Modernization of Oil and Gas Reporting
Requirements
Goals
 Provide investors with a more meaningful and
comprehensive understanding of oil and gas
reserves
 Align disclosure requirements with current
practices and changes in technology
 See companies through eyes of management
Industry Input
 Many changes and definitions are designed to be
consistent with the Petroleum Resource
Management System (PRMS) standards
Implementation
 Required in registration statements filed on or after
January 1, 2010 and annual reports for fiscal
years ending on or after December 31, 2009
 No early adoption is permitted
 Prospective only; no retroactive revisions of past
reserve estimates required
Reserves Generally
 The estimated remaining quantities of oil and gas
and related substances anticipated to be
economically producible, as of a given date, by
application of development projects to known
accumulations
Reserves Generally (cont.)
 There must exist, or there must be a reasonable
expectation that there will exist, the legal right to
produce or a revenue interest in the production,
installed means of delivery to market and all
permits and financing required to implement the
project
Proved 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
Proved Reserves (cont.)
– 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
12-Month Average
 In determining “economically producibility” a
company must use a 12-month average price
 The unweighted arithmetic average of the firstday-of-the-month price for each month in the 12month period prior to the end of the reporting
period (unless prices are defined by contractual
arrangements)
12-Month Average (cont.)
 Reduces effects of short term volatility
 Enhances comparability of disclosures
 Reserve estimations target volumes, not fair value
 SEC communicating with FASB and IASB to align
accounting standards with new disclosure
standards
Reasonable Certainty
 Deterministic
– “high degree of confidence”
– “much more likely to be achieved than not”
 Probabilistic – 90% probability that quantities
recovered will meet estimate
 Applies to all proved reserve calculations (rather
than prior “certainty” standard for certain
undeveloped reserves)
Developed and Undeveloped
Reserves
 Concept of “developed and undeveloped reserves”
applies to all reportable reserve classifications,
including the “probable” and “possible”
classifications
Developed and Undeveloped
Reserves (cont.)
 Developed:
– can be expected to be recovered through existing wells
with existing equipment and operating methods
– recovered through extraction technology installed and
operational or
– if the cost of required equipment is relatively minor
compared to the cost of a new well
Developed and Undeveloped
Reserves (cont.)
 Undeveloped:
– Reasonable certainty of development
– 5 – year development time frame, unless “specific”
circumstances exist
– use of techniques to establish undeveloped reserves
that have been proven by production from projects in
the same reservoir or an analogous reservoir – or “by
other evidence using reliable technology that
establishes reasonable certainty”
Reliable Technology
 New definition broadens types of technologies that
may be used to establish reserves
 “Principles-based” definition
Reliable Technology (cont.)
 Permits the use of technology (including
computational methods) that has been field tested
and has demonstrated consistency and
repeatability in the formation being evaluated or in
an analogous formation
 Must include in disclosure a concise summary of
technology used
Analogous Reservoir
 Have similar rock and fluid properties, reservoir
conditions (depth, temperature and pressure) and
drive mechanisms
 Same geological formation, environment of
deposition and geological structure
Unproved Reserves
 Prior to changes, only proved reserves could be
reported
 New rules allow voluntary reporting of “probable
reserves” and “possible reserves”
Probable Reserves
 “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 be
recovered”
Probable Reserves (cont.)
 Deterministic: as likely as not that actual remaining
quantities recovered will equal or exceed the sum
of estimated proved plus probable reserves
 Probabilistic: at least a 50% probability
Possible Reserves
 Reserves that are less certain to be recovered
than probable reserves
Possible Reserves (cont.)
 Deterministic: the total quantities ultimately
recovered from a project have a low probability to
exceed the sum of proved, probable and possible
estimates
 Probabilistic: at least a 10% probability
Accounting Issues
 FASB will make accounting standards consistent
(departure from proposed rules)
 Impact on “ceiling” test:
– certain oil and gas extraction costs below the ceiling test
are deferred or amortized over time
– can cause write-down in income during period of rising
prices or deferral of a write-down during period of
declining prices
Application to Non-Traditional
Resources
 Shift in focus to final product, regardless of the
extraction technology
 Must be a material part of a reporting issuers
business as a threshold matter
 Investment decisions are based on the value and
disposition of the final product
Application to Non-Traditional
Resources (cont.)
