Document ID: SEC-2008-0922-0001
Agency: sec
Document Type: Proposed Rule
Title: Modernization of the Oil and Gas Reporting Requirements
Posted Date: 2008-07-09T04:00Z

[Federal Register: July 9, 2008 (Volume 73, Number 132)]
[Proposed Rules]               
[Page 39525-39568]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09jy08-32]                         

[[Page 39525]]

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

Part IV

Securities and Exchange Commission

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

17 CFR Parts 210, 229, and 249

Modernization of the Oil and Gas Reporting Requirements; Proposed Rule

[[Page 39526]]

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

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 229, and 249

[Release Nos. 33-8935; 34-58030; File No. S7-15-08]
RIN 3235-AK00

 
Modernization of the Oil and Gas Reporting Requirements

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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

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

DATES: Comments should be received on or before September 8, 2008.

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

Electronic Comments

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

Paper Comments

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

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

FOR FURTHER INFORMATION CONTACT: Questions on this Proposing Release 
should be directed to Ray Be, Special Counsel, Office of Rulemaking at 
(202) 551-3430; Mellissa Campbell Duru, Attorney-Advisor, Dr. W. John 
Lee, Academic Petroleum Engineering Fellow, or Brad Skinner, Senior 
Assistant Chief Accountant, Office of Natural Resources and Food at 
(202) 551-3740; Leslie Overton, Associate Chief Accountant, Office of 
Chief Accountant for the Division of Corporation Finance at (202) 551-
3400, Division of Corporation Finance; or Mark Mahar, Associate Chief 
Accountant, or Jonathan Duersch, Assistant Chief Accountant, Office of 
the Chief Accountant at (202) 551-5300; U.S. Securities and Exchange 
Commission, 100 F Street, NE., Washington, DC 20549-3628.

SUPPLEMENTARY INFORMATION: We are proposing amendments to Rule 4-10 \1\ 
of Regulation S-X \2\ and Items 102, 801 and 802 \3\ of Regulation S-
K.\4\ We also propose to add new Subpart 1200, including Items 1201 
through 1209, to Regulation S-K.
---------------------------------------------------------------------------

    \1\ 17 CFR 210.4-10.
    \2\ 17 CFR 210.
    \3\ 17 CFR 229.102, 17 CFR 229.801, and 17 CFR 229.802.
    \4\ 17 CFR 229.
---------------------------------------------------------------------------

Table of Contents

I. Introduction
    A. Background
    B. Issuance of the Concept Release
    C. General Overview of the Comment Letters Received on Key 
Issues
II. Revisions and Additions to the Definition Section of Rule 4-10 
of Regulation S-X
    A. Introduction
    B. Year-End Pricing
    1. 12-month average price
    2. Trailing year-end
    3. Prices used for accounting purposes
    C. Extraction of Bitumen and Other Non-Traditional Resources
    D. Reasonable Certainty and Proved Oil and Gas Reserves
    1. New technology
    2. Probabilistic methods
    3. Other revisions related to proved oil and gas reserves
    E. Unproved Reserves--``Probable Reserves'' and ``Possible 
Reserves''
    F. Definition of ``Proved Developed Oil and Gas Reserves''
    G. Definition of ``Proved Undeveloped Reserves''
    1. Proposed replacement of certainty threshold
    2. Proposed definitions for continuous and conventional 
accumulations
    3. Proposed treatment of improved recovery projects
    H. Proposed Definition of Reserves
    I. Other Proposed Definitions and Reorganization of Definitions
III. Proposed Amendments To Codify the Oil and Gas Disclosure 
Requirements in Regulation S-K
    A. Proposed Revisions to Item 102, 801, and 802 of Regulation S-
K
    B. Proposed New Subpart 1200 of Regulation S-K Codifying 
Industry Guide 2 Regarding Disclosures by Companies Engaged in Oil 
and Gas Producing Activities
    1. Overview
    2. Proposed Item 1201 (General instructions to oil and gas 
industry-specific disclosures)
    3. Proposed Item 1202 (Disclosure of reserves)
    i. Oil and gas reserves tables
    ii. Optional reserves sensitivity analysis table
    iii. Geographic specificity with respect to reserves disclosures
    iv. Separate disclosure of conventional and continuous 
accumulations
    v. Preparation of reserves estimates or reserves audits
    vi. Contents of third party preparer and reserves audit reports
    vii. Solicitation of comments on process reviews
    4. Proposed Item 1203 (Proved undeveloped reserves)
    5. Proposed Item 1204 (Oil and gas production)
    6. Proposed Item 1205 (Drilling and other exploratory and 
development activities)
    7. Proposed Item 1206 (Present activities)
    8. Proposed Item 1207 (Delivery commitments)
    9. Proposed Item 1208 (Oil and gas properties, wells, 
operations, and acreage)
    i. Enhanced description of properties disclosure requirement
    ii. Wells and acreage
    iii. New proposed disclosures regarding extraction techniques 
and acreage
    10. Proposed Item 1209 (Discussion and analysis for registrants 
engaged in oil and gas activities)
IV. Proposed Conforming Changes to Form 20-F
V. Impact of Proposed Amendments on Accounting Literature

[[Page 39527]]

    A. Consistency with FASB and IASB Rules
    B. Change in Accounting Principle or Estimate
    C. Differing Capitalization Thresholds Between Mining Activities 
and Oil and Gas Producing Activities
    D. Price Used to Determine Proved Reserves for Purposes of 
Capitalizing Costs
VI. Impact of the Proposed Codification of Industry Guide 2 on Other 
Industry Guides
VII. Solicitation of Comment Regarding the Application of 
Interactive Data Format to Oil and Gas Disclosures
VIII. Proposed Implementation Date
IX. General Request for Comment
X. Paperwork Reduction Act
    A. Background
    B. Summary of Information Collections
    C. Paperwork Reduction Act Burden Estimates
    D. Request for Comment
XI. Cost-Benefit Analysis
    A. Background
    B. Description of Proposal
    C. Benefits
    1. Average price
    2. Probable and possible reserves
    3. Reserves estimate preparers and reserves auditors
    4. Development of proved undeveloped reserves
    5. Disclosure guidance
    6. Updating of definitions related to oil and gas activities
    7. Harmonizing foreign private issuer disclosure
    D. Costs
    1. Probable and possible reserves
    2. Reserves estimate preparers and reserves auditors
    3. Average price
    4. Consistency with IASB
    5. Harmonizing foreign private issuer disclosure
    E. Request for Comments
XII. Consideration of Burden on Competition and Promotion of 
Efficiency, Competition, and Capital Formation
XIII. Initial Regulatory Flexibility Analysis
    A. Reasons for, and Objectives of, the Proposed Action
    B. Legal Basis
    C. Small Entities Subject to the Proposed Amendments
    D. Reporting, Recordkeeping, and Other Compliance Requirements
    E. Duplicative, Overlapping, or Conflicting Federal Rules
    F. Significant Alternatives
    G. Solicitation of Comment
XIV. Small Business Regulatory Enforcement Fairness Act
XV. Statutory Basis and Text of Proposed Amendments

I. Introduction

A. Background

    On December 12, 2007, the Commission published a Concept Release on 
possible revisions to the disclosure requirements relating to oil and 
gas reserves.\5\ The release solicited comment on the oil and gas 
reserves disclosure requirements specified in Rule 4-10 of Regulation 
S-X \6\ and Item 102 of Regulation S-K.\7\ The Commission adopted these 
disclosure requirements in 1978 and 1982, respectively.\8\ 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.\9\ 
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.\10\
---------------------------------------------------------------------------

    \5\ See Release No. 33-8870 (Dec. 12, 2007) [72 FR 71610].
    \6\ 17 CFR 210.4-10. See Release No. 33-6233 (Sept. 25, 1980) 
[45 FR 63660] (adopting amendments to Regulation S-X, including Rule 
4-10). The precursor to Rule 4-10 was Rule 3-18 of Regulation S-X, 
which was adopted in 1978. See Accounting Series Release No. 253 
(Aug. 31, 1978) [43 FR 40688]. See also Accounting Series Release 
No. 257 (Dec. 19, 1978) [43 FR 60404] (further amending Rule 3-18 of 
Regulation S-X and revising the definition of proved reserves).
    \7\ Item 102 of Regulation S-K [17 CFR 229.102]. In 1982, the 
Commission adopted Item 102 of Regulation S-K. Item 102 contains the 
disclosure requirements previously located in Item 2 of Regulation 
S-K. See Release No. 33-6383 (March 16, 1982) [47 FR 11380]. The 
Commission also ``recast * * * the disclosure requirements for oil 
and gas operations, formerly contained in Item 2(b) of Regulation S-
K, as an industry guide.'' See Release No. 33-6384 (Mar. 16, 1982) 
[47 FR 11476].
    \8\ The disclosure requirements were introduced pursuant to a 
directive in the Energy Policy and Conservation Act of 1975 (the 
``EPCA''). The EPCA directed the Commission to ``take such steps as 
may be necessary to assure the development and observance of 
accounting practices to be followed in the preparation of accounts 
by persons engaged, in whole or in part, in the production of crude 
oil or natural gas in the United States.'' See 42 U.S.C. 6201-6422.
    \9\ See, for example, Daniel Yergin and David Hobbs: ``The 
Search for Reasonable Certainty in Reserves Disclosure,'' Oil and 
Gas Journal (July 18, 2005).
    \10\ See, for example, Greg Courturier, ``Standard & Poor's 
Urges SEC to Change Disclosure Rules,'' International Oil Daily 
(Dec. 3, 2007); Steve Levine, ``Tracking the Numbers: Oil Firms Want 
SEC to Loosen Reserves Rules,'' Wall Street Journal Online (Feb. 7, 
2006); Christopher Hope, ``Oil Majors Back Attack on SEC Rules,'' 
The Daily Telegraph (London) (Feb. 24, 2005); Barrie McKenna, 
``Rules undervalue reserves report says: Volumes buried in Canada's 
oil sands not counted by SEC's measure,'' The Globe & Mail (Canada) 
(Feb. 24, 2005); and ``Deloitte Calls on Regulators to Update Rules 
for Oil and Gas Reserves Reporting,'' Business Wire Inc. (Feb. 9, 
2005).
---------------------------------------------------------------------------

B. Issuance of the Concept Release

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

In addition, the Concept Release questioned whether our revised 
disclosure rules should be modeled on any particular resource 
classification framework currently being used within the oil and gas 
industry. We also asked how any revised disclosure rules could be made 
flexible enough to address future technological innovation and changes 
within the oil and gas industry. The Concept Release sought further 
comment on whether the Commission should require independent third 
party assessments of reserves estimates that a company includes in its 
filings.
    In response to the Concept Release, commenters submitted 80 comment 
letters which addressed all or some of the 15 questions that were 
raised by the release.\11\ We received comment letters from a variety 
of industry participants such as accounting firms, consultants, 
domestic and foreign oil and gas companies, federal government 
agencies, individuals, law firms, professional associations, public 
interest groups, and rating agencies.
---------------------------------------------------------------------------

    \11\ The public comments we received are available for 
inspection in the Commission's Public Reference Room at 100 F St. 
NE., Washington, DC 20549 in File No. S7-29-07. They are also 
available on-line at http://www.sec.gov/comments/s7-29-07/
s72907.shtml.
---------------------------------------------------------------------------

C. General Overview of the Comment Letters Received on Key Issues

    Almost all commenters supported some form of revision to the 
current oil and gas disclosure requirements, particularly given the 
length of time that has elapsed since the requirements were initially 
adopted. Commenters diverged significantly, however, in their views 
about the extent and type of revisions that we should make to our 
disclosure system. For example, commenters expressed varied opinions 
regarding whether we should adopt revisions that would result in a 
principles-based disclosure regime rather than a rules-based disclosure 
regime. Those who favored a principles-based approach noted that such 
an approach would be inherently more flexible than a rules-based 
approach and would allow for greater adaptability as technological 
advancements and changes occur in the industry.\12\ Other commenters, 
however,

[[Page 39528]]

expressed concern that a principles-based model is more subjective than 
a rules-based approach and could result in less consistent and 
comparable disclosure in the filings made by oil and gas companies.\13\
---------------------------------------------------------------------------

    \12\ See, for example, letters from BHP Biliton Petroleum 
(``BHP''), John R. Etherington (``J. Etherington''), and White & 
Case, LLP (``White & Case'').
    \13\ See, for example, letters from Apache Corp. (``Apache''), 
Moody's Investor's Service (``Moody's) and Oil Change International 
and the Center for Corporate Policy (``Oil Change'').
---------------------------------------------------------------------------

    Virtually all of the commenters supported a revision of the 
definition of proved reserves in some form or another. Most remarked 
that the definition of proved reserves should be broadened to allow 
unconventional resources such as oil shales and bitumen to be 
classified as proved reserves.\14\ In addition, while commenters were 
split on the use of a single fiscal year-end spot price to value the 
reserves held by an oil and gas company, a majority advocated the use 
of a different pricing standard to reduce the effects of short-term 
price volatility.\15\
---------------------------------------------------------------------------

    \14\ See letters from American Association of Petroleum 
Geologists (``AAPG''), American Clean Skies Foundation (``ACSF''), 
Apache, American Petroleum Institute (``API''), Center for Audit 
Quality (``Audit Quality''), BP Plc (``BP,'') Brookwood Petroleum 
Advisors Ltd. (``Brookwood''), CFA Institute Centre for Financial 
Market Integrity (``CFA''), Chesapeake Energy Corporation 
(``Chesapeake''), China National Offshore Oil Corporation 
(``CNOCC''), CIBC World Markets (``CIBC''), Denbury Resources 
(``Denbury''), Department of Energy (``DOE''), Deutsche Bank, Devon 
Energy Corporation (``Devon''), EnCana, Energy Information 
Administration (of DOE) (``EIA''), Energy Literacy Project (``Energy 
Literacy''), Eni S.p.A. (``Eni''), Ernst & Young (``E&Y''), J. 
Etherington, ExxonMobil, Grant Thornton, Imperial Oil Ltd. 
(``Imperial''), Independent Petroleum Association of America 
(``IPAA''), Dan Kelly (``D. Kelly''), McBride, Douglas-Morningstar 
Consultants (``D. McBride''), Moody's, Nexen Inc. (``Nexen''), Oil 
Change, Dan Olds (``D. Olds''), Petrobras, Petro-Canada, 
PriceWaterhouseCoopers (``PWC''), Robert Pinkerton (``R. 
Pinkerton''), Robinson Petroleum Consulting (``Robinson''), Ross 
Petroleum Ltd. (``Ross''), Derek Ryder (``D. Ryder''), Sasol Ltd 
(``Sasol''), Shell International (``Shell''), Society of Petroleum 
Engineers (``SPE''), Standard & Poor's (``S&P''), StatoilHydro, 
Total, S.A. (``Total''), Ashish Verma (``A. Verma''), Robert Wagner 
(``R. Wagner''), White & Case, and Fred Ziehe (``F. Ziehe'').
    \15\ See letters from Chesapeake, Devon, and Imperial.
---------------------------------------------------------------------------

    There were mixed views on whether the Commission should permit 
disclosure of reserves other than proved reserves in Commission 
filings. Commenters supporting the inclusion of disclosures about 
probable and possible reserves in Commission filings suggested that 
such disclosure would allow investors to gain a more comprehensive 
understanding of the resources held by an oil and gas company.\16\ 
Commenters opposing disclosure of probable and possible reserves 
thought that disclosure about these reserves categories would be less 
reliable than disclosure about proved reserves. Many of these 
commenters were concerned about liability issues associated with such 
disclosure and the loss of comparability of disclosure between 
companies.\17\
---------------------------------------------------------------------------

    \16\ See, for example, letters from Chesapeake, Oil Change, D. 
Olds, Ross, D. Ryder, and R. Wagner.
    \17\ See, for example, letters from Hugh Anderson (``H. 
Anderson''), Apache, API, ExxonMobil, Imperial, and Shell.
---------------------------------------------------------------------------

    Several of the comment letters addressed whether third parties 
should be required to independently evaluate the reserves reported by a 
company in its filings. There was a divergence in opinion on this 
issue. Some commenters suggested that an evaluation requirement is 
necessary to ensure the reliability of the reserves disclosure included 
in companies' filings.\18\ Other commenters, however, believed that a 
company's internal staff is often in the best position to accurately 
evaluate the reserves of the company.\19\ Some of the commenters that 
opposed a third-party evaluation requirement noted that there likely 
would be practical impediments to establishing that type of 
requirement, such as the lack of availability of qualified 
professionals to perform the evaluations and the lack of a regulatory 
or professional body to enforce universal standards that would govern 
the activities of third-party reserves evaluators or auditors.\20\
---------------------------------------------------------------------------

    \18\ See letters from Fitch Ratings (``Fitch'') and White & 
Case.
    \19\ See letters from API, Denbury, ExxonMobil, Imperial, Nexen, 
Shell, and Talisman Energy (``Talisman'').
    \20\ See, for example, letters from the AAPG, API, Devon, and R. 
Wagner.
---------------------------------------------------------------------------

    Finally, numerous commenters expressed support for the adoption of 
an alternate resource classification system that would allow for 
disclosure of a wider range of reserves and resources in Commission 
filings. Most of these commenters advocated the use of the Petroleum 
Resources Management System (PRMS) for this purpose.\21\ PRMS was 
prepared in 2007 by the oil and gas reserves committee of the Society 
of Petroleum Engineers and jointly sponsored by the World Petroleum 
Council, the American Association of Petroleum Geologists and the 
Society of Petroleum Evaluation Engineers.\22\ Other commenters 
proposed that we consider the rules adopted by regulators in Canada or 
the resource classification framework currently being created under the 
auspices of the United Nations Economic Commission for Europe and the 
United Nations Economic and Social Council in revising our rules.\23\ 
We address the public comments on specific issues in more detail in the 
relevant sections below.
---------------------------------------------------------------------------

    \21\ See comment letters from the API, Deloitte & Touche, LLP 
(``D&T''), DOE, ExxonMobil and Netherland, Sewell & Associates 
(``Netherland''). The Petroleum Resources Management System 
classification system defines a broad range of reserves categories, 
contingent resources and prospective resources. See Society of 
Petroleum Engineers, the World Petroleum Council, American 
Association of Petroleum Geologists, and the Society of Petroleum 
Evaluation Engineers, Petroleum Resources Management System, SPE/
WPC/AAPG/SPEE (2007).
    \22\ See letters from AAPG, SPE, and the Society of Petroleum 
Evaluation Engineers (``SPEE''). See also Petroleum Resources 
Management System, SPE/WPC/AAPG/SPEE (2007).
    \23\ See letters from Devon, Robinson, and White & Case. The 
Canadian system is outlined in National Instrument 51-101, 
``Standards of Disclosure for Oil and Gas Activities,'' and the 
related ``Canadian Oil and Gas Evaluation Handbook.'' See http://
www.albertasecurities.com/securitieslaw/Regulatory%20Instruments/5/
2232/AMENDED%20NI%2051-101%20_FULL%20VERSION_.pdf. The United 
Nations Economic Commission for Europe and the United Nations 
Economic and Social Council are working together to establish an 
international classification system to classify resources in both 
the oil and gas and mining industries. See United Nations Framework 
Classification System for Fossil Energy and Mineral Resources, 
United Nations Economic Council For Europe (March, 2006) available 
at http://www.unece.org/ie/se/pdfs/UNFC/UNFCemr.pdf.
---------------------------------------------------------------------------

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

A. Introduction

    The proposed revisions and additions to the definition section in 
Rule 4-10 of Regulation S-X would 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. Among other things, the proposed revisions to these 
definitions address three issues that have been of particular interest 
to companies, investors, and securities analysts:
     The exclusion of activities related to the extraction of 
bitumen and other ``non-traditional'' resources from the definition of 
oil and gas producing activities;
     The limitations regarding the types of technologies that 
an oil and gas company may rely upon to establish the levels of 
certainty required to classify reserves; and
     The limitation in the current rules that permits oil and 
gas companies to disclose only their proved reserves.

