The U.S. Securities and Exchange Commission (SEC) recently issued its final rule to modernize and update oil and gas reserve disclosure requirements, following a year of active consultation and discussion. The SEC’s final rule includes changes that reflect today’s improved technologies and alternative extraction methods, which have developed in the 26 years since the SEC last enacted the existing reporting rules. The requirements of the final rule are intended to improve comparability between companies and provide investors with better information about a company’s reserves.

What effect will the new requirements have on Canadian oil and gas companies?

Most Canadian companies that file registration statements or reports with the SEC do so under the Canada/United States Multijurisdictional Disclosure System (MJDS). The MJDS permits such companies to satisfy their US disclosure requirements by using their Canadian disclosure documents, which are prepared in accordance with Canadian law and practice. In its final rule, the SEC has clarified that the new disclosure requirements will not apply to foreign private issuers under the MJDS that use Form 40-F to file their annual reports or to register their securities and that comply with National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities adopted by the Canadian Securities Administrators in Canada. This is because the Canadian disclosure requirements already are broadly consistent with the final rule. Accordingly, the amendments to the US oil and gas disclosure requirements will not affect the disclosure practices of most Canadian clients in the industry. However, the final rule does apply to certain foreign private issuers who rely on Form 20-F to file their annual reports.

Highlights of the SEC’s Final Rule

The final rule made the following key changes to the definitions section of the oil and gas reserve requirements:

Twelve-month average price: The final rule changes 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. This price is calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12-month period prior to the end of the reporting period. In order to prevent confusion amongst investors and improve comparability, the SEC also changed the full-cost accounting rules to use a single price based on a 12-month average.

Extraction of Bitumen and Other Non-Traditional Resources: The final rule expands the definition of "oil- and gas-producing activities" to include sources of oil and gas from "non-traditional" or "unconventional" sources, such as bitumen extracted from oil sands, as well as oil and gas extracted from coalbeds and shales. The change is intended to shift the focus of the definition of oil and gas activities to the final product of such activities, regardless of the extraction technology used. The new definition states specifically that 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 non-renewable natural resources that are intended to be upgraded into natural or synthetic oil or gas, as well as activities undertaken with a view to such extraction, thus permitting these to be counted as reserves. The final rule permits disclosure of the reserves based on the final product sold by the reporting company and the price for the processed product, which allows companies with their own on-site or local processing facilities to disclose reserves that take into account the advantages of their extraction and processing capabilities.

The new definition will 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.

Definition of Proved Reserves: The final rule defines "proved oil and gas reserves" in part as "those quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible." The final rule provides guidance in respect of the concept of "proved reserves" by defining the term "reasonable certainty" as meaning "much more likely to be achievable than not."

Probable and Possible Reserves: The final rule allows optional or voluntary disclosure of probable and possible reserves, which previously could not be disclosed in SEC filings unless required by state or foreign law. The final rule defines "probable reserves" as those additional reserves that are less certain to be recovered than proved reserves but are "as likely to be achieved as not to be achieved" and "possible reserves" as those additional reserves that are less certain to be recovered than probable reserves and "might be achieved, but only under more favourable conditions than are likely."

The SEC made disclosures of probable and possible reserves voluntary because although such disclosure may be beneficial to oil and gas reporting companies and to investors, it also may involve an increased risk of litigation.

New Technology: The final rule allows reporting companies to use new technologies to establish oil and gas reserves so long as the new technologies are "reliable" as defined by the final rule. The definition permits broader use of new technologies to establish the proper classification for reserves, and lessens the need for frequent updates to the reserves definition as technology changes.

The final rule requires companies to disclose the technology used to establish reserve estimates in a company’s first filing with the SEC and for material additions to reserve estimates in subsequent filings. The level of disclosure required is limited to a concise summary of the technologies used to create the estimate.

Reserve Audits and the Contents of Third-Party Reports: Under the final rule, reporting companies who represent that a third party prepared the reserves estimate or conducted a reserves audit of the reserves estimate must file a report of the third party as an exhibit to the relevant registration statement or report. The final rule provides that these reports need not be the full "reserves report," but rather shorter reports that summarize the scope of the work performed by, and conclusions of, the third party.

Geographic Area: The final rule requires disclosure of reserves "by geographical area," meaning companies are required to disclose by individual country, by groups of countries within a continent, or by continent — as appropriate for meaningful disclosure under a company’s particular circumstances. The final rule also requires specific percentage thresholds of the geographical breakdowns of reserve estimates and production.

Disclosure Requirements

Under the final rule, the SEC has added a new Subpart 1200 to Regulation S-K that codifies the disclosure requirements related to companies engaged in oil- and gas-producing activities. The new Subpart is largely based on the existing requirements of Industry Guide 2. Those requirements have been updated and revised to provide better clarity regarding the level of detail required in oil and gas disclosures, including the geographic areas by which disclosures need to be made, as well as to provide formats for tabular presentation of these disclosures. In addition, Subpart 1200 contains new disclosure requirements regarding disclosure of reserves from non-traditional sources (such as, bitumen, shale, coal) 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, disclosure of technologies used to establish additions-to-reserves’ estimates, disclosure of the qualifications of the business entity or individual preparing or auditing the reserves’ estimates, disclosure of a company’s internal-controls-over-reserves’ estimation process, and disclosure based on a new definition of the term "by geographic area."

MD&A Guidance for Companies Engaged in Oil-and Gas-Producing Activities

The final rule provides companies engaged in oil- and gas-producing activities guidance on topics that may be addressed as part of its Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) or discussed in a location close to the tables of disclosure required for the new Subpart 1200 of Regulation S-K. The SEC emphasized that a company should only discuss topics material to the company. These topics include:

  • changes in reserves, including changes made due to changes in price, technical revisions and changes in the status of any concessions;
  • technologies used to establish material additions to reserves estimates;
  • prices and costs, including the impact on depreciation, depletion and amortization, as well as the full-cost ceiling test;
  • 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 company’s recent ability to convert proved undeveloped reserves to proved developed reserves, and if disclosed, its recent ability to convert probable reserves to proved reserves and possible reserves to probable or proved reserves;
  • 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;
  • potential effects of different forms of rights to resources; and
  • geopolitical risks that apply to material concentrations of reserves.


Companies will be required to begin complying with the new disclosure requirements 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 or after December 31, 2009. A company may not apply the new rules to disclosure in its quarterly reports prior to filing its first annual report under the new rules. In order to ensure comparability, the SEC will not permit voluntary compliance with the final rule prior to the effective date.

A copy of the final rule can be found on the SEC’s website at