 “Oil and gas producing activities include the
extraction of saleable hydrocarbons, in the solid,
liquid or gaseous state, from oil sands, shale,
coalbeds or other nonrenewable natural resources
intended to be upgraded to synthetic oil or gas”
 Reporting must distinguish between final products
that are synthetic and traditional (to take into
account additional cost of unconventional
development)
Codification of Guide 2
 Subpart 1200 of Regulation S-K will codify Guide 2
 In addition to the disclosure required by Guide 2,
Subpart 1200 will require the following:
Subpart 1200
 disclosure of reserves from
non-traditional sources
 disclosure of probable and
possible reserves
(optional)
 disclosure of reserve price
sensitivity (optional)
 geographic area
disclosure
 disclosure of development
of proved undeveloped
reserves
 disclosure of technologies
used to establish
estimates
 disclosure of internal
controls over reserve
estimations
By Geographic Area
 Must disclose reserves by geographic area as
appropriate under a company’s particular
circumstances:
– by individual country
– by groups of countries within a continent or
– by continent
By Geographic Area (cont.)
 Disclosure of reserves in each country or field
containing more than 15% of the proved reserves
(unless prohibited by the particular country)
Summary Tabular Presentation
 Must disclose in the aggregate and by geographic
area and product type:
–
–
–
–
proved developed reserves
proved undeveloped reserves
total proved reserves
on an optional basis, probable developed, probable
undeveloped, possible developed and possible
undeveloped reserves
Summary Table
Summary of Oil and Gas Reserves as of Fiscal
Based on Average Fiscal
- Year End
- Year Prices
Reserves
Natural
Synthetic
Synthetic
Gas
Oil
Gas
Oil
Reserves category
PROVED
Developed
Continen
tA
Continent B
Country A
Country B
Other Countries in Continent B
Undeveloped
Continent A
Continent B
Country A
Country B
Other Countries in Continent B
TOTAL PROVED
PROBABLE
Developed
Undeveloped
POSSIBLE
Developed
Undeveloped
(mbb
l s)
(mmcf)
(mmbls
)
(mmcf)
Product A
(measure)
Price Sensitivity Table
 Optional table
 Additional information regarding sensitivity that
reserves have to price fluctuations
Sensitivity Table
Sensitivity of Reserves to Prices
By Principal Product Type and Price Scenario
Price Case
Oil
mbbls
Scenario 1
Scenario 2
Proved Reserves
Gas
Product A
mmcf
measure
Probable Reserves
Oil
Gas
Product A
mbbls
mmcf
measure
Oil
mbbls
Possible Reserves
Gas
Product A
mmcf
measur e
Qualifications of Primary Technical
Person
 General discussion of internal controls used to
assure objectivity in estimation process
 qualifications of the technical person:
– primarily responsible for preparing reserve estimates
– or conducting reserve audit, if the company discloses
that such a reserve audit has been performed
 No requirement for independent third party
preparer
Third Party Audit Reports
 If a company represents that a third party
prepared the reserve estimate or conducted a
reserve audit, the third party report must be filed
as an exhibit
 Full report not required; summary of work
performed and conclusions is sufficient
 If included in a registration statement, consent of
third party must be an exhibit as well
Third Party Process Reviews
 Process reviews assess the adequacy and
effectiveness of a company’s internal processes
and controls relative to reserve estimations
 If a company discloses that a third party
conducted a process review, the third party report
must be filed as an exhibit
 If included in a registration statement, consent of
third party must be an exhibit as well
Aging of PUDs
 Narrative only (as opposed to proposed tabular
presentation) disclosure regarding:
– total quantity of proved undeveloped reserves (PUDs) at
year end
– any material changes during the year, including
conversion to proved reserves
– investments and progress made in converting to proved
reserves
– explanation of reasons for PUDs remaining
undeveloped five years after initial PUD disclosure
MD&A Guidance
 changes in proved
reserves
 technologies used to
establish level of certainty
 prices and costs, including
ceiling test
 performance of current
wells
 performance of miningtype activities for
hydrocarbon production
 ability to convert reserves
 remaining terms of leases
and concessions
 effects of different forms of
rights to resources
 geopolitical risks
 other material trends,
demands, commitments,
uncertainties and events