The SEC recently approved sweeping changes to its rules governing the reporting of oil and gas reserves. The SEC adopted the new rules to bring reporting requirements into line with technological advances in the estimation of reserves and to permit reporting companies to present a more complete and meaningful picture of their reserves. The rules modernize the disclosure requirements for oil and gas reserves, coordinate the full cost accounting rules with the revised disclosure requirements, update and codify the SEC’s industry guide for disclosure of oil and gas operations, and align the disclosure requirements of foreign private issuers with those that apply to domestic issuers. The new rules are discussed in the SEC’s massive adopting release (No. 34-59192).  

Reporting companies must comply with the new regulations for registration statements filed on or after January 1, 2010, and for annual reports for fiscal years ending on or after December 31, 2009. The SEC noted that it may delay compliance with the new rules while it communicates with the U.S. Financial Accounting Standards Board and the International Accounting Standards Board regarding the alignment of their accounting standards with the SEC’s new full cost accounting rules. Companies may not elect to comply with the new rules before they become effective.  


The SEC launched its project to update the oil and gas disclosure regime in a “concept release” it issued in December 2007. Many industry participants had criticized the current rules on disclosure of reserves as no longer reflecting of industry practice and as preventing an investor from viewing the company through management’s eyes. The new rules, which incorporate many suggestions from industry experts, represent a comprehensive overhaul of reserves definitions and oil and gas disclosure requirements. The SEC formulated many of the requirements to be consistent with the guidelines for oil and gas reserves issued by the Petroleum Resource Management System (PRMS), which is widely accepted in the industry as the standard for management of petroleum resources. The new rules include amendments to the oil and gas reserves definitions and related disclosure requirements in the SEC’s Regulation S-K. As part of the changes, a new Subpart 1200 to Regulation S-K (consisting of Items 1201 through 1208) amends and codifies the oil and gas disclosure requirements currently contained in Industry Guide 2 (Disclosure of Oil and Gas Operations).

Changes to Oil and Gas Reserves Definitions  

The SEC adopted important changes to the definitions of “reserves” in Rule 4-10 of Regulation S-K. Among the most significant changes, the new rules:  

  • Add classifications for “probable” and “possible” reserves;
  • Prescribe the use of a 12-month average price to determine economic producibility of oil and gas reserves estimates;  
  • Authorize the use of new technologies to establish reserves;  
  • Permit the inclusion of alternative sources of oil and gas, such as reserves derived from oil shale and tar sands; and  
  • Provide new definitions for “developed” and “undeveloped” reserves.  

Expanded Definitions of Reserves  

Although oil and gas companies categorize their reserves as “proved,” “probable” or “possible,” current SEC rules permit companies to disclose only proved reserves. Under the new rules, companies will have the option to report their estimated probable and possible reserves under new definitions of these types of reserves.  

The SEC observed that the current prohibition on disclosure of unproved reserves was based on concerns that categories of reserves that are not proved are speculative and uncertain of realization and therefore may be confusing or misleading to investors. Investors, however, currently rely on press releases, management portfolios and other unfiled documents to compare the prospects of probable and possible reserves for different companies. The SEC noted that, because these press releases and reports do not use standardized definitions, it is difficult objectively to compare different estimates of unproved reserves. The SEC believes that investors will benefit from consistency in the reporting of probable and possible reserves in accordance with the definitions in the new rules, which also significantly revise the definition of proved reserves.  

The new rules overhaul the current definitional scheme for oil and gas reserves.  

  • Reserves are defined as “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.” The definition adds that “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 delivering oil and gas or related substances to market, and all permits and financing required to implement the project.”
  • Proved 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 SEC has adopted a definition of reasonable certainty that largely mirrors the PRMS formulation, which defines reasonable certainty as “a high degree of confidence that the quantities will be recovered.” The SEC clarified in the adopting release that a “high degree of confidence” may be interpreted as “much more likely to be achieved than not.”  

The new rules permit the use of both deterministic methods and probabilistic methods for estimating reserves and include definitions for these two types of estimates, which also correspond to the PRMS standards currently used by reserves estimators. If deterministic methods are used to establish proved reserves, the term “reasonable certainty” is intended to express a high degree of confidence that the quantities will be recovered. If probabilistic methods are used, “reasonable certainty” means there should be at least a 90% probability that the quantities actually recovered will equal or exceed the estimate.  

  • 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.” When deterministic methods are used, it must be as likely as not that actual remaining quantities recovered will exceed the sum of estimated proved plus probable (2P) reserves. When probabilistic methods are used, there should be at least a 50% probability that the actual quantities recovered will equal or exceed the 2P estimate.  
  • Possible reserves are “those additional reserves that are less certain to be recovered than probable reserves.” When deterministic methods are used, the total quantities ultimately recovered from a project must have a low probability of exceeding 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 reserves estimates.  

