Undeveloped Reserves and the Five-Year Time limit: Can Different Interpretations Co-Exist?
Authors: Morales E. , Horizon B. V. , Lee W. J. 
Published: June 2014

Abstract
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. PRMS recommends five-years as a benchmark, although a longer time can be applied in some cases. The SEC also provides specific guidance and requirements on undeveloped reserves and the five-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 where different levels of commercial maturity have been introduced within a project for proved and probable reserves as a result of the five-year time limit. This has resulted in projects having their proved reserves re-classified as probable reserves because they will not be developed within the five-year time limit. This paper reviews SPE standards and SEC wording on commercial maturity requirements and the five-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 five-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 five-year time limit, the SEC uses different wording throughout the Final Rule document issued in January 2009. This has resulted in apparently different interpretations of the requirements for projects to meet this criterion. Based on the wording used in 10-Ks and 20-Fs, public disclosures seem to range from only reporting the projects with undeveloped reserves that have been continuously disclosed for five-years or more in the annual filings, to reporting all projects that have been or will remain undeveloped for five-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 required clarity required to ensure consistency in the way the SEC five-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 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 using an aligned interpretation of standards and requirements for reserves estimation, classification, categorization and disclosure.