In addition, the proposed revisions would change the use of single-day 
year-end pricing to determine economic producibility of oil and gas 
reserves. The proposed revisions of, and

[[Page 39529]]

additions to, the Rule 4-10 definitions attempt to address these issues 
without sacrificing clarity and comparability, which provide protection 
and transparency to investors.
    Many commenters on the Concept Release suggested that we adopt the 
PRMS definitions and classification system to the greatest extent 
possible.\24\ They noted that PRMS is rapidly becoming the leading 
standard for international petroleum resources classifications. Others 
suggested that we adopt the definitions and classifications used in 
Canadian National Instrument 51-101 (NI 51-101), adopted in 2003, 
because they have been tested in practice as part of a regulatory 
framework and because they are broadly consistent with PRMS.\25\
---------------------------------------------------------------------------

    \24\ See letters from API, BHP, Brookwood, CFA, China National 
Offshore Oil Corporation (``CNOOC''), CIBC World Markets (``CIBC''), 
D&T, Deutsche Bank, DOE, EIA, EnCana, Energy Literacy, Eni, 
ExxonMobil, Netherland, Newfield Exoploration (``Newfield''), D. 
Olds, Petrobras, Petro-Canada, Questar Market Resources 
(``Questar''), Sasol, Shell, Leigh Ann Smothers (``L. Smothers''), 
SPE, SPEE, Talisman, Total, TRACS International (``TRACS''), Ultra 
Petroleum Corporation (``Ultra''), White & Case, and Geoff Zakaib 
(``G. Zakaib'').
    \25\ See letters from Devon, Robinson, and White & Case. NI 51-
101 constitutes the Canadian regulatory system for oil and gas 
company disclosures.
---------------------------------------------------------------------------

    We have based many of our proposed new and revised definitions 
classifications on both PRMS and NI 51-101. The language in NI 51-101 
lends itself to a regulatory framework more easily than the language in 
PRMS, which is primarily a management tool, and we have been guided by 
the language in NI 51-101 in several instances. Although the proposed 
definitions are not totally consistent with either PRMS or NI 51-101, 
they are significantly more consistent with those standards than our 
existing rules.
    One important difference between the proposed amendments and PRMS 
or NI 51-101 is that the proposed amendments would continue to require 
the use of historical prices and costs used to promote comparability. 
In contrast, NI 51-101 and PRMS afford a reserves estimator more 
flexibility in choosing among alternative pricing schedules. While this 
flexibility has its benefits, it impedes comparability of different 
companies' disclosures. Another significant difference is that the 
proposed amendments, like the current rules, would require reserves to 
be ``economically producible,'' meaning that estimated revenues must 
exceed costs, whereas other classification systems require an 
extractive project to be ``commercial,'' meaning that a company's 
investment evaluation guidelines must be met (for example, the 
extraction project rate of return must exceed some prescribed minimum). 
There are many different investment evaluation guidelines in use today. 
However, we believe that our proposed criteria would provide greater 
comparability among companies' disclosures so that investors can better 
understand the relative merits of their different investment choices.
    In addition, NI 51-101 and PRMS provide definitions of various 
categories of resources beyond reserves, such as contingent and 
prospective resources, whereas our proposed rules do not. Given that we 
are not proposing to allow disclosure of resources that do not qualify 
as reserves in Commission filings, we are not proposing definitions of 
other various classifications of resources.
    After considering the comments received on the Concept Release, we 
are proposing to revise the definition of proved reserves. Furthermore, 
as a result of those changes and also observations made by commenters, 
we are proposing to revise associated definitions and the disclosures 
made by issuers regarding the extent, characteristics, and location of 
their reserves.

B. Year-End Pricing

1. 12-Month Average Price
    Most commenters on the Concept Release recommended that we replace 
our current use of a single-day, fiscal year-end spot price to 
determine whether resources are economically producible based on 
current economic conditions with a different test.\26\ Some believed 
that reliance on a single-day spot price is subject to significant 
volatility and results in frequent adjustment of reserves.\27\ These 
commenters expressed the view that variations in single-day prices 
provide temporary alterations in reserve quantities that are not 
meaningful or may lead investors to incorrect conclusions, do not 
represent the general price trend, and do not provide a meaningful 
basis for determination of reserve or enterprise value.\28\
---------------------------------------------------------------------------

    \26\ See letters from AAPG, American Clean Skies Foundation 
(``ACSF''), H. Anderson, Apache, API, BHP, BP, Brookwood, Canadian 
Association of Petroleum Producers (``CAPP''), CFA, Chesapeake, CIBC 
CNOOC, Davis Family Energy Partners (``Davis''), Denbury, Deutsche 
Bank, Devon, EIA, EnCana, Energy Literacy, Eni, Etherington, J., 
ExxonMobil, Grant Thornton, Imperial, IPAA, Robbin Jones (``R. 
Jones''), D. Kelly, Long Consultants (``Long''), D. McBride, MIT 
Center for Energy and Environmental Policy Research (``MIT''), 
Moody's, Netherland, Newfield, Nexen, D. Olds, Oil Change, 
Petrobras, Petro-Canada, Robinson, Ross, D. Ryder, S&P, Sasol, 
Shell, Southwestern, SPE, StatoilHydro, Total, TRACS, Ultra, Walter 
van de Vijver (``W. van DeVijver''), R. Wagner, White & Case, and F. 
Ziehe.
    \27\ See letters from API, Chesapeake, CIBC, ExxonMobil, 
Imperial, R. Jones, S&P, Ultra, and R. Wagner.
    \28\ See letters from Chesapeake, Devon, and Imperial.
---------------------------------------------------------------------------

    Of those who commented on this issue, most recommended using a 12-
month average price instead of the single-day price.\29\ However, 
others recommended using one of the following alternative pricing 
options:
---------------------------------------------------------------------------

    \29\ See letters from H. Anderson, Apache, API, BHP, BP, CAPP, 
Chesapeake, CIBC, CNOOC, Devon, DOE, EnCana, Eni, ExxonMobil 
Imperial, IPAA, R. Jones, D. McBride, Moody's, Netherland, Nexen, 
Oil Change, D. Olds, Petro-Canada, D. Ryder, Shell, StatoilHydro, 
Total, TRACS, R. Wagner, and F. Ziehe.
---------------------------------------------------------------------------

     A futures price or the average futures price over a 
specified period of time; \30\
---------------------------------------------------------------------------

    \30\ See letters from Apache, CFA, Chesapeake, Davis, EIA, IPAA, 
Southwestern, StatoilHydro, and TRACS.
---------------------------------------------------------------------------

     Management's forecasted price; \31\
---------------------------------------------------------------------------

    \31\ See letters from AAPG, J. Etherington, Grant Thornton, 
Robinson, Ross, StatoilHydro, and W. van de Vijver.
---------------------------------------------------------------------------

     Average price over three months; \32\
---------------------------------------------------------------------------

    \32\ See letter from CFA.
---------------------------------------------------------------------------

     Average price over two years; \33\ or
---------------------------------------------------------------------------

    \33\ See letter from Deutsche Bank.
---------------------------------------------------------------------------

     Probabilistic future pricing with ranges and explanations 
for the pricing basis.\34\
---------------------------------------------------------------------------

    \34\ See letter from Energy Literacy.
---------------------------------------------------------------------------

    Each of the options above, involving historical price averages, 
futures prices, futures price averages, and price forecasts developed, 
or relied on, by management, has advantages and disadvantages. For 
example, historical price averages provide a high level of 
comparability among oil and gas companies and are relatively easy to 
compute because the underlying data is readily available to companies. 
However, they may not reflect the prices that a company could 
reasonably expect to receive for its production in the future.
    Prices based on oil and gas futures are forward-looking, and 
therefore may better approximate the economic value of the reserves as 
they are ultimately produced and sold. These prices, however, are not 
necessarily available for all products in all geographic areas and 
would require adjustments. To provide comparability of disclosures 
among oil and gas companies, we likely would have to specify certain 
private-sector publications for use in such pricing. Price forecasts 
developed by management of an oil and gas company would provide 
investors with better insight into the prices that management of the 
company foresees and, therefore, the prices upon which management

[[Page 39530]]

bases its investment and operating decisions, but may provide limited 
comparability between companies.
    We propose to revise the definitions in Rule 4-10 of Regulation S-X 
to change the price used in calculating reserves from a single-day 
closing price measured on the last day of the company's fiscal year to 
an average price for the 12 months prior to the end of the company's 
fiscal year.\35\ This pricing standard is consistent with the PRMS's 
default guidelines for the term ``current economic conditions.'' This 
price would be calculated as the unweighted arithmetic average of the 
closing price on the last day of each month in that 12-month period. 
Using historical pricing maximizes comparability between companies, 
which is the primary objective of the oil and gas disclosure. This 
proposal is intended to maintain reserves disclosure comparability 
while mitigating the risk that an anomalous single pricing date will 
distort the proved reserves estimates. It therefore may provide a 
better basis for economic producibility than single-day pricing.
---------------------------------------------------------------------------

    \35\ See proposed Rule 4-10(a)(24)(v).
---------------------------------------------------------------------------

    We recognize that use of historical pricing may not capture 
management's outlook on the future as well as futures prices or 
management's planning prices. As noted in detail elsewhere in this 
release,\36\ in order to allow for such disclosures, we are proposing 
to add a disclosure item that would specifically permit an oil and gas 
company, at its option, to include a sensitivity case analysis in its 
filings that would show total reserves estimates based on futures 
prices, management's planning prices, or other price schedules in 
addition to the pricing mechanism specifically required.\37\
---------------------------------------------------------------------------

    \36\ See Section III.B.3.ii of this release.
    \37\ See proposed Item 1202(c).
---------------------------------------------------------------------------

Request for Comment
     Should the economic producibility of a company's oil and 
gas reserves be based on a 12-month historical average price? Should we 
consider an historical average price over a shorter period of time, 
such as three, six, or nine months? Should we consider a longer period 
of time, such as two years? If so, why?
     Should we require a different pricing method? Should we 
require the use of futures prices instead of historical prices? Is 
there enough information on futures prices and appropriate 
differentials for all products in all geographic areas to provide 
sufficient reporting consistency and comparability?
     Should the average price be calculated based on the prices 
on the last day of each month during the 12-month period, as proposed? 
Is there another method to calculate the price that would be more 
representative of the 12-month average, such as prices on the first day 
of each month? Why would such a method be preferable?
     Should we require, rather than merely permit, disclosure 
based on several different pricing methods? If so, which different 
methods should we require?
     Should we require a different price, or supplemental 
disclosure, if circumstances indicate a consistent trend in prices, 
such as if prices at year-end are materially above or below the average 
price for that year? If so, should we specify the particular 
circumstances that would trigger such disclosure, such as a 10%, 20%, 
or 30% differential between the average price and the year-end price? 
If so, what circumstances should we specify?
2. Trailing Year-End
    Numerous commenters recommended the use of an average price over a 
period ending some time before the company's fiscal year end.\38\ They 
noted that, with accelerated filing deadlines, it becomes difficult for 
the larger companies subject to those deadlines to make the required 
calculations accurately and with the best available data.\39\ Most of 
these commenters recommended that the pricing period end three months 
prior to the end of the company's fiscal year (for example, a company 
with a December 31, 2007 fiscal year end, would use the average 
historical price for the period between October 1, 2006 and September 
30, 2007 to calculate its reserves estimates).\40\ We are not proposing 
such a lag in the time between the close of the pricing period and the 
end of the fiscal year. However, we solicit comment on this issue.
---------------------------------------------------------------------------

    \38\ See letters from AAPG, API, BP, CAPP, CIBC, Deutsche Bank, 
EnCana, Eni, ExxonMobil, Imperial, D. McBride, Moody's Netherland, 
Nexen, D. Ryder, Shell, Total, R. Wagner, and F. Ziehe.
    \39\ See letters from CAPP and Shell.
    \40\ See letters from AAPG, API, BP, CAPP, CIBC, Deutsche Bank, 
EnCana, Eni, ExxonMobil, Imperial, D. McBride, Moody's, Netherland, 
Nexen, D. Ryder, Shell, Total, R. Wagner, and F. Ziehe.
---------------------------------------------------------------------------

Request for Comment

     Should the price used to determine the economic 
producibility of oil and gas reserves be based on a time period other 
than the fiscal year, as some commenters have suggested? If so, how 
would such pricing be useful? Would the use of a pricing period other 
than the fiscal year be misleading to investors?
     Is a lag time between the close of the pricing period and 
the end of the company's fiscal year necessary? If so, should the 
pricing period close one month, two months, three months, or more 
before the end of the fiscal year? Explain why a particular lag time is 
preferable or necessary. Do accelerated filing deadlines for the 
periodic reports of larger companies justify using a pricing period 
ending before the fiscal year end?
3. Prices Used for Accounting Purposes
    Notwithstanding our proposal to change the single-day, year-end 
pricing for the estimation of reserves, we are not proposing to change 
the prices that are used for accounting purposes. Specifically, 
companies using either the successful efforts accounting method 
described in Statement of Financial Accounting Standard No. 19 (SFAS 
19) prescribed by the Financial Accounting Standards Board (FASB) or 
the full cost accounting method, set forth in Rule 4-10(c) \41\ of 
Regulation S-X, would continue to depreciate property, plant, and 
equipment related to oil and gas producing activities using a units-of-
production basis over proved developed reserves or proved reserves, as 
applicable, using single-day, year-end rates. In addition, companies 
using the full cost accounting method would continue to use the single-
day, year-end rate for purposes of determining the limitation on 
capitalized costs (i.e., the ceiling test).
---------------------------------------------------------------------------

    \41\ 17 CFR 210.4-10(c).
---------------------------------------------------------------------------

    However, to provide consistency between the reserves disclosures 
required by proposed new Subpart 1200 and SFAS 69, we believe that the 
information required by SFAS 69 should be prepared using the average 
price as described above. This would result in two different 
presentations of proved reserves using two different economic 
producibility assumptions. For purposes of Subpart 1200, a company 
would use a value for proved reserves based on average prices. 
Conversely, for purposes of applying the successful efforts method and 
the full cost accounting method, a company would use a value of proved 
reserves based on a single-day, year-end price. We intend to discuss 
such possible changes with FASB.

Request for Comment

     Should we require companies to use the same prices for 
accounting purposes as for disclosure outside of the financial 
statements?

[[Page 39531]]

     Is there a basis to continue to treat companies using the 
full cost accounting method differently from companies using the 
successful efforts accounting method? For example, should we require, 
or allow, a company using the successful efforts accounting method to 
use an average price but require companies using the full cost 
accounting method to use a single-day, year-end price?
     Should we require companies using the full cost accounting 
method to use a single-day, year-end price to calculate the limitation 
on capitalized costs under that accounting method, as proposed? If such 
a company were to use an average price and prices are higher than the 
average at year end or at the time the company issues its financial 
statements, should that company be required to record an impairment 
charge?
     Should the disclosures required by SFAS 69 be prepared 
based on different prices than the disclosures required by proposed 
Section 1200?
     If proved reserves, for purposes of disclosure outside of 
the financial statements, other than supplemental information provided 
pursuant to SFAS 69, are defined differently from reserves for purposes 
of determining depreciation, should we require disclosure of that fact, 
including quantification of the difference, if the effect on 
depreciation is material?
     What concerns would be raised by rules that require the 
use of different prices for accounting and disclosure purposes? For 
example, is it consistent to use an average price to estimate the 
amount of reserves, but then apply a single-day price to calculate the 
ceiling test under the full cost accounting method? Would companies 
have sufficient time to prepare separate reserves estimates for 
purposes of reserves disclosure on one hand, and calculation of 
depreciation on the other? Would such a requirement impose an 
unnecessary burden on companies?
     Will our proposed change to the definitions of proved 
reserves and proved developed reserves for accounting purposes have an 
impact on current depreciation amounts or net income and to what 
degree?
     If we change the definitions of proved reserves and proved 
developed reserves to use average pricing for accounting purposes, what 
would be the impact of that change on current depreciation amounts and 
on the ceiling test? Would the differences be significant?