Economic Producibility and 12-Month Average Pricing  

The new rules revise the current pricing method for determining proved reserves estimates. The definition provides that, for oil and gas reserves to be considered “proved,” they must be “economically producible” under existing economic conditions. The SEC staff has interpreted economic producibility to mean that “the company can sell the resources for more than its cost to extract and transport them to market.” The current rule requires that companies use single-day, year-end pricing to establish that reserves are economically producible. Commenters on the proposed rules strongly argued that the use of a year-end fixed price was incompatible with the volatility of price swings in the industry and did not provide investors with meaningful information or a sound basis for evaluating a company’s reserve estimates.  

The new rules will require companies to use a 12-month average price to determine economic producibility, calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12-month period before the end of the reporting period (unless prices are defined by contractual agreement). The change to the pricing calculation was designed to mitigate the effect of variability in oil and gas prices due to seasonal demands. Moreover, companies will now be permitted to report tabular sensitivity analyses outlining potential oil and gas prices under alternative economic conditions. The SEC noted that this additional disclosure also should help to mitigate seasonal effects, so that reserves estimates will more closely match those used by management in planning and investment decisions.  

The SEC stated that it will be revising the full cost accounting rules related to oil and gas reserves to adopt a pricing calculation based on the new 12-month average, rather than (as originally proposed) continuing yearend pricing for calculating the limitation on costs that may be capitalized under the full cost method. The SEC emphasized that the accounting change does not require retroactive revision of past reserves estimates, as the change should be treated as a change in the method of applying an accounting principle that is inseparable from a change in accounting estimate. Thus, the change need only be recognized in an explanatory paragraph in the independent auditor’s report.  

The SEC believes that the move towards a 12-month average price effectively eliminates the anomalies caused by the single-day, year-end price used in the current ceiling limitation test. As a result, the SEC is also eliminating portions of the Staff Accounting Bulletin (SAB) Topic 12:D.3.c, which allows companies to consider the impact of price increases after the end of the period. The SEC observed that the use of a 12- month average price in the ceiling test calculation and the elimination of SAB Topic 12:D.3.c could result in companies having to record a write-down during periods of rising oil and gas prices that would not have been necessary under the current pricing approach. In periods of declining oil and gas prices, on the other hand, application of the new rules could cause the deferral of ceiling test write-downs.  

Use of New Technologies to Establish Reserves  

The SEC amended the definition of proved oil and gas reserves to allow for new technologies to establish the reasonable certainty of proved reserves. Advancements in technology, such as 3-D and 4-D seismic imaging, computer modeling, and drilling and extraction techniques, have increased the accuracy of oil and gas estimates and have allowed companies to identify reservoirs with greater confidence. Under the current Rule 4-10, economic producibility must be established by actual production or a conclusive formation test. Accordingly, there must be actual drilling or well-flow testing in these reservoirs for the reserves to be considered “proved.”  

A primary objective of the new rules is to allow companies to use technologies developed over the last three decades to determine reserve estimates and classifications. The new rules authorize for this purpose the use of “reliable technology,” which the rules define as “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.” The SEC noted that the definition was crafted to include new technologies that may be developed in the future. In addition, the SEC amended its rules to permit companies to claim proved reserves beyond those areas immediately adjacent to “developed spacing areas” (formally known as “drilling units”) if companies can establish with reasonable certainty that these reserves are economically producible. Disclosure of Reserves Derived from Alternative Sources The current definition of “oil and gas producing activities” specifically excludes “unconventional” sources of oil and gas that involve extraction by means other than traditional oil and gas wells. The new rules will permit companies to report reserves from some alternative sources. The SEC agreed with industry experts that significant advancements in extraction and processing technology over the last three decades have resulted in the increasing use of alternative energy sources. In adopting a products-based approach to reserves disclosure, the SEC noted that the method of extraction and interim processing should not be a determining factor in whether an oil and gas resource can be included in a company’s estimation of its reserves. As amended, the definition of “oil and gas producing activities” has been expanded to include “the extraction of saleable hydrocarbons, in the solid, liquid, or gaseous state, from oil sands, shale, coalbeds, or other nonrenewable natural resources which are intended to be upgraded into synthetic oil or gas, and activities undertaken with a view to such extraction.” The SEC clarified, however, that the new rules will prohibit a company from including coal and oil shale as oil and gas reserves if they will not be converted into oil and gas (such as when the company utilizes these resources as direct fuel).  

