in January 2009 (NARA 2009). This has resulted in apparently different interpretations of the requirements for projects to meet this criterion. On the basis of the wording used in SEC forms 10-K and 20-F, public disclosures seem to range from reporting only the projects with undeveloped reserves that have been continuously disclosed for 5 years or more in the annual filings, to reporting all projects that have been or will remain undeveloped for 5 years or more from the time of their first disclosure date. Given the wording in the SEC Final Rule, it is understandable that different interpretations of the regulations may emerge. This paper presents an analysis of the SEC language used in the Final Rule and related wording used in SEC comment letters from the last few years. Failing further clarity from the SEC, this analysis provides the authors' opinion on the clarity required to ensure consistency in the way the SEC 5-year rule should be interpreted and in the spirit of comparability among companies that provides the basis for the SEC requirement to report these undeveloped reserves as a separate item.
Another area discussed in this paper relates to the wording used by the SEC regarding a project's undeveloped-reserves volumes (i.e., its undeveloped reserves in barrels of oil equivalent) and the potential different interpretations that the industry may give to the SEC Final Rule. A simple example is presented to provide clarity on the option that is most likely to meet the SEC requirements. Potential inconsistencies resulting from different interpretation are highlighted.
The analysis and recommendations presented in this paper aim at creating consistent approaches leading to better comparability among oil and gas companies by use of an aligned interpretation of standards and requirements for reserves estimation, classification, categorization, and disclosure.