C. Extraction of Bitumen and Other Non-Traditional Resources

    Our current definition of ``oil and gas producing activities'' 
explicitly excludes sources of oil and gas from ``non-traditional'' or 
``unconventional'' sources, that is, sources that involve extraction by 
means other than ``traditional'' oil and gas wells.\42\ These other 
sources include bitumen extracted from oil sands, as well as oil and 
gas extracted from coalbeds and shales, even though some of these 
resources are sometimes extracted through wells, as opposed to mining 
and surface processing. However, such sources are increasingly 
providing energy resources to the world due in part to advancements in 
extraction and processing technology.\43\ As noted earlier, many 
commenters supported such disclosure.\44\
---------------------------------------------------------------------------

    \42\ See 17 CFR 210.4-10(a)(1)(ii)(D).
    \43\ According to one commenter, some estimates indicate that 
such resources already provide 40% of the natural gas produced in 
the United States. See letter from Chesapeake Energy.
    \44\ See letters from AAPG, ACSF, Apache, API, Audit Quality, 
BP, Brookwood, CFA, Chesapeake, CIBC, CNOOC, Denbury, Deutsche Bank, 
Devon, DOE, EIA, EnCana, Energy Literacy, Eni, J. Etherington, 
ExxonMobil, E&Y, Grant Thornton, Imperial, IPAA, D. Kelly, D. 
McBride, Moody's, Nexen, Oil Change, D. Olds, Petrobras, Petro-
Canada, R. Pinkerton, PWC, Robinson, Ross, D. Ryder, S&P, Sasol, 
Shell, SPE, StatoilHydro, Total, A. Verma, R. Wagner, White & Case, 
and F. Ziehe.
---------------------------------------------------------------------------

    The proposed revised definition of ``oil and gas producing 
activities'' would include the extraction of the non-traditional 
resources described above.\45\ The proposal is intended to shift the 
focus of the definition of oil and gas producing activities to the 
final product of such activities, regardless of the extraction 
technology used. The proposed definition would state specifically that 
oil and gas producing activities include the extraction of marketable 
hydrocarbons, in the solid, liquid, or gaseous state, from oil sands, 
shale, coalbeds \46\ or other nonrenewable natural resources which can 
be upgraded into natural or synthetic oil or gas, and activities 
undertaken with a view to such extraction.
---------------------------------------------------------------------------

    \45\ See proposed Rule 4-10(a)(16).
    \46\ Although the proposed definition would encompass activities 
such as extracting coalbed methane from a deposit of coal, it would 
not include the extraction of the coal itself, even if the company 
intends to use that coal as feedstock into processing activities 
that result in oil and gas products, such as coal gasification. We 
recognize that as technologies progress, it may become appropriate 
to include such processes as oil and gas producing activities.
---------------------------------------------------------------------------

    However, the proposed definition would continue to exclude 
activities relating to:
     Transporting, refining, processing (other than field 
processing of gas to extract liquid hydrocarbons), or marketing oil and 
gas;
     The production of natural resources other than oil, gas, 
or natural resources from which natural or synthetic oil and gas can be 
extracted; and
     The production of geothermal steam.
    Consistent with historical treatment, we continue to believe that, 
once a resource is extracted from the ground, it should not be 
considered oil and gas reserves. Thus, the current definition of the 
term ``oil and gas producing activities'' does not, and the proposed 
definition would not, permit companies that only transport, process, 
and/or market oil or gas to disclose, as reserves, amounts of oil or 
gas received from, and extracted from the ground by, another company. 
In addition, if a company extracting the resources also builds its own 
processing plant on-site or near the extraction location (other than 
field processing of gas to extract liquid hydrocarbons), we do not 
believe it would be appropriate for that company to use the price of 
its processed product to determine the economic producibility of the 
unprocessed product. For example, if a company builds a bitumen 
processing plant to convert raw bitumen into synthetic crude oil, its 
calculation for the economic producibility of reserves from that 
location should be based on the prices for the raw bitumen, as though 
it were providing the bitumen to a third party processor. This will 
facilitate comparability among companies.
    We recognize, however, that excluding the listed activities from 
the definition of ``oil and gas producing activities'' would not permit 
a company to reflect the result of building its own processing plant on 
the price estimates and other considerations that may be used in making 
the company's business decisions. Such a processing plant can 
significantly enhance the value of the upgraded product, enabling the 
company to use lower costs (or higher prices) in its internal decision-
making. As noted elsewhere in this release, we are proposing to allow 
companies to voluntarily present an analysis of the sensitivity of 
reserves estimates based on varying prices, including the expected 
product prices used by management for its own planning purposes.\47\ 
Such supplemental disclosure would permit companies to disclose other 
pricing and cost considerations, including advantages gained by 
internal processing of raw

[[Page 39532]]

products that may add value to the final product sold by the company.
---------------------------------------------------------------------------

    \47\ See proposed Item 1202(c).
---------------------------------------------------------------------------

Request for Comment
     Should we consider the extraction of bitumen from oil 
sands, extraction of synthetic oil from oil shales, and production of 
natural gas and synthetic oil and gas from coalbeds to be considered 
oil and gas producing activities, as proposed? Are there other non-
traditional resources whose extraction should be considered oil and gas 
producing activities? If so, why?
     The extraction of coal raises issues because it is most 
often used directly as mined fuel, although hydrocarbons can be 
extracted from it. As noted above, we propose to include the extraction 
of coalbed methane as an oil and gas producing activity. However, the 
actual mining of coal has traditionally been viewed as a mining 
activity. In most cases, extracted coal is used as feedstock for energy 
production rather than refined further to extract hydrocarbons. 
However, as technologies progress, certain processes to extract 
hydrocarbons from extracted coal, such as coal gasification, may become 
more prevalent. Applying rules to coal based on the ultimate use of the 
resource could lead to different disclosure and accounting implications 
for similar coal mining companies based solely on the coal's end use. 
How should we address these concerns? Should all coal extraction be 
considered an oil and gas producing activity? Should it all be 
considered mining activity? Should the treatment be based on the end 
use of the coal? Please provide a detailed explanation for your 
comments.
     Similar issues could arise regarding oil shales, although 
to a significantly less extent, because those resources currently are 
used as direct fuel only in limited applications. How should we treat 
the extraction of oil shales?
     If adopted, how would the proposed changes affect the 
financial statements of producers of non-traditional resources and 
mining producers?

D. Reasonable Certainty and Proved Oil and Gas Reserves

    The current definition of the term ``proved reserves'' states that 
these reserves are ``the estimated quantities of crude oil, natural 
gas, and natural gas liquids which geological and engineering data 
demonstrate with reasonable certainty to be recoverable in future years 
from known reservoirs under existing economic and operating 
conditions.'' \48\ Although ``reasonable certainty'' is, and has been, 
the standard used in the definition of proved oil and gas reserves, the 
current rules do not define that term. As a result, the meaning of the 
term ``reasonable certainty'' has been the subject of significant 
disagreement within the industry relating to the level of probability 
necessary to meet this standard. Although some believe that this 
standard is clear and has established a consistent guideline for 
establishing proved reserves,\49\ others do not believe that this has 
been the case.\50\ To avoid ambiguity, we propose to add a definition 
of the term ``reasonable certainty'' to Rule 4-10 of Regulation S-
X.\51\
---------------------------------------------------------------------------

    \48\ See Rule 4-10(a)(2) of Regulation S-X [17 CFR 210.4-
10(a)(2)].
    \49\ See letters from R. Jones and Moody's.
    \50\ See letters from D. Olds, Raymond Schutte (``R. Schutte''), 
L. Smothers, R. Wagner, and Sir Philip Watts (``P. Watts'').
    \51\ See proposed Rule 4-10(a)(26).
---------------------------------------------------------------------------

    We propose to define the term ``reasonable certainty'' as ``much 
more likely to be achieved than not.'' In addition, we would clarify 
that, when deterministic methods \52\ are used to estimate oil and gas 
reserves, as changes due to increased availability of geoscience 
(geological, geophysical, and geochemical), engineering, and economic 
data are made to estimated ultimate recovery (EUR) \53\ with time, 
reasonably certain EUR is much more likely to increase than to either 
decrease or remain constant. The proposed definition also would explain 
that, when probabilistic methods are used to estimate reserves, 
reasonable certainty means that there is at least a 90% probability 
that the quantities actually recovered will equal or exceed the stated 
volume.\54\
---------------------------------------------------------------------------

    \52\ See Section II.D.2 of this release for a discussion 
regarding deterministic methods and probabilistic methods.
    \53\ We propose to define the term ``estimated ultimate 
recovery'' as the sum of reserves remaining as of a given date plus 
the cumulative production as of that date. See proposed Rule 4-
10(a)(11).
    \54\ This is consistent with the PRMS definition of ``proved 
reserves.''
---------------------------------------------------------------------------

Request for Comment
     Is the proposed definition of ``reasonable certainty'' as 
``much more likely to be achieved than not'' a clear standard? Is the 
standard in the proposed definition appropriate? Would a different 
standard be more appropriate?
     Is the proposed 90% threshold appropriate for defining 
reasonable certainty when probabilistic methods are used? Should we use 
another percentage value? If so, what value?
1. New Technology
    The current rules limit the use of alternative technologies as the 
basis for determining a company's reserves disclosures. For example, 
under the current rules, a company generally must use actual production 
or flow tests to meet the ``reasonable certainty'' standard necessary 
to establish the proved status of its reserves. However, in the past, 
the Commission's staff has recognized that flow tests can be 
impractical in certain areas, such as the Gulf of Mexico, where 
environmental restrictions effectively prohibit these types of tests. 
The staff has not objected to disclosure of reserves estimates for 
these restricted areas using alternative technologies. Some commenters 
noted that a case-by-case exemption from the flow test requirement 
imposes unequal standards for establishing reasonable certainty based 
on geographic location.\55\
---------------------------------------------------------------------------

    \55\ See letters from Petrobras, D. Ryder, and White & Case.
---------------------------------------------------------------------------

    In addition, we recognize that technology will continue to develop, 
improving the quality of information that can be obtained from existing 
tests and creating entirely new tests that we cannot yet envision. We 
propose to add a definition of the term ``reliable technology'' to Rule 
4-10 of Regulation S-X to clarify the types of technology that can be 
used to establish reasonable certainty. We propose to define ``reliable 
technology'' as ``technology (including computational methods) that, 
when applied using high quality geoscience and engineering data, is 
widely accepted within the oil and gas industry, has been field tested 
and has demonstrated consistency and repeatability in the formation 
being evaluated or in an analogous formation. Consistent with current 
industry practice, expressed in probabilistic terms, reliable 
technology has been proved empirically to lead to correct conclusions 
in 90% or more of its applications.'' \56\
---------------------------------------------------------------------------

    \56\ See proposed Rule 4-10(a)(27).
---------------------------------------------------------------------------

    The proposed definition is intended to permit broader use of new 
technologies to establish the proper classification for reserves and to 
lessen the need for frequent updates to our reserves definitions as 
technology continues to evolve. Because companies would now be able to 
select the technology that it uses, we are proposing to require a 
company to disclose the technology used to establish the appropriate 
level of certainty for material properties in a company's first filing 
with the Commission and for material additions

[[Page 39533]]

to reserves estimates in subsequent filings.\57\ Such disclosure should 
identify the particular portion of the reserves estimates for which a 
particular technology was used, including identification of the 
geographic area, country, field or basin to the extent necessary for 
investors to determine whether use of that technology was appropriate 
under the circumstances.
---------------------------------------------------------------------------

    \57\ See proposed Item 1202(a)(4) and proposed Item 1209(a)(2).
---------------------------------------------------------------------------

Request for Comment
     Is our proposed definition of ``reliable technology'' 
appropriate? Should we change any of its proposed criteria, such as 
widespread acceptance, consistency, or 90% reliability?
     Is the open-ended type of definition of ``reliable 
technology'' that we propose appropriate? Would permitting the company 
to determine which technologies to use to determine their reserves 
estimates be subject to abuse? Do investors have the capacity to 
distinguish whether a particular technology is reasonable for use in a 
particular situation? What are the risks associated with adoption of 
such a definition?
     Is the proposed disclosure of the technology used to 
establish the appropriate level of certainty for material properties in 
a company's first filing with the Commission and for material additions 
to reserves estimates in subsequent filings appropriate? Should we 
require disclosure of the technology used for all properties? Should we 
require companies currently filing reports with the Commission to 
disclose the technology used to establish appropriate levels of 
certainty regarding their currently disclosed reserves estimates?
2. Probabilistic Methods
    We propose to add definitions of the terms ``deterministic 
estimate'' and ``probabilistic estimate.'' \58\ These two terms relate 
to the two alternative methods by which a company may estimate its 
reserves amounts. We understand that both methods are, to varying 
degrees, currently used by the industry. Our proposed definitions are 
consistent with industry practice. We propose to define the term 
``deterministic estimate'' to mean an estimate that is based on using a 
single ``most appropriate'' value for each variable in the estimation 
of reserves, such as the company's determination of the oil or gas in 
place in a reservoir, multiplied by the fraction of that oil or gas 
that can be recovered. In addition, we propose to define the term 
``probabilistic estimate'' as an estimate that is obtained when the 
full range of values that could reasonably occur from each unknown 
parameter (from the geoscience, engineering, and economic data) is used 
to generate a full range of possible outcomes and their associated 
probabilities of occurrence. Although companies currently can use 
either method to produce reserves estimates, we believe that these 
proposed definitions will promote consistent usage of the terms 
``probabilistic estimate'' and ``deterministic estimate.''
---------------------------------------------------------------------------

    \58\ See proposed Rules 4-10(a)(6) and (a)(19). These 
definitions are based on the Canadian Oil and Gas Evaluation 
Handbook (COGEH). This handbook was developed by the Calgary Chapter 
of the Society of Petroleum Evaluation Engineers and the Petroleum 
Society of CIM to establish standards to be used within the Canadian 
oil and gas industry in evaluating oil and gas reserves and 
resources.
---------------------------------------------------------------------------

    Some of the commenters suggested that we require the use of 
probabilistic estimates to establish proved reserves because these 
methods are derived through extensive statistical computer calculations 
using a wide range of potential values for parameters that affect the 
reserves estimate, such as possible recovery factors for a particular 
field or type of field, and so would be more rigorous than 
deterministic methods.\59\ Conversely, the quality of an estimate 
derived through deterministic methods depends more heavily on the 
experience and judgment of the reserves estimator to select the most 
appropriate value for those parameters. Although we recognize that 
probabilistic methods can be useful in certain circumstances, requiring 
the use of probabilistic estimates could significantly increase the 
costs of reserves estimate preparation, without significant increases 
in reliability of the results in many cases. One commenter was 
concerned that companies may not have sufficient staff to calculate all 
reserves estimates through probabilistic methods.\60\ Thus, the 
proposed definition of ``reasonable certainty'' would continue to allow 
companies to estimate reserves amounts using either deterministic or 
probabilistic methods, leaving companies to determine which method is 
more appropriate for their particular situations.\61\
---------------------------------------------------------------------------

    \59\ See letters from AAPG, EIA, Long, D. Olds, Rose, and SPE.
    \60\ See letter from D. Olds.
    \61\ See proposed Rule 4-10(a)(26).
---------------------------------------------------------------------------

Request for Comment
     Are the proposed definitions of ``deterministic estimate'' 
and ``probabilistic estimate'' appropriate? Should we revise either of 
these definitions in any way? If so, how?
     Are the statements regarding the use of deterministic and 
probabilistic estimates in the proposed definition of ``reasonable 
certainty'' appropriate? Should we change them in any way? If so, how?
     Should an oil and gas company have the choice of using 
deterministic or probabilistic methods for reserves estimation, or 
should we require one method? If we were to require a single method, 
which one should it be? Why? Would there be greater comparability 
between companies if only one method was used?
     Should we require companies to disclose whether they use 
deterministic or probabilistic methods for their reserves estimates?
3. Other Revisions Related to Proved Oil and Gas Reserves
    The current definition of the term ``proved oil and gas reserves'' 
also incorporates certain specific concepts such as ``lowest known 
hydrocarbons'' which limit a company's ability to claim proved reserves 
in the absence of information on fluid contacts in a well 
penetration,\62\ notwithstanding the existence of other engineering and 
geoscientific evidence.\63\ Consistent with our proposal to permit the 
use of new technologies to establish the reasonable certainty of proved 
reserves, the proposed revisions to the definition of ``proved oil and 
gas reserves'' also include provisions for establishing levels of 
lowest known hydrocarbons and highest known oil through reliable 
technology other than well penetrations.
---------------------------------------------------------------------------

    \62\ In certain circumstances, a well may not penetrate the area 
at which the oil makes contact with water. In these cases, the 
company would not have information on the fluid contact and must use 
other means to estimate the lower boundary depths for the reservoir 
in which oil is located.
    \63\ See Rule 4-10(a)(2)(i) [17 CFR 210.4-10(a)(2)(i)].
---------------------------------------------------------------------------

    Similarly, the proposed definition would permit a company to claim 
proved reserves beyond drilling units that immediately offset developed 
drilling locations if the company can establish with reasonable 
certainty that these reserves are economically producible.\64\ These 
revisions are designed to permit the use of alternative technologies to 
establish proved reserves in lieu of requiring companies to use 
specific tests. In addition, they would establish a uniform standard of 
reasonable certainty that could be applied to all proved reserves, 
regardless of location or distance from producing wells.
---------------------------------------------------------------------------

    \64\ See proposed Rule 4-10(a)(24)(ii). See Section II.G for a 
more detailed discussion regarding this proposed revision.

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

[[Page 39534]]

    Finally, we propose adding a sentence to the definition that would 
state that, in order for reserves to be proved, the project to extract 
the hydrocarbons must have commenced or it must be reasonably certain 
that the operator will commence the project within a reasonable time. 
This revision is designed to prevent a company from including, in 
proved reserves, projects in undeveloped areas for which it does not 
have the intent to develop.
Request for Comment
     Should we permit the use of technologies that do not 
provide direct information on fluid contacts to establish reservoir 
fluid contacts, provided that they meet the definition of ``reliable 
technology,'' as proposed?
     Should there be other requirements to establish that 
reserves are proved? For example, for a project to be reasonably 
certain of implementation, is it necessary for the issuer to 
demonstrate either that it will be able to finance the project from 
internal cash flow or that it has secured external financing?

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

    We propose to define the terms ``probable reserves'' and ``possible 
reserves'' because we are proposing to permit companies to disclose 
these categories of reserves estimates.\65\ When producing an estimate 
of the amount of oil and gas that is recoverable from a particular 
reservoir, a company can make three types of estimates:
---------------------------------------------------------------------------

    \65\ See proposed Rule 4-10(a)(18) and (17), respectively.
---------------------------------------------------------------------------

     An estimate that is reasonably certain;
     An estimate that is as likely as not to be achieved; and
     An estimate that might be achieved, but only under more 
favorable circumstances than are likely.