New Definitions of Developed and Undeveloped Reserves  

The new rules add new definitions of “developed” and “undeveloped” reserves. The rules define developed reserves (from traditional wells) as those reserves of any classification the company can expect to recover through “existing wells with existing equipment and operating methods.” The reserves also may be considered “developed” if the cost of any required equipment is relatively minor compared to the cost of a new well. In projects that extract oil and gas by alternative methodologies, the rules define developed reserves as those which the company can expect to recover through “extraction technology installed and operational at the time of the reserves estimate.”  

Under the new rules, undeveloped reserves are “reserves of any category 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.” The SEC amended the rules regarding undeveloped reserves in several significant ways. First, under the current rules, proved undeveloped reserves in offsetting drilling units (referred to in the new rules as offsetting “developed spacing areas”), immediately adjacent to productive wells, are determined under a reasonable certainty standard. For areas beyond immediately adjacent drilling units, however, the current standard is one of “certainty.” The current rules require that, if proved undeveloped reserves are estimated to be in areas beyond those areas immediately adjacent to productive wells, oil and gas companies must demonstrate with “certainty” that there is a “continuity of production from the existing productive formation.” Commenters roundly criticized the certainty requirement, arguing that there should be a consistent standard of “reasonable certainty” for proved developed reserves and proved undeveloped reserves. Agreeing with this judgment, the SEC amended the definition of proved undeveloped reserves to adopt a reasonable certainty standard for all areas. The SEC affirmed that the changes “establish a uniform standard of reasonable certainty that applies to all proved reserves, regardless of location or distance from producing wells.”  

Second, the SEC addressed the issue of requiring a time limit for maintaining undeveloped reserves. The SEC originally had proposed the imposition of a five-year limit for the disclosure of undeveloped reserves in the absence of “unusual” circumstances. In response to comments on its proposal, the SEC revised the rule to replace the “unusual circumstances” test with a “specific circumstances” standard. This standard will allow companies to include in their reserves estimates those projects that are expected to remain undeveloped longer than five years, irrespective of unusual circumstances.  

Finally, the SEC expanded the definition of proved undeveloped reserves to permit the use of techniques that have been proved effective by actual production from projects in the same reservoir or an analogous reservoir, or by other evidence using reliable technology that establishes reasonable certainty.  

Overview of New Disclosure Requirements Under Regulation S-K  

Industry Guide 2 currently prescribes the specialized disclosure requirements for oil and gas companies, including disclosure of reserves, production, properties and operations. Industry Guide 2 has been updated and codified as a new Subpart 1200 of Regulation S-K and will be eliminated once the new rules take effect.  

The SEC revised the Industry Guide 2 requirements to clarify the level of detail required in oil and gas disclosures, including the geographic areas by which the disclosures must be made, and to provide formats for the tabular presentation of the disclosures. In addition, Subpart 1200 will go beyond Industry Guide 2 to require the company, or give it the option, to disclose:  

  • Reserves from “non-traditional” sources;
  • Probable and possible reserves (on an optional basis);
  • Sensitivity analyses (on an optional basis);
  • Progress in converting proved undeveloped reserves into proved developed reserves;
  • New technologies utilized in reserves estimates;
  • Internal controls relating to reserves estimation;
  • Third-party reports on reserves; and
  • Geographic areas of reserves estimates.

Companies will have to present most of the new disclosures in tabular form. The SEC has provided examples of reporting tables, but assured companies in the adopting release that they may combine two or more of the required tables or otherwise adjust the prescribed format to include additional information or improve the presentation. Disclosure of Reserves from Non-Traditional Sources  

New Item 1202 will require companies to separate their reserves based on the final product, while distinguishing between traditional and synthetic oil and gas products. Separate disclosure of alternative sources of oil and gas will allow investors to identify those reserves estimates that may involve higher extraction and processing costs.  

The SEC clarified that a company must disclose as “other natural resources” alternative resources (such as bitumen) which it sells before the resources are processed into synthetic oil or gas. In such a case, the final product is the alternative resource rather than synthetic oil or gas, and the company will not be permitted to determine reserves estimates based on the price of the upgraded product. Similarly, if the company is involved only with the processing of the natural resource, it will not be able to claim either type of reserves.  

Optional Disclosure of Probable and Possible Reserves

The new rules will permit companies to disclose probable and possible reserves in addition to proved reserves. The disclosure of these two less reliable reserves estimates will be optional. The SEC included a table in Item 1202 to illustrate how reserves estimates should be reported. (Although the table presents disclosure of all classifications of reserves, the full reserve report will not have to be filed.) If companies choose to disclose probable and possible reserves, they must indicate whether those reserves are developed or undeveloped and provide the geographic locations of the unproved reserves, as they would for proved reserves. The company also must report the “relative uncertainty” associated with these classes of reserves.  