These three types of estimates are known in the industry as proved, 
probable, and possible reserves estimates. By proposing to permit 
disclosure of all three of these classifications of reserves, our 
objective is to enable companies to provide investors with more insight 
into the potential reserves base that managements of companies may use 
as their basis for decisions to invest in resource development.
    Some commenters on the Concept Release were concerned that 
disclosing reserves categories that are less certain than proved 
reserves could increase the risk of confusion and litigation.\66\ 
Therefore, we are proposing to make these disclosures voluntary.\67\ 
Numerous oil and gas companies currently disclose unproved reserves on 
their Web sites and in press releases. This practice does not appear to 
have created confusion in the market. However, we understand 
commenters' concerns that probable and possible reserves estimates are 
less certain than proved reserves estimates and so may create increased 
litigation risk. By making these disclosures voluntary, a company could 
decide on its own whether to provide the market with this disclosure, 
despite possible increased litigation risk. In addition, to address the 
concerns regarding the uncertainty of estimates of unproved reserves, 
we also are proposing to require disclosure about the person primarily 
responsible for preparing the company's reserves estimates and, if 
applicable, about the person primarily responsible for conducting a 
reserves audit.\68\ The proposal would clarify that a ``person'' may be 
a business entity or an individual. We address this proposed disclosure 
in more detail in Section III.B.3.v of this release.
---------------------------------------------------------------------------

    \66\ See letters from Devon and Imperial.
    \67\ See proposed Item 1202.
    \68\ See proposed Item 1202(a)(6).
---------------------------------------------------------------------------

    We propose to define the term ``probable reserves'' as those 
additional reserves that are less certain to be recovered than proved 
reserves but which, in sum with proved reserves, are as likely as not 
to be recovered.\69\ The proposed definition would provide guidance for 
the use of both deterministic and probabilistic methods. The proposed 
definition would clarify that, when deterministic methods are used, it 
is as likely as not that actual remaining quantities recovered will 
equal or exceed the sum of estimated proved plus probable reserves. 
Similarly, when probabilistic methods are used, there should be at 
least a 50% probability that the actual quantities recovered will equal 
or exceed the proved plus probable reserves estimates. This proposed 
definition was derived from the PRMS definition of the term ``probable 
reserves.''
---------------------------------------------------------------------------

    \69\ See proposed Rule 4-10(a)(18).
---------------------------------------------------------------------------

    Our proposed definition of ``possible reserves'' would include 
those additional reserves that are less certain to be recovered than 
probable reserves.\70\ It would clarify that, when deterministic 
methods are used, the total quantities ultimately recovered from a 
project have a low probability to exceed the sum of proved, probable, 
and possible reserves. When probabilistic methods are used, there 
should be at least a 10% probability that the actual quantities 
recovered will equal or exceed the sum of proved, probable, and 
possible estimates. As with the proposed definition of probable 
reserves, the proposed definition of possible reserves is based on the 
PRMS definition of the term ``possible reserves.''
---------------------------------------------------------------------------

    \70\ See proposed Rule 4-10(a)(17).
---------------------------------------------------------------------------

Request for Comment
     Should we permit a company to disclose its probable or 
possible reserves, as proposed? If so, why?
     Should we require, rather than permit, disclosure of 
probable or possible reserves? If so why?
     Should we adopt the proposed definitions of probable 
reserves and possible reserves? Should we make any revisions to those 
proposed definitions? If so, how should we revise them?
     Are the proposed 50% and 10% probability thresholds 
appropriate for estimating probable and possible reserves quantities 
when a company uses probabilistic methods? Should probable reserves 
have a 60% or 70% probability threshold? Should possible reserves have 
a 15% or 20% probability threshold? If not, how should we modify them?

F. Definition of ``Proved Developed Oil and Gas Reserves''

    As noted above, we are proposing to expand the scope of oil and gas 
producing activities to include resources extracted by technologies 
other than traditional oil and gas wells, such as mining processes. 
Similarly, we propose to expand the definition of the term ``proved 
developed oil and gas reserves'' to include extraction of resources 
using technologies other than production through wells.\71\ The 
proposed new definition would state that ``proved developed oil and gas 
reserves'' are proved reserves that:
---------------------------------------------------------------------------

    \71\ See proposed Rule 4-10(a)(22).
---------------------------------------------------------------------------

     In projects that extract oil and gas through wells, can be 
expected to be recovered through existing wells with existing equipment 
and operating methods; and
     In projects that extract oil and gas in other ways, can be 
expected to be recovered through extraction technology installed and 
operational at the time of the reserves estimate.
Request for Comment
     Should we revise the definition of proved developed oil 
and gas reserves, as proposed? Should we make any other revisions to 
that definition? If so, how should we revise it?

[[Page 39535]]

G. Definition of ``Proved Undeveloped Reserves''

1. Proposed Replacement of Certainty Threshold
    We propose to amend the definition of the term ``proved undeveloped 
reserves'' (PUDs) by replacing the requirement that productivity be 
``certain'' for areas beyond the immediate area of known proved 
reserves with a ``reasonably certain'' requirement.\72\ Currently, the 
definition of the term ``proved undeveloped reserves'' imposes a 
``reasonable certainty'' standard for reserves in drilling units 
immediately adjacent to the drilling unit containing a producing well 
and a ``certainty'' standard for reserves in drilling units beyond the 
immediately adjacent drilling units.\73\
---------------------------------------------------------------------------

    \72\ See proposed Rule 4-10(a)(25).
    \73\ See 17 CFR 210.4-10(a)(4). A drilling unit refers to the 
spacing required between wells to prevent wasting resources and 
optimize recovery. These units are typically determined by the local 
jurisdiction.
---------------------------------------------------------------------------

    Some commenters believed that requiring ``certainty'' beyond 
offsetting, or adjacent, units is not appropriate.\74\ They believed 
that there should be a single criterion--reasonable certainty--to 
characterize all proved reserves, including proved undeveloped 
reserves. Two commenters noted that the offsetting unit requirement is 
a purely mathematical and arbitrary standard for ease of calculation 
and does not reflect the actual geological characteristics of the 
reservoir.\75\ Other commenters argued that PUDs should be determined 
by the totality of the engineering and geoscience data available, 
including seismic data, appropriate analogs, and assessment of 
reservoir characteristics.\76\ One commenter believed that the ``one 
offsetting unit'' rule is outdated and does not acknowledge new 
technology.\77\
---------------------------------------------------------------------------

    \74\ See letters from AAPG, API, Denbury, Devon, and DOE.
    \75\ See letters from CNOOC and Ultra.
    \76\ See letters from API, Devon, DOE, and ExxonMobil.
    \77\ See letter from Ultra.
---------------------------------------------------------------------------

    The proposed definition would permit the use of evidence gathered 
from reliable technology that establishes reasonable certainty of 
economic producibility at any distance from productive units (that is, 
in units adjacent to the productive units as well as units beyond those 
adjacent units).\78\ It would further clarify that proved reserves can 
be claimed in a conventional accumulation \79\ or a continuous 
accumulation in a given area beyond immediately offset drilling units 
where economic producibility is reasonably certain, based on 
engineering, geoscience, and economic data and reliable technology, 
including actual drilling statistics in the area.\80\ However, the 
proposed definition would prohibit a company from assigning proved 
status to undrilled locations if a development plan has not been 
adopted indicating that the locations are scheduled to be drilled 
within five years, unless it discloses unusual circumstances that 
justify a longer time, such as particularly complex projects in remote 
areas that require more time to develop.\81\
---------------------------------------------------------------------------

    \78\ See proposed Rule 4-10(a)(25)(i).
    \79\ See Section II.G.2 for a discussion of continuous 
accumulations and conventional accumulations.
    \80\ See proposed Rule 4-10(a)(25)(i)(B).
    \81\ See proposed Rule 4-10(a)(25)(ii).
---------------------------------------------------------------------------

Request for Comment
     Are the proposed revisions appropriate? Would the proposed 
expansion of the PUDs definition create potential for abuses?
     Should we replace the current ``certainty'' threshold for 
reserves in drilling units beyond immediately adjacent drilling units 
with a ``reasonable certainty'' threshold as proposed?
     Is it appropriate to prohibit a company from assigning 
proved status to undrilled locations if the locations are not scheduled 
to be drilled more than five years, absent unusual circumstances, as 
proposed? Should the proposed time period be shorter or longer than 
five years? Should it be three years? Should it be longer, such as 
seven or ten years?
     Should the proposed definition specify the types of 
unusual circumstances that would justify a development schedule longer 
than five years for reserves that are classified as proved undeveloped 
reserves?
2. Proposed Definitions for Continuous and Conventional Accumulations
    We propose to adopt definitions for the terms ``continuous 
accumulations'' and ``conventional accumulations'' to assist companies 
in determining the extent of PUDs associated with these two types of 
accumulations.\82\ PUDs have caused estimation difficulties in the 
past. The fundamental difficulty in making these estimates is 
calculating the volume of a resource beyond the immediate area in which 
wells have been drilled (or beyond the immediate area in which other 
extraction technology has been installed and is operational) that 
should be included in the proved category. The answer can be vastly 
different for continuous accumulations, as opposed to conventional 
accumulations. Because of this potential difference, we believe that it 
is important to define these two distinct categories of accumulations 
in the proposed rules.
---------------------------------------------------------------------------

    \82\ See proposed Rule 4-10(a)(4) and (a)(5).
---------------------------------------------------------------------------

    The proposed definition of ``continuous accumulations'' would 
encompass resources that are pervasive throughout large areas, have 
ill-defined boundaries, and typically lack or are unaffected by 
hydrocarbon-water contacts near the base of the accumulation.\83\ 
Examples include, but are not limited to, accumulations of natural 
bitumen (oil sands), gas hydrates, and self-sourced accumulations such 
as coalbed methane, shale gas, and oil shale deposits. Typically, such 
accumulations require specialized extraction technology (e.g., removal 
of water from coalbed methane accumulations, large fracturing programs 
for shale gas, steam, or solvents to mobilize bitumen for in-situ 
recovery, and, in some cases, mining activities). Moreover, the 
extracted petroleum may require significant processing prior to sale 
(e.g., bitumen upgraders). This proposed definition is based on the 
PRMS definition of the term ``unconventional resources.''
---------------------------------------------------------------------------

    \83\ See proposed Rule 4-10(a)(4).
---------------------------------------------------------------------------

    Conversely, we propose to define ``conventional accumulations'' as 
discrete oil and gas resources related to localized geological 
structural features or stratigraphic conditions, with the accumulation 
typically bounded by a hydrocarbon-water contact near its base, and 
which are significantly affected by the tendency of lighter 
hydrocarbons to ``float'' or accumulate above the heavier water.\84\ 
This proposed definition is based on the PRMS definition of the term 
``conventional resources.''
---------------------------------------------------------------------------

    \84\ See proposed Rule 4-10(a)(5).
---------------------------------------------------------------------------

Request for Comment
     Should we provide separate definitions of conventional and 
continuous accumulations, as proposed? Would separate disclosure of 
these accumulations be helpful to investors?
     Should we revise our proposed definition of ``continuous 
accumulations'' in any way? For example, should the proposed definition 
provide examples of such accumulations? If so, how should we revise it?
     Should we revise our proposed definition of ``conventional 
accumulations'' in any way? If so, how should we revise it?

[[Page 39536]]

3. Proposed Treatment of Improved Recovery Projects
    The proposed definition of proved undeveloped reserves also would 
be broadened to permit a company to include quantities of oil that can 
be recovered through improved recovery projects in its proved 
undeveloped reserves estimates. Currently, a company can include such 
quantities only where techniques have been proved effective by actual 
production from projects in the area and in the same reservoir. The 
proposed amendments would expand this definition to permit the use of 
techniques that have been proved effective by actual production from 
projects in an analogous reservoir in the same geologic formation in 
the immediate area or by other evidence using reliable technology that 
establishes reasonable certainty.\85\
---------------------------------------------------------------------------

    \85\ See proposed Rule 4-10(a)(25)(iii).
---------------------------------------------------------------------------

Request for Comment
     Should we expand the definition of proved undeveloped 
reserves to permit the use of techniques that have been proven 
effective by actual production from projects in an analogous reservoir 
in the same geologic formation in the immediate area or by other 
evidence using reliable technology that establishes reasonable 
certainty?

H. Proposed Definition of Reserves

    To add clarity to the definition of the term ``proved reserves,'' 
we also propose to add a definition of the term ``reserves.'' \86\ We 
propose to describe more completely the criteria that an accumulation 
of oil, gas, or related substances must satisfy to be considered 
reserves (of any classification), including non-technical criteria such 
as legal rights. We propose to define reserves as the estimated 
remaining quantities of oil and gas and related substances anticipated 
to be recoverable, as of a given date, by application of development 
projects to known accumulations based on:
---------------------------------------------------------------------------

    \86\ See proposed Rule 4-10(a)(28).
---------------------------------------------------------------------------

     Analysis of geoscience and engineering data;
     The use of reliable technology;
     The legal right to produce;
     Installed means of delivering the oil, gas, or related 
substances to markets, or the permits, financing, and the appropriate 
level of certainty (reasonable certainty, as likely as not, or possible 
but unlikely) to do so; and
     Economic producibility at current prices and costs.
    The definition would clarify that reserves are classified as 
proved, probable, and possible according to the degree of uncertainty 
associated with the estimates. This proposed definition is based on the 
PRMS definition of the term ``reserves.''
Request for Comment
     Is the proposed definition of ``reserves'' appropriate? 
Should we change it in any way? If so, how?

I. Other Proposed Definitions and Reorganization of Definitions

    We are proposing additional definitions primarily to support and 
clarify the proposed definitions of the key terms discussed above. 
These supplementary definitions include:
     ``Analogous formation in the immediate area,'' which 
appears in the definition of proved reserves; \87\
---------------------------------------------------------------------------

    \87\ See proposed Rule 4-10(a)(2).
---------------------------------------------------------------------------

     ``Condensate'' \88\
---------------------------------------------------------------------------

    \88\ See proposed Rule 4-10(a)(3).
---------------------------------------------------------------------------

     ``Development project'' \89\
---------------------------------------------------------------------------

    \89\ See proposed Rule 4-10(a)(8).
---------------------------------------------------------------------------

     ``Estimated ultimate recovery,'' which appears in the 
definition of proved reserves; \90\ and
---------------------------------------------------------------------------

    \90\ See proposed Rule 4-10(a)(11).
---------------------------------------------------------------------------

     ``Resources,'' which are often confused with reserves.\91\
---------------------------------------------------------------------------

    \91\ See proposed Rule 4-10(a)(30).
---------------------------------------------------------------------------

    Most of these supporting terms and their proposed definitions are 
based on similar terms in the PRMS. The proposed definition of 
``resources'' is based on the Canadian Oil and Gas Evaluation Handbook 
(COGEH).
    We also are proposing to alphabetize the definitional terms in Rule 
4-10(a), including existing and proposed definitions. Currently, the 
terms defined in Rule 4-10(a) are organized by placing the key terms 
ahead of supporting terms. The proposals would significantly increase 
the number of terms defined in this section. With the proposed addition 
of numerous new definitions, we believe that alphabetizing these 
definitions would make specific definitions easier to find.
Request for Comment
     Are these additional proposed definitions appropriate? 
Should we revise them in any way?
     Are there other terms that we have used in the proposal 
that need to be defined? If so, which terms and how should we define 
them?
     Should we alphabetize the definitions, as proposed? Would 
any undue confusion result from the re-ordering of existing 
definitions?

III. Proposed Amendments To Codify the Oil and Gas Disclosure 
Requirements in Regulation S-K

    The Concept Release primarily solicited comment on certain key 
definitions in the oil and gas disclosure regime, and whether oil and 
gas companies should be permitted to disclose probable and possible 
reserves. In this release, we are proposing, and soliciting comment on, 
a broader scope of amendments. In particular, we are proposing to 
update and codify Securities Act and Exchange Act Industry Guide 2: 
Disclosure of Oil and Gas Operations (Industry Guide 2).\92\ Industry 
Guide 2 sets forth most of the disclosures that an oil and gas company 
provides regarding its reserves, production, property, and operations. 
Regulation S-K references Industry Guide 2 in Instruction 8 to Item 102 
(Description of Property), Item 801 (Securities Act Industry Guides), 
and Item 802 (Exchange Act Industry Guides). However, Industry Guide 2 
itself does not appear in Regulation S-K or in the Code of Federal 
Regulations. We propose to codify the contents of Industry Guide 2 in 
Regulation S-K.
---------------------------------------------------------------------------

    \92\ Exchange Act Industry Guide 2 merely references, and 
therefore is identifical to, Securities Act Industry Guide 2.
---------------------------------------------------------------------------

    Included in the proposals are several new disclosure items that we 
believe are necessary in light of the proposed amendments to the 
definitions in Rule 4-10, such as disclosure of technology used to 
determine levels of certainty because we propose to permit companies to 
choose the appropriate technology for that purpose. We also are 
proposing to eliminate several disclosures in Industry Guide 2 because 
we believe that they are no longer necessary, such as reporting of 
production through processing plant ownership. We address these 
proposals in detail below.

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

    The instructions to Item 102 of Regulation S-K, in conjunction with 
Items 801 and 802 of Regulation S-K, currently reference the industry 
guides. Because we are proposing to move the disclosures from Industry 
Guide 2 into a new Subpart 1200 of Regulation S-K, we propose to revise 
the instructions to Item 102 to reflect this change.\93\ We also 
propose eliminating the references in Items 801 and 802 to Industry 
Guide 2 because that industry guide will cease to exist if the 
proposals described in this release are adopted.\94\
---------------------------------------------------------------------------

    \93\ See proposed Instructions 4 and 8 to Item 102.
    \94\ See proposed Item 801 and 802.

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

[[Page 39537]]

    In addition, Instruction 5 to Item 102 of Regulation S-K currently 
prohibits the disclosure of reserves other than proved oil and gas 
reserves. Because we are proposing to permit disclosure of probable and 
possible oil and gas reserves, we would revise Instruction 5 to limit 
its applicability to extractive enterprises other than oil and gas 
producing activities, such as mining activities.\95\ Similarly, 
Instruction 3 of Item 102, regarding production, reserves, locations, 
development and the nature of the company's interests, would no longer 
need to apply to oil and gas producing activities if the proposals are 
adopted, so we also propose to limit that instruction to mining 
activities.\96\
---------------------------------------------------------------------------

    \95\ See proposed Instruction 5 to Item 102. Extractive 
enterprises include enterprises such as mining companies that 
extract resources from the ground.
    \96\ See proposed Instruction 3 to Item 102.
---------------------------------------------------------------------------

    Finally, we propose to eliminate Instruction 4 to Item 102 
regarding the ability of the Commission's staff to request supplemental 
information, including reserves reports. This instruction is 
duplicative of Securities Act Rule 418 \97\ and Exchange Act 12b-4,\98\ 
regarding the staff's general ability to request supplemental 
information.
---------------------------------------------------------------------------

    \97\17 CFR 230.418.
    \98\17 CFR 240.12b-4.
---------------------------------------------------------------------------

Request for Comment
     Is the proposed amendment to Instruction 3, limiting it to 
extractive activities other than oil and gas activities, appropriate? 
Should we simply call them mining activities?
     Are there any other aspects of Item 102 that we should 
revise? If so, what are they and how should they be revised?

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

1. Overview
    We are proposing to add a new Subpart 1200 to Regulation S-K that 
would codify the disclosure requirements related to companies engaged 
in oil and gas producing activities. This proposed subpart would 
largely include the existing requirements of Industry Guide 2. However, 
we have revised these requirements to update them, provide better 
clarity with respect to the level of detail required in oil and gas 
disclosures, including the geographic areas by which disclosures need 
to be made, and provide formats for tabular presentation of these 
disclosures. In addition, the proposed Subpart 1200 would contain the 
following new disclosure requirements, many of which have been 
requested by industry participants:
     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;
     Disclosure of the objectivity and qualifications of the 
business entity or individual preparing or auditing the reserves 
estimates;
     Filing a report prepared by the third party if a company 
represents that it is relying on a third party to prepare the reserves 
estimates or conduct a reserves audit; and
     Disclosure based on a new definition for the term ``by 
geographic area.''
    We discuss each of these proposed new Items below.
2. Proposed Item 1201 (General Instructions to Oil and Gas Industry-
Specific Disclosures)
    We propose to add new Item 1201 to Regulation S-K. This item would 
set forth the general instructions to Subpart 1200. The proposed item 
would contain three paragraphs that would:
     Instruct companies for which oil and gas producing 
activities are material to provide the disclosures specified in Subpart 
1200;\99\
---------------------------------------------------------------------------

    \99\ This paragraph would maintain the existing exclusion in 
Industry Guide 2 for limited partnerships and joint ventures that 
conduct, operate, manage, or report upon oil and gas drilling or 
income programs, that acquire properties either for drilling and 
production, or for production of oil, gas, or geothermal steam or 
water.
---------------------------------------------------------------------------

     Clarify that, although a company must present specified 
Subpart 1200 information in tabular form, the company may modify the 
format of the table for ease of presentation, to add additional 
information or to combine two or more required tables; and
     State that the definitions in Rule 4-10(a) of Regulation 
S-X apply to Subpart 1200.
Request for Comment
     Are the proposed general instructions to Subpart 1200 
clear and appropriate? Are there any other general instructions that we 
should include in this proposed Item?
     For disclosure items requiring tabulated information, 
should we require companies to adhere to a specified tabular format, 
instead of permitting companies to reorganize, supplement, or combine 
the tables?
     In particular, should we permit a company to disclose 
reserves estimates from conventional accumulations in the same table as 
it discloses its reserves estimates from continuous accumulations?
3. Proposed Item 1202 (Disclosure of Reserves)
    Existing Instruction 3 to Item 102 of Regulation S-K requires 
disclosure of an extractive enterprise's proved reserves. With respect 
to oil and gas producing companies, we are proposing to replace this 
Instruction by adding a new Item 1202 to Regulation S-K that would 
contain a similar disclosure requirement regarding a company's proved 
reserves.\100\ However, the proposed new Item would expand on the 
requirements of Item 102 by specifically permitting the disclosure of 
probable and possible reserves and permitting the disclosure of 
reserves from continuous accumulations. Proposed Item 1202 would 
organize reserves disclosure into the following three tables:
---------------------------------------------------------------------------

    \100\ See proposed Item 1202.
---------------------------------------------------------------------------

     An oil and gas reserves from conventional accumulations 
table;
     An oil and gas reserves from continuous accumulations 
table; and
     An optional sensitivity analysis table.
i. Oil and Gas Reserves Tables
    Proposed Item 1202 would require disclosure, in the aggregate and 
by geographic area,\101\ of reserves estimated using prices and costs 
under existing economic conditions, for each product type, in the 
following categories:
---------------------------------------------------------------------------

    \101\ See Section II.B.3.iv for a discussion about geographic 
area specificity.
---------------------------------------------------------------------------

     Proved developed reserves;
     Proved undeveloped reserves;
     Total proved reserves;
     Probable reserves (optional); and
     Possible reserves (optional).
    The proposed Item would provide for separate tables for reserves in 
conventional accumulations \102\ and continuous accumulations.\103\ 
However,

[[Page 39538]]

a company may combine these two tables.\104\ If a company does so, it 
must present different products in different columns. For example, 
because refining and processing, other than field processing of gas to 
extract liquid hydrocarbons, are not oil and gas producing activities, 
we believe that a company that extracts and processes oil sands into 
synthetic crude oil should report the first salable product, bitumen, 
as its reserves. The activity of processing bitumen into synthetic 
crude oil at a plant, even if on or near the extraction location, is a 
refining process. Forms of these two proposed tables are set forth 
below:
---------------------------------------------------------------------------

    \102\ See proposed Item 1202(a).
    \103\ See proposed Item 1202(b).
    \104\ See proposed Item 1201(b).

   Summary of Oil and Gas Reserves in Conventional Accumulations as of
           Fiscal-Year End Based on Average Fiscal-Year Prices
------------------------------------------------------------------------
                                                  Reserves
                                  --------------------------------------
        Reserves category                                 Natural gas
                                      Oil  (mbbls)           (mmcf)
------------------------------------------------------------------------
PROVED...........................  ..................  .................
    Developed:
        Continent A..............  ..................  .................
        Continent B..............  ..................  .................
            15% Country A........  ..................  .................
            15% Country B........  ..................  .................
                10% Field A in     ..................  .................
                 Country B.
                Other Fields in    ..................  .................
                 Country B.
            Other Countries in     ..................  .................
             Continent B.
    Undeveloped:
        Continent A..............  ..................  .................
        Continent B..............  ..................  .................
            15% Country A........  ..................  .................
            15% Country B........  ..................  .................
                10% Field A in     ..................  .................
                 Country B.
                Other Fields in    ..................  .................
                 Country B.
        Other Countries in
         Continent B
                                  --------------------------------------
            TOTAL PROVED.........
            PROBABLE.............
            POSSIBLE.............
------------------------------------------------------------------------

Summary of Oil and Gas Reserves From Continuous Accumulations as of Fiscal-Year End Based on Average Fiscal-Year
                                                     Prices
----------------------------------------------------------------------------------------------------------------
                                                                        Reserves
                                       -------------------------------------------------------------------------
           Reserves category                Product A \105\
                                               (measure)           Product B  (measure)    Product C  (measure)
----------------------------------------------------------------------------------------------------------------
PROVED................................
    Developed:
        Country A.....................  .......................  .......................
        Country B.....................  .......................  .......................
            10% Field A in Country B..  .......................  .......................
            Other Fields in Country B.  .......................  .......................
    Undeveloped:
        Country A.....................  .......................  .......................
        Country B.....................  .......................  .......................
            10% Field A in Country B..  .......................  .......................
            Other Fields in Country B.  .......................  .......................
                TOTAL PROVED..........
                PROBABLE..............
                POSSIBLE..............
----------------------------------------------------------------------------------------------------------------

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

    \105\ The product should be based on the product that is the 
result of the oil and gas producing activity, such as bitumen, which 
is extracted from oil sands.
---------------------------------------------------------------------------

    A company may, but would not be required, to disclose probable or 
possible reserves in these tables. If a company discloses probable or 
possible reserves, it must provide the same level of geographic detail 
as with proved reserves. The proposal would require a company to update 
such reserves tables as of the close of each fiscal year. The table 
would be categorized by the products (Product A, Product B, etc.) that 
are the result of oil and gas producing activities. Thus, an oil and 
gas company should not disclose, as reserves, products that are not the 
result of oil and gas producing activities, including refined or 
processed products

[[Page 39539]]

such as synthetic crude oil.\106\ Of course, a company may provide 
supplemental disclosure regarding the amount of synthetic crude oil or 
other refined or processed product that may be extracted ultimately 
from the product of oil and gas producing activities. The proposal 
would also clarify that, if the company discloses amounts of a product 
in barrels of oil equivalent, it must disclose the basis for such 
equivalency.
---------------------------------------------------------------------------

    \106\ Rule 4-10(a)(16)(ii) specifically excludes from oil and 
gas producing activities refining and processing (other than field 
processing of gas to extract liquid hydrocarbons) of oil and gas.
---------------------------------------------------------------------------

    The reserves to be reported in these proposed tables would be 
aggregations (to the company total level) of reserves determined for 
individual wells, reservoirs, properties, fields, or projects. 
Regardless of whether the reserves were determined using deterministic 
or probabilistic methods, the reported reserves should be simple 
arithmetic sums of all estimates at the well, reservoir, property, 
field, or project level within each reserves category.
    The proposed items would require companies that previously have not 
disclosed reserves estimates in a filing with the Commission to 
disclose the technologies used to establish the appropriate level of 
certainty for reserves estimates from material properties included in 
the total reserves disclosed. However, the particular properties would 
not need to be identified. Similarly, proposed Item 1209 would note 
that companies should discuss the technologies used to establish the 
appropriate level of certainty for material additions to, or increases 
in, reserves estimates.\107\ The proposal would not require a company 
to disclose the technologies used to determine levels of certainty for 
reserves disclosed prior to effectiveness of the proposed amendments, 
if adopted, because the current definitions limit technologies to 
prescribed types, such as production or flow tests or actual 
observation of oil-water contacts in the wellbore.
---------------------------------------------------------------------------

    \107\ See proposed Item 1209.
---------------------------------------------------------------------------

    If probable or possible reserves are disclosed, the proposed item 
would also require the company to disclose the relative risks related 
to such reserves estimations. Because we are proposing to permit 
disclosure of probable and possible reserves, an instruction to this 
proposed Item would revise existing Instruction 5 to Item 102 of 
Regulation S-K to continue to prohibit disclosure of estimates of oil 
or gas resources other than reserves, and any estimated values of such 
resources, in any document publicly filed with the Commission, unless 
such information is required to be disclosed in the document by foreign 
or state law.\108\ We continue to believe that such resources are too 
speculative and may lead investors to incorrect conclusions. However, 
consistent with Instruction 5, a company could disclose such estimates 
in a Commission filing related to an acquisition, merger, or 
consolidation if the company previously provided those estimates to a 
person that is offering to acquire, merge, or consolidate with the 
company or otherwise to acquire the company's securities.\109\
---------------------------------------------------------------------------

    \108\ See proposed Instruction 5 to Item 102.
    \109\ Id.
---------------------------------------------------------------------------

Request for Comment
     Should we permit companies to disclose their probable 
reserves or possible reserves? Is the probable reserves category, the 
possible reserves category (or both categories) too uncertain to be 
included as disclosure in a company's public filings? Should we only 
permit disclosure of probable reserves? What are the advantages and 
disadvantages of permitting disclosure of probable and possible 
reserves, from the perspective of both an oil and gas company and an 
investor in an oil and gas company that chooses to provide such 
disclosure? Would investors be concerned by such disclosure? Would they 
understand the risks involved with probable or possible reserves?
     Would the proposed disclosure requirements provide 
sufficient disclosure for investors to understand how companies 
classified their reserves? Should the proposed Item require more 
disclosure regarding the technologies used to establish certainty 
levels and assumptions made to determine the reserves estimates for 
each classification?
     Should companies be required to provide risk factor 
disclosure regarding the relative uncertainty associated with the 
estimation of probable and possible reserves?
     Should we allow filers to report sums of proved and 
probable reserves or sums of proved, probable, and possible reserves? 
Or, to avoid misleading investors, should we allow only disclosure of 
each category of reserves by itself and not in sum with others, as 
proposed?
     Should we require disclosure of probable or possible 
reserves estimates in a company's public filings if that company 
otherwise discloses such estimates outside of its filings?
     Should we require all reported reserves to be simple 
arithmetic sums of all estimates, as proposed? Alternatively, should we 
allow probabilistic aggregation of reserves estimated probabilistically 
up to the company level? If we do so, will company reserves estimated 
and aggregated deterministically be comparable to company reserves 
estimated and aggregated probabilistically?
     Should we revise the proposed form and content of the 
table? If so, how should we revise the table's form or content?
     Should we eliminate the current exception regarding the 
disclosure of estimates of resources in the context of an acquisition, 
merger, or consolidation if the company previously provided those 
estimates to a person that is offering to acquire, merge, or 
consolidate with the company or otherwise to acquire the company's 
securities? If so, would this create a significant imbalance in the 
disclosures being made to the possible acquirer, as opposed to the 
company's shareholders?
ii. Optional Reserves Sensitivity Analysis Table
    Our current rules require determining whether oil or gas is 
economically producible based on the price on the last day of the 
fiscal year. As discussed in Section II.B.1 above, this single-day 
price has been the subject of some criticism from commenters in the 
past because it is sensitive to short-term price volatility and does 
not account for seasonal variations in the prices of different 
products. Although we are proposing to require that reserves estimates 
be based on a 12-month average of historical prices, we are proposing 
to permit companies to include an optional reserves sensitivity 
analysis table in their filings that would show what the reserves 
estimates would be if based on different price and cost criteria, such 
as a range of prices and costs that may reasonably be achieved, 
including standardized futures prices or management's own forecasts. 
The company would be free to choose the different scenario or 
scenarios, if any, that it wishes to disclose in the table. If the 
company chooses to provide such disclosure, it would be required to 
disclose the price and cost schedules and assumptions on which the 
alternate reserves estimates are based. Similarly, companies should 
remember that Item 303 of Regulation S-K (Management's Discussion and 
Analysis of Financial Condition and Results of Operations) \110\

[[Page 39540]]

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

    \110\ See Item 303 of Regulation S-K [17 CFR 229.303].

                                                         Sensitivity of Reserves to Prices by Principal Product Type and Price Scenario
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                    Proved reserves                                      Probable reserves                                    Possible reserves
                                ----------------------------------------------------------------------------------------------------------------------------------------------------------------
           Price case                                                    Product A                                             Product A                                            Product A
                                    Oil (mbbls)       Gas (mmcf)         (measure)        Oil (mbbls)       Gas (mmcf)         (measure)        Oil (mbbls)       Gas (mmcf)        (measure)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Scenario 1.....................  ................  ................  ................  ................  ................  ................  ................  ................  ...............
Scenario 2.....................  ................  ................  ................  ................  ................  ................  ................  ................  ...............
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Request for Comments
     Should we adopt such an optional reserves sensitivity 
analysis table? Would such a table be beneficial to investors? Is such 
a table necessary or appropriate?
     Should we require a sensitivity analysis if there has been 
a significant decline in prices at the end of the year? If so, should 
we specify a certain percentage decline that would trigger such 
disclosure?
     Should we revise the proposed form and content of the 
table? If so, how should we revise the table's form or content?
     As noted above in this release, SFAS 69 currently uses 
single-day, year-end prices to estimate reserves, while the reserves 
estimates in the proposed tables would be based on 12-month average 
year-end prices. If the FASB elects not to change its SFAS 69 
disclosures to be based on 12-month average year-end prices, should we 
require reconciliation between the proposed Item 1202 disclosures and 
the SFAS 69 disclosures? What other means should we adopt to promote 
comparability between these disclosures?
iii. Geographic Specificity With Respect to Reserves Disclosures
    There have been differing interpretations among oil and gas 
companies as to the level of specificity required when a company is 
breaking out its reserves disclosures based on geographic area as 
required by Instruction 3 of Item 102 of Regulation S-K.\111\ Some 
companies currently broadly organize their reserves only by hemisphere 
or continent. SFAS 69 requires reserves disclosure to be separately 
disclosed for the company's home country and foreign geographic areas. 
It defines ``foreign geographic areas'' as ``individual countries or 
groups of countries as appropriate for meaningful disclosure in the 
circumstances.'' Since SFAS 69 was issued, the operations of oil and 
gas companies have become much more diversified globally. For many 
large U.S. oil and gas producers, the majority of reserves are now 
overseas, with material amounts in individual countries and even 
individual fields or basins. We think that greater specificity than 
simply disclosing reserves within ``groups of countries'' would benefit 
investors and currently are necessary to meet the requirements of Item 
102 of Regulation S-K, in cases where a particular country, sedimentary 
basin, or field constitutes a significant portion of a company's 
reserves, particularly if that country, sedimentary basin, or field is 
subject to unique risks, such as political instability. Thus, 
instructions to proposed Item 1202 would state that, in general, 
disclosures need only be broken out by continent, except where:
---------------------------------------------------------------------------

    \111\ 17 CFR 229.102.
---------------------------------------------------------------------------

     A particular country contains 15% or more of the company's 
global oil reserves or gas reserves, or
     A particular sedimentary basin or field contains 10% or 
more of the company's global oil reserves or gas reserves.\112\
---------------------------------------------------------------------------

    \112\ See proposed Instruction to Item 1202.
---------------------------------------------------------------------------

This proposed amendment would differ from the existing guidance in SFAS 
69, which would permit disclosure based on broader geographic areas. In 
addition, under the proposals, a company would be permitted, but not 
required, to provide more detailed disclosure, such as countries or 
fields containing less than the specified percentages.
Request for Comment
     Should we provide the proposed guidance about the level of 
specificity required when a company discloses its oil and gas reserves 
by ``geographic area''?
     Are the proposed 15% and 10% thresholds appropriate? 
Should either, or both, of these percentages be different? For example, 
should both be 15%? Should both be 10%? Would 5% or 20% be a more 
appropriate threshold for either or both?
     What would be the impact to investors if companies are 
permitted to omit disclosures based on the individual field or basin 
due to concerns related to competitive sensitivities? Would investors 
be harmed if disclosure based on the individual field or basin is 
omitted due to concerns related to competitive sensitivities? Is there 
a better way to provide disclosure that a company heavily dependent on 
a particular field or basin may be subject to risks related to the 
concentration of its reserves?
     Would greater specificity cause competitive harm? Is so, 
how can the rules mitigate the risk of harm?
     In the event that the FASB does not amend SFAS 69, should 
we require companies to supplement their SFAS 69 disclosure with 
greater geographic specificity? If the FASB does not amend SFAS 69, 
should we require that companies reconcile the differences between the 
reserves estimates shown in the SFAS 69 disclosure with the estimates 
presented in the proposed tables?
iv. Separate Disclosure of Conventional and Continuous Accumulations
    Under proposed Item 1202, companies would be required to disclose 
reserves from conventional accumulations separately from reserves in 
continuous accumulations. Several commenters on the Concept Release 
believed that it is important to disclose such reserves 
separately.\113\ Although proposed Item 1201 would permit a company to 
combine these two tables, it would not permit a company to combine 
columns of different tables. Thus, for example, if a company decided to 
combine the two tables, it would have to represent reserves in 
conventional natural gas reservoirs separately from gas reserves in 
coalbeds or gas shales.
---------------------------------------------------------------------------

    \113\ See letters from Brookwood, D. McBride, Moody's, and Oil 
Change.