Optional Disclosure of Sensitivity Analysis  

Under the new rules, a company will be permitted, but not required, to report a price sensitivity analysis that provides additional reserve information at different prices and costs, such as those that the company’s management uses to make investment decisions or that reflect other changes in assumptions. The company will have to submit the sensitivity analysis in tabular form, and may include an estimate of reserves for each product type based on different price and cost criteria, including standardized futures prices or management’s own forecasts. If the company chooses to disclose a sensitivity analysis, it also will have to disclose the price and cost schedules and assumptions on which it has based the disclosed values.  

Disclosure of Proved Undeveloped Reserves  

New Item 1203 will require companies to disclose, in narrative form, the total quantity of proved undeveloped reserves at year end as well as any material changes in proved undeveloped reserves that occurred during the year, including proved undeveloped reserves converted into proved developed reserves. In its disclosure, the company will have to discuss investments (including capital expenditures) and progress made during the year to convert proved undeveloped reserves to proved developed reserves. If proved undeveloped reserves have been held for five years or more, the company will have to provide an explanation of why these reserves have remained undeveloped and why they should continue to be considered “proved.”  

Disclosure of New Technologies  

Disclosure under the new rules will include a concise summary of the technology or technologies the company used in determining its reserve estimates and in establishing the level of certainty for the estimates. The summary may be general in nature and will not have to disclose specific proprietary information. The disclosure will be due in a company’s first filing with the SEC on Form 10-K after the rules become effective and thereafter whenever the company discloses material additions to its reserves estimates. The SEC noted that the staff may request that companies provide supplemental data with respect to the technologies used to establish reserves estimates as part of the review and comment process already in place pursuant to Instruction 4 to Item 102 of Regulation S-K.  

Disclosure of Internal Controls and Technical Qualifications  

Under Item 1202, a company will be required to disclose the internal controls it uses to assure objectivity in the reserves estimation process. The disclosure will have to contain a discussion of qualifications of the technical person primarily responsible for overseeing the preparation of the reserves estimates and for overseeing any reserves audit conducted by a third party.  

Disclosure of Third-Party Reports  

If a company’s reserves disclosures are based on the authority of a third party that prepared the reserves estimates or conducted a “reserves audit” or process review, the company will have to file a report prepared by the third party as an exhibit to its registration statement or other SEC filing, rather than furnish the report supplementally to the SEC staff. The SEC has defined the term “reserves audit” as “the process of reviewing certain of the pertinent facts interpreted and assumptions underlying a reserves estimate prepared by another party 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.”  

The third-party report will have to contain the following information (based on the audit report guidelines of the Society of Petroleum Evaluation Engineers):  

  • Effective date of the report;
  • Purpose of the report and the party for which it was prepared;
  • Proportion of the company’s total reserves and the geographic location of the reserves covered by the report;  
  •  Assumptions data, methods, and procedures used in preparation of the report;  
  • Primary economic assumptions underlying the report;  
  • Possible effects of regulation on reserves recovery;  
  • Discussion regarding the inherent uncertainties of reserves estimates;  
  • Statement assuring the use of all necessary methods and procedures in preparing the report;  
  • Summary of conclusions; and  
  • Signature of the third party.  

Disclosure of Geographic Areas of Reserves  

The new rules will require companies to disclose their reserves estimates, as appropriate, by individual country, by groups of countries within a continent, or by continent. Under Item 1204, companies will have to report the production for each of the last three fiscal years, by final product sold, of oil, gas and other products for each country and field that contains 15% or more of the company’s total proved reserves, unless prohibited from doing so by the laws of the country in which the reserves are located. Under Item 1202, companies will have to report the reserves estimates as of fiscal-year end in each country containing 15% or more of the companies’ proved reserves, unless that country’s government prohibits disclosure of reserves. The new rules do not require companies to break out reserves estimates by sedimentary field or basin.  

The staff has clarified that if a country prohibits disclosure of reserves by field, and the majority of a particular country’s reserves are situated in one field, a company will not be required to disclose the reserves from that country, as this reporting would essentially result in field disclosure. Companies reporting domestic reserves will not be required to disclose the state or states in which the reserves are located.  


The SEC's new disclosure scheme should be welcomed by oil and gas companies and their investors. Companies will now have the opportunity to present significantly improved disclosure in their SEC filings, so that investors will no longer have to rely on press releases and other unfiled presentations to obtain comprehensive reserves information. Companies will need to develop their enhanced reserves disclosure and related internal controls in order to be ready for implementation of the new regime. Unfortunately for investors, the rules do not permit registrants voluntarily to accelerate their compliance with the new requirements.