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

[[Page 39541]]

Request for Comment
     Should we require separate disclosure of conventional 
accumulations and continuous accumulations, as proposed?
     Should we permit combining of columns if the product of 
the oil and gas producing activity is the same, such as natural gas, 
regardless of whether the reserves are in conventional or continuous 
accumulations?
v. Preparation of Reserves Estimates or Reserves Audits
    In the Concept Release, we sought comment on whether the rules 
should require a company to retain an independent third party to 
prepare, or conduct a reserves audit on, the company's reserves 
estimates. Most commenters urged the Commission not to adopt such a 
requirement.\114\ Some believed that a company's internal staff, 
particularly at larger companies, is in a better position to prepare 
those estimates.\115\ In addition, commenters pointed out a potential 
lack of qualified third party engineers and other professionals to 
conduct the increase in work that would need to be accomplished if we 
adopted such a requirement.\116\ Others were concerned about the added 
costs that would be associated with such a requirement.\117\ However, 
some commenters believed that the participation of an independent third 
party would provide heightened assurance regarding the accuracy of the 
reserves estimates.\118\
---------------------------------------------------------------------------

    \114\ See letters from API, BHP, BP, CFA, CNOOC, Denbury, Devon, 
Eni, Energy Literacy, ExxonMobil, Imperial, R. Jones, D. McBride, 
Newfield, Nexen, Petro-Canada, Ross, D. Ryder, Sasol, Shell, 
Talisman, Total, and W. van de Vijver.
    \115\ See letters from API, Denbury, ExxonMobil, Imperial, 
Nexen, Shell, and Talisman.
    \116\ See letters from AAPG, API, BP, Devon, ExxonMobil, 
Imperial, D. McBride, Newfield, D. Ryder, and Sasol.
    \117\ See letters from Sasol and Nexen.
    \118\ See letters from CIBC, EnCana, Fitch, D. Kelly, Petrobras, 
Robinson, Ultra, and White & Case.
---------------------------------------------------------------------------

    In light of the commenters' concerns, we are not proposing to 
require an independent third party to prepare the reserves estimates or 
conduct a reserves audit. However, several commenters noted that it is 
important that persons preparing or auditing the reserves estimates be 
objective and qualified to perform the work that they are doing.\119\ 
In addition, because we are proposing to broaden permissible 
technologies for establishing levels of certainty of reserves, we 
believe that the proper application of such technologies in particular 
situations requires a heightened level of judgment. Therefore, we 
propose to require disclosure regarding the qualifications of the 
person primarily responsible for preparing the reserves estimates or, 
if the company represents that a reserves audit was conducted, 
conducting a reserves audit.\120\ In addition, we propose to require 
disclosure regarding the objectivity of third parties that conduct such 
service for an oil and gas company and measures taken to assure the 
independence and objectivity of employees. We based these 
qualifications largely on the reserves audit guidance of the Society of 
Petroleum Engineers (SPE).\121\ In particular, we propose to require 
the company to disclose the following information about the technical 
person \122\ primarily responsible for preparing the reserves estimate 
or, if the company represents that such a reserves audit was conducted, 
conducting the reserves audit:
---------------------------------------------------------------------------

    \119\ See letters from Brookwood, Denbury, D. McBride, Petro-
Canada, Robinson, and Total.
    \120\ See proposed Item 1202(a)(6).
    \121\ See Standards Pertaining to the Estimating and Auditing of 
Oil and Gas Reserves Information of the SPE (SPE Reserves Auditing 
Standards).
    \122\ With regard to the objectivity of a technical person, the 
``person'' could be an individual or an entity, as appropriate. 
However, with regard to the qualifications of a person, the 
disclosure would relate to the individual who is primarily 
responsible for the technical aspects of the reserves estimation or 
audit. Thus, this individual is not necessarily the individual 
generally overseeing the estimation or audit, but the individual who 
is primarily responsible for the actual calculations and estimation 
or audit.
---------------------------------------------------------------------------

    (1) If the person is an employee of the company,
    [cir] The fact that an employee of the company had primary 
responsibility for preparing the reserves estimate (but the employee 
would not have to be identified); and
    [cir] Measures taken to assure the independence and objectivity of 
the estimate;
    (2) If the person is not an employee of the company,
    [cir] The identity of the person;
    [cir] The nature and amount of all work that the person has 
performed for the company during the past three fiscal years, other 
than preparing the reserves estimate or conducting the reserves audit, 
as well as all compensation and fees (in any form) paid to that person 
for all such services; and
    [cir] Whether the person has any other interests in the company or 
other conflict of interests;
    (3) Whether the person (regardless of whether an employee or third 
party) primarily responsible for the estimating or auditing of 
reserves:
    [cir] Has a minimum of three years of practical experience in 
petroleum engineering or petroleum production geology, with at least 
one full year of this experience being in the estimation and evaluation 
of reserves if the person was in charge of preparing the reserves 
estimates;
    [cir] Has a minimum of ten years of practical experience in 
petroleum engineering or petroleum production geology, with at least 
five years of this experience being in the estimation and evaluation of 
reserves and the conducting of reserves audits if that person conducted 
a reserves audit of the registrant's reserves estimates;
    [cir] Has received, and is maintaining in good standing, a 
registered or certified professional engineer's license or a registered 
or certified professional geologist's license, or the equivalent 
thereof, from an appropriate governmental authority or a recognized 
self-regulating professional organization; and
    [cir] Has a bachelor's or advanced degree in petroleum engineering, 
geology, or other discipline of engineering or physical science, and if 
so, the specific degree earned by the person; and
    (4) Any memberships, in good standing, of the person (regardless of 
whether an employee or third party) with a self-regulatory organization 
of engineers, geologists, other geoscientists, or other professionals 
whose professional practice includes reserves evaluations or reserves 
audits, that:
    [cir] Admits members primarily on the basis of their educational 
qualifications;
    [cir] Requires its members to comply with the professional 
standards of competence and ethics prescribed by the organization that 
are relevant to the estimation, evaluation, review, or audit of 
reserves data; and
    [cir] Has disciplinary powers, including the power to suspend or 
expel a member.
    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

[[Page 39542]]

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;

[[Page 39543]]

     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 2.1.3.2 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

[[Page 39544]]

     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.

[[Page 39545]]

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

[[Page 39546]]

(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....................  ..................  ..................  ..................  .................
----------------------------------------------------------------------------------------------------------------

[[Page 39547]]

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,

[[Page 39548]]

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

[[Page 39549]]

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

[[Page 39550]]

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);

[[Page 39551]]

    (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:

[[Page 39552]]

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

[[Page 39553]]

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

[[Page 39554]]

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.

[[Page 39555]]

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

[[Page 39556]]

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

[[Page 39557]]

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).
---------------------------------------------------------------------------

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

[[Page 39558]]

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:
---------------------------------------------------------------------------

    \175\ Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

     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.

    2. Amend Sec.  210.4-10 by:
    a. Redesignating the subparagraphs in paragraph (a) as follows:

------------------------------------------------------------------------
                                                          New paragraph
                 Old paragraph  number                       number
------------------------------------------------------------------------
(a)(1)                                                          (a)(16)
(a)(2)                                                          (a)(24)
(a)(3)                                                          (a)(22)
(a)(4)                                                          (a)(25)
(a)(5)                                                          (a)(23)
(a)(6)                                                          (a)(34)
(a)(7)                                                          (a)(21)
(a)(8)                                                          (a)(15)
(a)(9)                                                          (a)(29)
(a)(10)                                                         (a)(13)
(a)(11)                                                          (a)(9)
(a)(12)                                                         (a)(32)
(a)(13)                                                         (a)(33)
(a)(14)                                                          (a)(1)
(a)(15)                                                         (a)(12)
(a)(16)                                                          (a)(7)
(a)(17)                                                         (a)(20)
------------------------------------------------------------------------

    b. Adding new paragraphs (a)(2), (a)(3), (a)(4), (a)(5), (a)(6), 
(a)(8), (a)(10), (a)(11), (a)(14), (a)(17), (a)(18), (a)(19), (a)(26), 
(a)(27), (a)(28), (a)(30), and (a)(31); and
    c. Revising newly redesignated paragraphs (a)(13), (a)(16), 
(a)(22), (a)(24), and (a)(25).
    The additions and revisions read as follows:

Sec.  210.4-10  Financial accounting and reporting for oil and gas 
producing activities pursuant to the Federal securities laws and the 
Energy Policy and Conservation Act of 1975.

* * * * *
    (a) * * *
* * * * *
    (2) Analogous formation in the immediate area. An ``analogous 
formation in the immediate area'' refers to a formation that shares the 
following characteristics with the formation of interest:
    (i) Same geological formation;
    (ii) Same environment of deposition;
    (iii) Similar geological structure; and
    (iv) Same drive mechanism.
    Instruction to paragraph (a)(2): Reservoir properties must be no 
more favorable in the analog than in the formation of interest. When 
the geological properties change, the proposed analog formation can no 
longer be said to be an analogous formation in the immediate area of 
the formation of interest.
    (3) Condensate. Condensate is a mixture of hydrocarbons that exists 
in the gaseous phase at original reservoir temperature and pressure, 
but that, when produced, is in the liquid phase at surface pressure and 
temperature.
    (4) Continuous accumulations. Continuous accumulations are 
resources that are pervasive throughout large areas, have ill-defined 
boundaries, and typically lack or are unaffected by hydrocarbon-water 
contacts near the base of the accumulation. Examples include, but are 
not limited to, natural bitumen (oil sands), gas hydrates, and self-
sourced accumulations such as coalbed methane, shale gas, and oil shale 
deposits. Typically, such accumulations require specialized extraction 
technology (e.g., removal of water from coalbed methane accumulations, 
large fracturing programs for shale gas, steam, or solvents to mobilize 
bitumen for in-situ recovery, and, in some cases, mining methods). 
Moreover, the extracted oil or gas may require significant processing 
prior to sale (e.g., bitumen upgraders).
    (5) Conventional accumulations. Conventional accumulations are 
discrete oil or gas resources related to

[[Page 39559]]

localized geological structural features or stratigraphic conditions, 
with the accumulation typically bounded by a hydrocarbon-water contact 
near its base, and which are significantly affected by the tendency of 
lighter hydrocarbons to ``float'' or accumulate above heavier water.
    (6) Deterministic estimate. The method of estimating reserves or 
resources is called deterministic when a single value for each 
parameter (from the geoscience, engineering, or economic data) in the 
reserves calculation is used in the reserves estimation procedure.
* * * * *
    (8) Development project. A development project is the means by 
which petroleum resources are brought to the status of economically 
producible. As examples, the development of a single reservoir or 
field, an incremental development in a producing field, or the 
integrated development of a group of several fields and associated 
facilities with a common ownership may constitute a development 
project.
* * * * *
    (10) Economically producible. The term economically producible, as 
it relates to a resource means a resource which generates revenue that 
exceeds, or is reasonably expected to exceed, the costs of the 
operation. The value of the products that generate revenue shall be 
determined at the terminal point of oil and gas producing activities as 
defined in paragraph (a)(16) of this section.
    (11) Estimated ultimate recovery (EUR). Estimated ultimate recovery 
is the sum of reserves remaining as of a given date and cumulative 
production as of that date.
* * * * *
    (13) Exploratory well. A well drilled to find and produce oil or 
gas in an unproved area or to find a new reservoir in a field 
previously found to be productive of oil or gas in another reservoir. 
Generally, an exploratory well is any well that is not a development 
well, an extension well, a service well, or a stratigraphic test well 
as those items are defined in this section.
    (14) Extension well. A well drilled to extend the limits of a 
proved reservoir.
* * * * *
    (16) Oil and gas producing activities. (i) Oil and gas producing 
activities include:
    (A) The search for crude oil, including condensate and natural gas 
liquids, or natural gas (``oil and gas'') in their natural states and 
original locations;
    (B) The acquisition of property rights or properties for the 
purpose of further exploration or for the purpose of removing the oil 
or gas from existing reservoirs on such properties;
    (C) The construction, drilling, and production activities necessary 
to retrieve oil and gas from their natural reservoirs, including the 
acquisition, construction, installation, and maintenance of field 
gathering and storage systems, such as:
    (1) Lifting the oil and gas to the surface; and
    (2) Gathering, treating, and field processing (as in the case of 
processing gas to extract liquid hydrocarbons); and
    (D) Extraction of marketable hydrocarbons, in the solid, liquid, or 
gaseous state, from oil sands, shale, coalbeds, or other nonrenewable 
natural resources which can be upgraded into natural or synthetic oil 
or gas, and activities undertaken with a view to such extraction.
    Instruction 1 to paragraph (a)(16)(i): The oil and gas production 
function shall be regarded as terminating at the first point at which:
    a. Oil, gas, or gas liquids are delivered to a main pipeline, a 
common carrier, a refinery, or a marine terminal; and
    b. In the case of marketable hydrocarbons that can be upgraded into 
natural or synthetic oil or gas, the marketable hydrocarbons are 
delivered to a main pipeline, a common carrier, a refinery, a marine 
terminal, or a facility which upgrades such natural resources into 
synthetic oil or gas from the natural resources.
    Instruction 2 to paragraph (a)(16)(i): For purposes of this 
paragraph (a)(16), the term ``marketable hydrocarbons'' means 
hydrocarbons for which there is a market for the product in the state 
in which the hydrocarbons are delivered.
    (ii) Oil and gas producing activities do not include:
    (A) Transporting, refining, processing (other than field processing 
of gas to extract liquid hydrocarbons), or marketing oil and gas;
    (B) Activities relating to the production of natural resources 
other than oil, gas, or natural resources from which natural or 
synthetic oil and gas can be extracted; or
    (C) Production of geothermal steam.
    (17) Possible reserves. Possible reserves are those additional 
reserves that are less certain to be recovered than probable reserves.
    (i) When deterministic methods are used, the total quantities 
ultimately recovered from a project have a low probability of exceeding 
proved plus probable plus possible reserves. When probabilistic methods 
are used, there should be at least a 10% probability that the total 
quantities ultimately recovered will equal or exceed the proved plus 
probable plus possible reserves estimates.
    (ii) Possible reserves may be assigned to areas of a reservoir 
adjacent to probable reserves where data control and interpretations of 
available data are progressively less certain. Frequently, this will be 
in areas where geoscience and engineering data are unable to define 
clearly the area and vertical limits of commercial production from the 
reservoir by a defined project.
    (iii) Possible reserves also include incremental quantities 
associated with a greater percentage recovery of the hydrocarbons in 
place than the recovery quantities assumed for probable reserves.
    (iv) The proved plus probable and proved plus probable plus 
possible reserves estimates must be based on reasonable alternative 
technical and commercial interpretations within the reservoir or 
subject project that are clearly documented, including comparisons to 
results in successful similar projects.
    (v) Possible reserves may be assigned where geoscience and 
engineering data identify directly adjacent portions of a reservoir 
within the same accumulation that may be separated from proved areas by 
faults with displacement less than formation thickness or other 
geological discontinuities and that have not been penetrated by a 
wellbore, but are interpreted to be in communication with the known 
(proved) reservoir. Probable or possible reserves may be assigned to 
areas that are structurally higher or lower than the proved area if 
these areas are in communication with the proved reservoir.
    (vi) Pursuant to paragraph (a)(24)(iii) of this section, where 
direct observation has defined a highest known oil (HKO) elevation and 
the potential exists for an associated gas cap, proved oil reserves 
should be assigned in the structurally higher portions of the reservoir 
above the HKO only if the higher contact can be established with 
reasonable certainty through reliable technology. Portions of the 
reservoir that do not meet this reasonable certainty criterion may be 
assigned as probable and possible oil and/or gas based on reservoir 
fluid properties and pressure gradient interpretations.
    (18) Probable reserves. Probable reserves are those additional 
reserves that are less certain to be recovered than proved reserves but 
which, together with proved reserves, are as likely as not to be 
recovered.
    (i) When deterministic methods are used, it is as likely as not 
that actual remaining quantities recovered will

[[Page 39560]]

exceed the sum of estimated proved plus probable reserves. When 
probabilistic methods are used, there should be at least a 50% 
probability that the actual quantities recovered will equal or exceed 
the proved plus probable reserves estimates.
    (ii) Probable reserves may be assigned to areas of a reservoir 
adjacent to proved reserves where data control or interpretations of 
available data are less certain, even if the interpreted reservoir 
continuity of structure or productivity does not meet the reasonable 
certainty criterion.
    (iii) Probable reserves estimates also include potential 
incremental quantities associated with a greater percentage recovery of 
the hydrocarbons in place than assumed for proved reserves.
    (iv) See also guidelines in paragraphs (a)(17)(iv) through 
(a)(17)(vi) of this section.
    (19) Probabilistic estimate. The method of estimation of reserves 
or resources is called probabilistic when the full range of values that 
could reasonably occur for each unknown parameter (from the geoscience, 
engineering, and economic data) is used to generate a full range of 
possible outcomes and their associated probabilities of occurrence.
* * * * *
    (22) Proved developed oil and gas reserves. Proved developed oil 
and gas reserves are proved reserves that can be expected to be 
recovered:
    (i) In projects that extract oil and gas through wells, through 
existing wells with existing equipment and operating methods; and
    (ii) In projects that extract oil and gas in other ways, through 
installed extraction technology operational at the time of the reserves 
estimate.
* * * * *
    (24) Proved oil and gas reserves. Proved oil and gas reserves are 
those quantities of oil and gas, which, by analysis of geoscience and 
engineering data, can be estimated with reasonable certainty to be 
economically producible--from a given date forward, from known 
reservoirs, and under existing economic conditions, operating methods, 
and government regulations--prior to the time at which contracts 
providing the right to operate expire, unless evidence indicates that 
renewal is reasonably certain, regardless of whether deterministic or 
probabilistic methods are used for the estimation. The project to 
extract the hydrocarbons must have commenced or the operator must be 
reasonably certain that it will commence the project within a 
reasonable time.
    (i) The area of the reservoir considered as proved includes:
    (A) The area identified by drilling and limited by fluid contacts, 
if any, and
    (B) Adjacent undrilled portions of the reservoir that can, with 
reasonable certainty, be judged to be continuous with it and to contain 
economically producible oil or gas on the basis of available geoscience 
and engineering data.
    (ii) In the absence of data on fluid contacts, proved quantities in 
a reservoir are limited by the lowest known hydrocarbons (LKH) as seen 
in a well penetration unless geoscience, engineering, or performance 
data and reliable technology establishes a lower contact with 
reasonable certainty.
    (iii) Where direct observation from well penetrations has defined a 
highest known oil (HKO) elevation and the potential exists for an 
associated gas cap, proved oil reserves may be assigned in the 
structurally higher portions of the reservoir only if geoscience, 
engineering, or performance data and reliable technology establishes 
the higher contact with reasonable certainty.
    (iv) Reserves which can be produced economically through 
application of improved recovery techniques (including, but not limited 
to, fluid injection) are included in the proved classification when:
    (A) Successful testing by a pilot project in an area of the 
reservoir with properties no more favorable than in the reservoir as a 
whole, the operation of an installed program in the reservoir or an 
analogous formation in the immediate area, or other evidence using 
reliable technology establishes the reasonable certainty of the 
engineering analysis on which the project or program was based; and
    (B) The project has been approved for development by all necessary 
parties and entities, including governmental entities.
    (v) Existing economic conditions include prices and costs at which 
economic producibility from a reservoir is to be determined. The price 
shall be the average price during the 12-month period prior to the 
ending date of the period covered by the report, determined as an 
unweighted arithmetic average of the ending price for each month within 
such period.
    (25) Proved undeveloped reserves. Proved undeveloped oil and gas 
reserves are reserves that are expected to be recovered from new wells 
on undrilled acreage, or from existing wells where a relatively major 
expenditure is required for recompletion.
    (i) Reserves on undrilled acreage shall be limited to those 
drilling units directly offsetting productive units that are reasonably 
certain of production when drilled, unless evidence using reliable 
technology exists that establishes reasonable certainty of economic 
producibility at greater distances.
    (A) In a conventional accumulation, offsetting productive units 
must lie within an area in which economic producibility has been 
established by reliable technology to be reasonably certain.
    (B) Proved reserves can be claimed in a conventional or continuous 
accumulation in a given area in which engineering, geoscience, and 
economic data, including actual drilling statistics in the area, and 
reliable technology show that, with reasonable certainty, economic 
producibility exists beyond immediately offsetting drilling units.
    (ii) Undrilled locations can be classified as having proved 
undeveloped reserves only if a development plan has been adopted 
indicating that they are scheduled to be drilled within five years, 
unless unusual circumstances justify a longer time.
    (iii) Under no circumstances shall estimates for proved undeveloped 
reserves be attributable to any acreage for which an application of 
fluid injection or other improved recovery technique is contemplated, 
unless such techniques have been proved effective by actual projects in 
the area and in the same reservoir or an analogous reservoir in the 
same geologic formation in the immediate area or by other evidence 
using reliable technology establishing reasonable certainty.
    (26) Reasonable certainty. Reasonable certainty means ``much more 
likely to be achieved than not.'' When deterministic methods are used, 
as changes due to increased availability of geoscience (geological, 
geophysical, and geochemical), engineering, and economic data are made 
to estimated ultimate recovery (EUR) with time, reasonably certain EUR 
is much more likely to increase than to either decrease or remain 
constant. When probabilistic methods are used, reasonable certainty 
means that there is at least a 90% probability that the quantities 
actually recovered will equal or exceed the stated volume.
    (27) Reliable technology. Reliable technology is technology 
(including computational methods) that, when applied using high quality 
geoscience and engineering data, is widely accepted within the oil and 
gas industry, has been field tested and has demonstrated consistency 
and

[[Page 39561]]

repeatability in the formation being evaluated or in an analogous 
formation. Expressed in probabilistic terms, reliable technology has 
been proved empirically to lead to correct conclusions in 90% or more 
of its applications.
    (28) Reserves. Reserves are estimated remaining quantities of oil 
and gas and related substances anticipated to be recoverable, as of a 
given date, by application of development projects to known 
accumulations based on: Analysis of geoscience and engineering data; 
the use of technology appropriate to establish the degree of certainty 
of the reserves; the legal right to produce; installed means of 
delivering the oil, gas, or related substances to markets, or the 
permits, financing, and the appropriate level of certainty (reasonable 
certainty, as likely as not, or possible but not likely) to do so; and 
economic producibility at current prices and costs. The volumes of 
reserves shall be determined on the basis of their volumes at the 
terminal point of oil and gas producing activities as defined in 
paragraph (a)(16) of this section. Reserves are classified as proved, 
probable, and possible according to the degree of uncertainty 
associated with the estimates.

    Note to paragraph (a)(28):
    Reserves should not be assigned to adjacent reservoirs isolated 
by major, potentially sealing, faults until those reservoirs are 
penetrated and evaluated as economically producible. Reserves should 
not be assigned to areas that are clearly separated from a known 
accumulation by a non-productive reservoir (i.e., absence of 
reservoir, structurally low reservoir, or negative test results). 
Such areas may contain prospective resources (i.e., potentially 
recoverable resources from undiscovered accumulations).

* * * * *
    (30) Resources. Resources are quantities of oil and gas estimated 
to exist in naturally occurring accumulations. A portion of the 
resources may be estimated to be recoverable, and another portion may 
be considered to be unrecoverable. Resources include both discovered 
and undiscovered accumulations.
    (31) Sedimentary basin. A sedimentary basin is a low area in the 
crust of the earth in which sediments have accumulated. Frequently, 
sedimentary basins that contain oil and gas reserves contain a number 
of discrete oil and gas reservoirs.
* * * * *

PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES 
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND 
CONSERVATION ACT OF 1975--REGULATION S-K

    3. The authority citation for part 229 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 
77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78u-5, 78w, 78ll, 
78mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-31(c), 80a-37, 80a-
38(a), 80a-39, 80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless 
otherwise noted.
* * * * *
    4. Amend Sec.  229.102 by revising the introductory text of 
Instruction 3, and Instructions 4, 5 and 8 to read as follows.

Sec.  229.102 (Item 102)  Description of property.

* * * * *
    Instructions to Item 102: * * *
    3. In the case of an extractive enterprise, not involved in oil and 
gas producing activities, material information shall be given as to 
production, reserves, locations, development, and the nature of the 
registrant's interest. If individual properties are of major 
significance to an industry segment:
* * * * *
    4. A registrant engaged in oil and gas producing activities shall 
provide the information required by Subpart 1200 of Regulation S-K.
    5. In the case of extractive reserves other than oil and gas 
reserves, estimates other than proven or probable reserves (and any 
estimated values of such reserves) shall not be disclosed in any 
document publicly filed with the Commission, unless such information is 
required to be disclosed in the document by foreign or state law; 
provided, however, that where such estimates previously have been 
provided to a person (or any of its affiliates) that is offering to 
acquire, merge, or consolidate with the registrant, or otherwise to 
acquire the registrant's securities, such estimates may be included in 
documents relating to such acquisition.
* * * * *
    8. The attention of certain issuers engaged in oil and gas 
producing activities is directed to the information called for in Guide 
4 (referred to in Sec.  229.801(d)).
* * * * *

Sec.  229.801  [Amended]

    5. Amend Sec.  229.801 by removing and reserving paragraph (b) and 
removing the authority citation following the section.

Sec.  229.802  [Amended]

    6. Amend Sec.  229.802 by removing and reserving paragraph (b) and 
removing the authority citation following the section.
    7. Add subpart 229.1200 to read as follows:
Subpart 229.1200--Disclosure by Registrants Engaged in Oil and Gas 
Producing Activities
Sec.
229.1201 (Item 1201) General instructions to oil and gas industry-
specific disclosures.
229.1202 (Item 1202) Disclosure of reserves.
229.1203 (Item 1203) Proved undeveloped reserves.
229.1204 (Item 1204) Oil and gas production.
229.1205 (Item 1205) Drilling and other exploratory and development 
activities.
229.1206 (Item 1206) Present activities.
229.1207 (Item 1207) Delivery commitments.
229.1208 (Item 1208) Oil and gas properties, wells, operations, and 
acreage.
229.1209 (Item 1209) Discussion and analysis of changes, trends, and 
uncertainties for registrants engaged in oil and gas activities.

Subpart 229.1200--Disclosure by Registrants Engaged in Oil and Gas 
Producing Activities

Sec.  229.1201 (Item 1201)  General instructions to oil and gas 
industry-specific disclosures.

    (a) If oil and gas producing activities are material to the 
registrant's or its subsidiaries' business operations or financial 
position, the disclosure specified in this subpart 229.1200 should be 
included under appropriate captions (with cross references, where 
applicable, to related information disclosed in financial statements). 
However, limited partnerships and joint ventures that conduct, operate, 
manage, or report upon oil and gas drilling or income programs, that 
acquire properties either for drilling and production, or for 
production of oil, gas, or geothermal steam or water, need not include 
such disclosure.
    (b) To the extent that Items 1202 through 1208 (Sec. Sec.  229.1202 
through 229.1208) call for disclosures in tabular format, as specified 
in the particular Item, a registrant may modify such format for ease of 
presentation, to add information or to combine two or more required 
tables.

[[Page 39562]]

    (c) The definitions in Rule 4-10(a) of Regulation S-X (17 CFR 
210.4-10(a)) shall apply for purposes of this subpart 229.1200.
    (d) For purposes of this subpart 229.1200, the term ``by geographic 
area'' means, to the extent allowed by law:
    (1) By continent;
    (2) By country totals for each country that contains 15% or more of 
the registrant's global oil reserves or gas reserves; and
    (3) By sedimentary basin or field totals for each sedimentary basin 
or field that contains 10% or more of the registrant's global oil 
reserves or gas reserves.

Sec.  229.1202 (Item 1202)  Disclosure of reserves.

    (a) Summary of conventional oil and gas reserves at fiscal year 
end. (1) Provide the information specified in paragraph (a)(2) of this 
Item in tabular format as provided below:

   Summary of Oil and Gas Reserves in Conventional Accumulations as of
           Fiscal-Year End Based on Average Fiscal-Year Prices
------------------------------------------------------------------------
                                                  Reserves
                                  --------------------------------------
        Reserves category                                 Natural gas
                                      Oil  (mbbls)           (mmcf)
------------------------------------------------------------------------
PROVED                             ..................  .................
    Developed:                     ..................  .................
        Continent A..............  ..................  .................
        Continent B..............  ..................  .................
            15% Country A........  ..................  .................
            15% Country B........  ..................  .................
                10% Field A in     ..................  .................
                 Country B.
                Other Fields in    ..................  .................
                 Country B.
            Other Countries in     ..................  .................
             Continent B.
    Undeveloped:                   ..................  .................
        Continent A..............  ..................  .................
        Continent B..............  ..................  .................
            15% Country A........  ..................  .................
            15% Country B........  ..................  .................
                10% Field A in     ..................  .................
                 Country B.
                Other Fields in    ..................  .................
                 Country B.
            Other Countries in     ..................  .................
             Continent B.
                                  --------------------------------------
TOTAL PROVED.....................  ..................  .................
PROBABLE                           ..................  .................
POSSIBLE                           ..................  .................
------------------------------------------------------------------------

    (2) Disclose, in the aggregate and by geographic area, reserves 
from conventional accumulations estimated using prices and costs under 
existing economic conditions, for each product type, in the following 
categories:
    (i) Proved developed reserves;
    (ii) Proved undeveloped reserves;
    (iii) Total proved reserves;
    (iv) Probable reserves (optional); and
    (v) Possible reserves (optional).
    Instruction 1 to paragraph (a)(2): Disclose updated reserves tables 
as of the close of each fiscal year.
    Instruction 2 to paragraph (a)(2): The registrant is permitted, but 
not required, to disclose probable or possible reserves pursuant to 
paragraphs (a)(2)(iv) and (a)(2)(v) of this Item.
    Instruction 3 to paragraph (a)(2): If the registrant discloses 
amounts of a product in barrels of oil equivalent, disclose the basis 
for such equivalency.
    (3) Reported total reserves shall be simple arithmetic sums of all 
estimates for individual properties or fields within each reserves 
category. When probabilistic methods are used, reserves should not be 
aggregated probabilistically beyond the field or property level; 
instead, they should also be aggregated by simple arithmetic summation.
    (4) If the registrant has not previously disclosed reserves 
estimates in a filing with the Commission, the registrant shall 
disclose the technologies used to establish the appropriate level of 
certainty for reserves estimates from material properties included in 
the total reserves disclosed. The particular properties do not need to 
be identified.
    (5) If the registrant chooses to disclose probable or possible 
reserves, discuss the relative risks related to such reserves 
estimates.
    (6) Preparation of reserves estimates or reserves audit. Disclose 
the following information regarding the technical person primarily 
responsible for preparing the reserves estimates and, if the registrant 
represents that a third party conducted a reserves audit, regarding the 
technical person primarily responsible for conducting such reserves 
audit:
    (i) If the person is an employee of the registrant:
    (A) The fact that an employee of the registrant had primary 
responsibility for preparing the reserves estimate (but the employee 
does not have to be identified); and
    (B) Measures taken to assure the independence and objectivity of 
the estimate;
    (ii) If the person is not an employee of the registrant:
    (A) The identity of the person;
    (B) The nature and amount of all work that the person has performed 
for the registrant during the past three fiscal years, other than 
preparing the reserves estimate or conducting the reserves audit, as 
well as all compensation and fees (in any form) paid to that person for 
all such services;
    (C) Whether the person has any other interests in the company or 
other conflict of interests;
    (iii) Whether the person:
    (A) Has a minimum of three years of practical experience in 
petroleum engineering or petroleum production geology, with at least 
one full year of this experience being in the estimation and evaluation 
of reserves if the person

[[Page 39563]]

was primarily responsible for preparing the reserves estimates;
    (B) Has a minimum of ten years of practical experience in petroleum 
engineering or petroleum production geology, with at least five years 
of this experience being in the estimation and evaluation of reserves 
and the conducting of reserves audits if that person conducted a 
reserves audit of the registrant's reserves estimates;
    (C) Has received, and is maintaining in good standing, a registered 
or certified professional engineer's license or a registered or 
certified professional geologist's license, or the equivalent thereof, 
from an appropriate governmental authority or a recognized self-
regulating professional organization; and
    (D) Has a bachelor's or advanced degree in petroleum engineering, 
geology, or other discipline of engineering or physical science, and if 
so, the specific degree earned by that person; and
    (iv) Any memberships, in good standing, of the person with a self-
regulatory organization of engineers, geologists, other geoscientists, 
or other professionals whose professional practice includes reserves 
evaluations or reserves audits, that:
    (A) Admits members primarily on the basis of their educational 
qualifications;
    (B) Requires its members to comply with the professional standards 
of competence and ethics prescribed by the organization that are 
relevant to the estimation, evaluation, review, or audit of reserves 
data; and
    (C) Has disciplinary powers, including the power to suspend or 
expel a member; and
    (v) To the extent the person does not have all of the 
qualifications listed in paragraphs (a)(6)(iii) and (iv) of this Item, 
the reasons why the registrant believes that the person is sufficiently 
qualified to be primarily responsible for the technical aspects of the 
reserves estimation or audit, as applicable, and any risks associated 
with reserves estimates not prepared or audited by persons with such 
qualifications.
    Instruction to paragraph (a)(6): For purposes of this Item, the 
identified ``person'' may be an individual or a business entity. To the 
extent that the person is a business entity, any disclosure regarding 
the qualifications listed in paragraphs (a)(6)(iii) and (iv) of this 
Item of that person will relate to the individual that is primarily 
responsible for the technical aspects of the reserves estimation or 
audit, as applicable.
    (7) Third party preparer reports. If the registrant represents that 
its reserves estimates, or any estimated valuation thereof, are based 
on estimates prepared by a third party, the registrant shall file a 
report of the third party as an exhibit to the relevant registration 
statement or report. The report must include the following disclosure:
    (i) The purpose for which the report was prepared and for whom it 
was prepared;
    (ii) The effective date of the report and the date on which the 
report was completed;
    (iii) The proportion of the company's total reserves covered by the 
report and the geographic area in which the covered reserves are 
located;
    (iv) The assumptions, data, methods, and procedures used to 
estimate reserves quantities, including the percentage of the 
registrant'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;
    (v) A discussion of primary economic assumptions;
    (vi) A discussion of the possible effects of regulation on the 
ability of the registrant to recover the estimated reserves;
    (vii) A discussion regarding the inherent risks and uncertainties 
of reserves estimates;
    (viii) A statement that the third party has used all methods and 
procedures as it considered necessary under the circumstances to 
prepare the report; and
    (ix) The signature of the third party.
    (8) Third party reserves audit reports. If the registrant 
represents that a third party conducted a reserves audit of the 
registrant's reserves estimates, or any estimated valuation thereof, 
the registrant shall file a report of the third party as an exhibit to 
the relevant registration statement or report. The report must include 
the following disclosure:
    (i) The purpose for which the report is being prepared and for whom 
it is prepared;
    (ii) The effective date of the report and the date on which the 
report was completed;
    (iii) The proportion of the company's total reserves covered by the 
report and the geographic area in which the covered reserves are 
located;
    (iv) The assumptions, data, methods, and procedures used to conduct 
the reserves audit, including the percentage of the registrant'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;
    (v) A discussion of primary economic assumptions;
    (vi) A discussion of the possible effects of regulation on the 
ability of the registrant to recover the estimated reserves;
    (vii) A discussion regarding the inherent risks and uncertainties 
of reserves estimates;
    (viii) A statement that the third party has used all methods and 
procedures as it considered necessary under the circumstances to 
prepare the report;
    (ix) A brief summary of the third party's conclusions with respect 
to the reserves estimates; and
    (x) The signature of the third party.
    (9) For purposes of this Item 1202, the term ``reserves audit'' 
means the process of reviewing certain of the pertinent facts 
interpreted and assumptions made that have resulted in an estimate of 
reserves prepared by others and the rendering of an opinion about the 
appropriateness of the methodologies employed, the adequacy and quality 
of the data relied upon, the depth and thoroughness of the reserves 
estimation process, the classification of reserves appropriate to the 
relevant definitions used, and the reasonableness of the estimated 
reserves quantities. In order to disclose that a ``reserves audit'' has 
been conducted, the report resulting from this review must represent an 
examination of at least 80% of the portion of the registrant's reserves 
covered by the reserves audit.
    (b) Summary of oil and gas reserves from continuous accumulations. 
(1) Provide the information specified in paragraph (b)(2) of this Item 
in tabular format as provided below:

[[Page 39564]]

Summary of Oil and Gas Reserves From Continuous Accumulations as of Fiscal-Year End Based on Average Fiscal-Year
                                                     Prices
----------------------------------------------------------------------------------------------------------------
                                                                        Reserves
           Reserves category           -------------------------------------------------------------------------
                                          Product A (measure)      Product B (measure)      Product C (measure)
----------------------------------------------------------------------------------------------------------------
PROVED                                  .......................  .......................  ......................
    Developed:                          .......................  .......................  ......................
        Country A.....................  .......................  .......................  ......................
        Country B.....................  .......................  .......................  ......................
            10% Field A in Country B..  .......................
            Other Fields in Country B.  .......................
    Undeveloped:                        .......................  .......................  ......................
        Country A.....................  .......................  .......................  ......................
        Country B.....................  .......................  .......................  ......................
            10% Field A in Country B..  .......................  .......................  ......................
            Other Fields in Country B.  .......................  .......................  ......................
                                       -------------------------------------------------------------------------
TOTAL PROVED..........................  .......................  .......................  ......................
PROBABLE                                .......................  .......................  ......................
POSSIBLE                                .......................  .......................  ......................
----------------------------------------------------------------------------------------------------------------

    (2) Disclose, in the aggregate and by geographic area, reserves 
from continuous accumulations (including, but not limited to, bitumen 
and shale oil, shale gas, and coalbed methane) estimated using prices 
and costs under existing economic conditions, for each product type 
applicable to the registrant, in the following categories:
    (i) Proved developed reserves;
    (ii) Proved undeveloped reserves;
    (iii) Total proved reserves;
    (iv) Probable reserves (optional); and
    (v) Possible reserves (optional).
    Instruction 1 to paragraph (b)(2): Disclose updated reserves tables 
as of the close of each fiscal year.
    Instruction 2 to paragraph (b)(2): The registrant is permitted, but 
not required, to disclose probable or possible reserves pursuant to 
paragraphs (b)(2)(iv) and (b)(2)(v) of this Item.
    Instruction 3 to paragraph (b)(2): If the registrant discloses 
amounts of a product in barrels of oil equivalent, disclose the basis 
for such equivalency.
    (3) Provide the disclosures required by paragraphs (a)(3) through 
(a)(9) of this Item, as they apply to continuous accumulations.
    (c) Reserves sensitivity analysis (optional). (1) The registrant 
may, but is not required, to provide the information specified in 
paragraph (c)(2) of this Item in tabular format as provided below:

                                                          Sensitivity of Reserves to Prices by Principal Product Type and Price Scenario
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                    Proved reserves                                      Probable reserves                                    Possible reserves
                                ----------------------------------------------------------------------------------------------------------------------------------------------------------------
           Price case                                                    Product A                                             Product A                                            Product A
                                    Oil (mbbls)       Gas (mmcf)         (measure)        Oil (mbbls)       Gas (mmcf)         (measure)        Oil (mbbls)       Gas (mmcf)        (measure)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Scenario 1.....................  ................  ................  ................  ................  ................  ................  ................  ................  ...............
Scenario 2.....................  ................  ................  ................  ................  ................  ................  ................  ................  ...............
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

    (2) The registrant may, but is not required to, disclose, in the 
aggregate, an estimate of reserves estimated for each product type 
based on different price and cost criteria, such as a range of prices 
and costs that may reasonably be achieved, including standardized 
futures prices or management's own forecasts.
    (3) If the registrant provides disclosure under this paragraph (c) 
of this Item, disclose the price and cost schedules and assumptions on 
which the values disclosed under paragraphs (c)(2)(i) through 
(c)(2)(iv) of this Item are based.
    Instruction to Item 1202: Estimates of oil or gas resources other 
than reserves, and any estimated values of such resources, shall not be 
disclosed in any document publicly filed with the Commission, unless 
such information is required to be disclosed in the document by foreign 
or state law; provided, however, that where such estimates previously 
have been provided to a person (or any of its affiliates) that is 
offering to acquire, merge, or consolidate with the registrant or 
otherwise to acquire the registrant's securities, such estimate may be 
included in documents related to such acquisition.

Sec.  229.1203 (Item 1203)  Proved undeveloped reserves.

    (a) Provide the information specified in paragraph (b) of this Item 
in tabular format as provided 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)
----------------------------------------------------------------------------------------------------------------
Fiscal Year--4...............  ..............  ..............  ..............  .................................

[[Page 39565]]

Fiscal Year--3...............  ..............  ..............  ..............  .................................
Fiscal Year--2...............  ..............  ..............  ..............  .................................
Fiscal Year--1...............  ..............  ..............  ..............  .................................
    Fiscal Year..............  ..............  ..............  ..............  .................................
----------------------------------------------------------------------------------------------------------------

    (b) For the last five fiscal years, disclose, by product type, 
proved reserves estimated using current prices and costs in the 
following categories:
    (1) Proved undeveloped reserves converted to proved developed 
reserves during the year; and
    (2) Investments in the conversion of proved undeveloped reserves to 
proved developed reserves during the year.
    (c) Disclose, by product type, any proved undeveloped reserves 
which have remained undeveloped for five years or more. Explain the 
reason for the lack of development.
    (d) Disclose the registrant's plans to develop proved undeveloped 
reserves and to further develop proved oil and gas reserves.
    (e) Discuss any material changes to proved undeveloped reserves.

Sec.  229.1204 (Item 1204)  Oil and gas production.

    (a) Provide the information specified in paragraph (b) of this Item 
in tabular format as provided below:

                                               Oil and Gas Production, Sales Prices, and Production Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                Oil                                    Gas                                    Product A
                              --------------------------------------------------------------------------------------------------------------------------
           Location                                       Production                             Production                                 Production
                                Production  Sales price   cost ($US/   Production  Sales price   cost ($US/   Production    Sales price     cost ($US/
                                 (mbbls)     ($US/bbl)       boe)        (mmcf)     ($US/mcf)      mcfc)      (measure)   ($US/ measure)     measure)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Geographic Area A............  ...........  ...........  ...........  ...........  ...........  ...........  ...........  ..............  ..............
    Fiscal Year--2...........  ...........  ...........  ...........  ...........  ...........  ...........  ...........  ..............  ..............
    Fiscal Year--1...........  ...........  ...........  ...........  ...........  ...........  ...........  ...........  ..............  ..............
    Fiscal Year..............  ...........  ...........  ...........  ...........  ...........  ...........  ...........  ..............  ..............
Geographic Area B............  ...........  ...........  ...........  ...........  ...........  ...........  ...........  ..............  ..............
Geographic Area C............  ...........  ...........  ...........  ...........  ...........  ...........  ...........  ..............  ..............
--------------------------------------------------------------------------------------------------------------------------------------------------------

    (b) Disclose, by geographic area, for the last three years:
    (1) Net oil and gas production;
    (2) Average oil and gas sales prices, net of any effects as a 
result of hedging transactions; and
    (3) Average production costs (lifting costs, not including 
severance taxes) per unit of production.
    (c) For purposes of this Item 1204, the term ``net production'' 
includes only production that the registrant owns and production 
attributable to the registrant's interest in projects less royalties 
and production due to others. In special situations (e.g., foreign 
operations), the registrant may provide net production before royalties 
if more appropriate. If the registrant provides ``net before royalty'' 
production figures, it must note the change from usage of ``net 
production.''

Sec.  229.1205 (Item 1205)  Drilling and other exploratory and 
development activities.

    (a) Provide the information specified in paragraph (b) of this Item 
in tabular format as provided below:

                                                                   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..................  ..................  ..................  ..................  ..................  ..................  .................

[[Page 39566]]

    Fiscal Year--1...............  ..................  ..................  ..................  ..................  ..................  .................
    Fiscal Year--2...............  ..................  ..................  ..................  ..................  ..................  .................
Dry                                ..................  ..................  ..................  ..................  ..................  .................
    Fiscal Year..................  ..................  ..................  ..................  ..................  ..................  .................
    Fiscal Year--1...............  ..................  ..................  ..................  ..................  ..................  .................
    Fiscal Year--2...............  ..................  ..................  ..................  ..................  ..................  .................
                                  ----------------------------------------------------------------------------------------------------------------------
        Total....................  ..................  ..................  ..................  ..................  ..................  .................
--------------------------------------------------------------------------------------------------------------------------------------------------------

    (b) Disclose, by geographic area, for each of the last three years, 
the following information:
    (1) The number of gross and net productive, suspended, and dry 
exploratory wells drilled;
    (2) The number of gross and net productive, suspended, and dry 
development wells drilled; and
    (3) The number of gross and net productive, suspended, and dry 
extension wells drilled.
    (c) Definitions. For purposes of this Item, the following terms 
shall be defined as indicated below.
    (1) A dry well is an exploratory, development, or extension well 
that proves to be incapable of producing either oil or gas in 
sufficient quantities to justify completion as an oil or gas well.
    (2) A productive well is an exploratory, development, or extension 
well that is not a dry well.
    (3) A suspended well is a well that has neither been declared dry 
nor completed for use in field operations.
    (4) Completion refers to installation of permanent equipment for 
production of oil or gas, or, in the case of a dry well, to reporting 
to the appropriate authority that the well has been abandoned.
    (v) The number of wells drilled refers to the number of wells 
completed at any time during the fiscal year, regardless of when 
drilling was initiated.
    (d) Disclose, by geographic area, for each of the last three years, 
any other exploratory or development activities conducted, including 
implementation of mining methods for purposes of oil and gas producing 
activities.

Sec.  229.1206 (Item 1206)  Present activities.

    (a) Disclose, by geographical area, the registrant's present 
activities, such as 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.
    (b) Provide the description of present activities as of a date at 
the end of the most recent fiscal year or as close to the date that the 
registrant files the document as reasonably possible.
    (c) Include only those wells in the process of being drilled at the 
``as of'' date and express them in terms of both gross and net wells.
    (d) Do not include wells that the registrant plans to drill, but 
has not commenced drilling unless there are factors that make such 
information material.

Sec.  229.1207 (Item 1207)  Delivery commitments.

    (a) If the registrant is committed to provide a fixed and 
determinable quantity of oil or gas in the near future under existing 
contracts or agreements, disclose material information concerning the 
estimated availability of oil and gas from any principal sources, 
including the following:
    (1) The principal sources of oil and gas that the registrant will 
rely upon and the total amounts that the registrant expects to receive 
from each principal source and from all sources combined;
    (2) The total quantities of oil and gas that are subject to 
delivery commitments; and
    (3) The steps that the registrant has taken to ensure that 
available reserves and supplies are sufficient to meet such commitments 
for the next one to three years.
    (b) Disclose the information required by this Item:
    (1) In a form understandable to investors; and
    (2) Based upon the facts and circumstances of the particular 
situation, including, but not limited to:
    (i) Disclosure by geographic area;
    (ii) Significant supplies dedicated or contracted to the 
registrant;
    (iii) Any significant reserves or supplies subject to priorities or 
curtailments which may affect quantities delivered to certain classes 
of customers, such as customers receiving services under low priority 
and interruptible contracts;
    (iv) Any priority allocations or price limitations imposed by 
Federal or State regulatory agencies, as well as other factors beyond 
the registrant's control that may affect the registrant's ability to 
meet its contractual obligations (the registrant need not provide 
detailed discussions of price regulation);
    (v) Any other factors beyond the registrant's control, such as 
other parties having control over drilling new wells, competition for 
the acquisition of reserves and supplies, and the availability of 
foreign reserves and supplies, which may affect the registrant's 
ability to acquire additional reserves and supplies or to maintain or 
increase the availability of reserves and supplies; and
    (vi) Any impact on the registrant's earnings and financing needs 
resulting from its inability to meet short-term or long-term 
contractual obligations. (See Items 303 and 1209 of Regulation S-K 
(Sec. Sec.  229.303 and 229.1209).)
    (c) If the registrant has been unable to meet any significant 
delivery commitments in the last three years, describe the 
circumstances concerning such events and their impact on the 
registrant.
    (d) For purposes of this Item, available reserves are estimates of 
the amounts of oil and gas which the registrant can produce from 
current proved developed reserves using presently installed equipment 
under existing economic and operating conditions and an estimate of 
amounts that others can deliver to the registrant under long-term 
contracts or agreements on a per-day, per-month, or per-year basis.

Sec.  229.1208 (Item 1208)  Oil and gas properties, wells, operations, 
and acreage.

    (a) Identify and describe generally the registrant's material 
properties, plants, facilities, and installations:
    (1) Identify the geographic area in which they are located;

[[Page 39567]]

    (2) Indicate whether they are located onshore or offshore; and
    (3) Describe any statutory or other mandatory relinquishments, 
surrenders, back-ins, or changes in ownership.
    (b) Provide the information specified in paragraph (c) of this Item 
in tabular format as provided below:

                                  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..........................  .................  ................
------------------------------------------------------------------------

    (c) For oil wells and gas wells in both conventional and continuous 
accumulations and for other wells for products from continuous 
accumulations, disclose separately the number of the registrant's 
producing wells, expressed in terms of both gross wells and net wells, 
by geographic area.
    (d) To the extent the registrant is extracting hydrocarbons through 
means other than wells, provide a discussion of such operations.
    (e) Provide the information specified in paragraph (f) of this Item 
in tabular format as provided below:

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

    (f) Disclose, by geographic area, the registrant's total gross and 
net developed acres (i.e., acres spaced or assignable to productive 
wells) and undeveloped acres, including leases and concessions.
    (g) For unproved properties disclose:
    (1) The existence, nature (including any bonding requirements), 
timing, and cost (specified or estimated) of any work commitments; and
    (2) 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.
    (h) Disclose areas of acreage concentration, and, if material, the 
minimum remaining terms of leases and concessions.
    (i) Definitions. For purposes of this Item, the following terms 
shall be defined as indicated:
    (1) A gross well or acre is a well or acre in which the registrant 
owns a working interest. The number of gross wells is the total number 
of wells in which the registrant owns a working interest. Count one or 
more completions in the same bore hole as one well. In a footnote, 
disclose the number of wells with multiple completions. If one of the 
multiple completions in a well is an oil completion, classify the well 
as an oil well.
    (2) A net well or acre is deemed to exist when the sum of 
fractional ownership working interests in gross wells or acres equals 
one. The number of net wells or acres is the sum of the fractional 
working interests owned in gross wells or acres expressed as whole 
numbers and fractions of whole numbers.
    (3) Productive wells include producing wells and wells mechanically 
capable of production.
    (4) Undeveloped acreage encompasses those leased acres on which 
wells have not been drilled or completed to a point that would permit 
the production of economic quantities of oil or gas regardless of 
whether such acreage contains proved reserves. Do not confuse 
undeveloped acreage with undrilled acreage held by production under the 
terms of the lease.

Sec.  229.1209 (Item 1209)  Discussion and analysis of changes, trends, 
and uncertainties for registrants engaged in oil and gas activities.

    (a) Provide, either as part of Management's Discussion and Analysis 
of Financial Condition and Results of Operations or in a separate 
section, a discussion of:
    (1) 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:
    (i) Changes in prices;
    (ii) Technical revisions; and
    (iii) Changes in the status of any concessions held (such as 
terminations, renewals, or changes in provisions);
    (2) Technologies used to establish the appropriate level of 
certainty for any material additions to, or increases in, reserves 
estimates; and
    (3) Known trends, demands, commitments, uncertainties, and events 
that have had, or are reasonably likely to have, a material effect on 
the company with respect to matters including, but not limited to, the 
following:
    (i) Prices and costs;
    (ii) 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;
    (iii) Performance of any mining-type activities for the production 
of hydrocarbons;
    (iv) The registrant's recent ability to convert:
    (A) Proved undeveloped reserves to proved developed reserves;
    (B) Probable reserves to proved reserves, if disclosed; and
    (C) Possible reserves to probable or proved reserves, if disclosed;
    (v) Anticipated capital expenditures directed toward conversion of:
    (A) Proved undeveloped reserves to proved developed reserves;
    (B) Probable reserves to proved reserves, if disclosed; and
    (C) Possible reserves to probable or proved reserves, if disclosed;
    (vi) Anticipated exploratory activities, well drilling, and 
production;
    (vii) The minimum remaining terms of leases and concessions;

[[Page 39568]]

    (viii) Material changes to any line item in the tables described in 
Sec. Sec.  229.1202 through 229.1208; and
    (ix) Potential effects of different forms of rights to resources, 
such as production sharing contracts, on operations.
    (b) To the extent that such discussion or analysis of material 
changes, known trends, or uncertainties is directly relevant to a 
particular disclosure required by Sec. Sec.  229.1202 through 229.1208, 
the registrant may include such discussion or analysis in response to 
the relevant section, with appropriate cross-references, rather than 
including such discussion or analysis in its general response to Sec.  
229.303 (Management's Discussion and Analysis of Financial Condition 
and Results of Operations).

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

    8. The authority citation for part 249 continues to read in part as 
follows:

    Authority: 15 U.S.C. 78a et seq., 7202, 7233, 7241, 7262, 7264, 
and 7265; and 18 U.S.C. 1350, unless otherwise noted.
* * * * *
    9. Amend Form 20-F (referenced in Sec.  249.220f) by:
    a. Revising ``Instruction to Item 4'' and the introductory text and 
paragraph (b) of ``Instructions to Item 4.D''; and
    b. Removing paragraph (c) of ``Instructions to Item 4.D'' and 
``Appendix A to Item 4.D--Oil and Gas.''
    The additions and revisions read as follows:

    [Note: The text of Form 20-F does not, and this amendment 
thereto will not, appear in the Code of Federal Regulations.]

Form 20-F

* * * * *
    Item 4. Information on the Company
* * * * *
    Instructions to Item 4:
    1. Furnish the information specified in any industry guide listed 
in Part 9 of Regulation S-K (Sec.  229.802 of this chapter) that 
applies to you.
    2. If oil and gas operations are material to your or your 
subsidiaries' business operations or financial position, provide the 
information specified in Subpart 1200 of Regulation S-K (Sec.  229.1200 
et seq. of this chapter). If the required information is not disclosed 
because a foreign government restricts the disclosure of estimated 
reserves for properties under its governmental authority, or amounts 
under long-term supply, purchase, or similar agreements, the registrant 
shall disclose the country, cite the law or regulation which restricts 
such disclosure, and indicate that the reported reserves estimates or 
amounts do not include figures for the named country.
* * * * *
    Instruction to Item 4.D: In the case of an extractive enterprise, 
other than an oil and gas producing activity:
* * * * *
    (b) In documents that you file publicly with the Commission, do not 
disclose estimates of reserves unless the reserves are proved or 
probable and do not give estimated values of those reserves, unless 
foreign law requires you to disclose the information. If these types of 
estimates have already been provided to any person that is offering to 
acquire you, however, you may include the estimates in documents 
relating to the acquisition.
* * * * *

    By the Commission.

    Dated: June 26, 2008.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-14944 Filed 7-8-08; 8:45 am]

BILLING CODE 8010-01-P