Undeveloped Reserves and the Five-Year Time Limit: Can Different Interpretations Coexist?

A key element in determining a project's commercial maturity is the evidence of a firm intent to proceed with development within a reasonable time frame. PRMS recommends five-years as a benchmark, although a longer time can be applied in some cases. The SEC also provides specific guidance and requirements on undeveloped reserves and the five-year maturation time limit. Despite the apparent clarity in the PRMS and SEC regulations regarding project maturity, this paper describes actual examples in the public domain where different levels of commercial maturity have been introduced within a project for proved and probable reserves as a result of the five-year time limit. This has resulted in projects having their proved reserves re-classified as probable reserves because they will not be developed within the five-year time limit. This paper reviews SPE standards and SEC wording on commercial maturity requirements and the five-year time limit, providing clarity on whether a project's recoverable volumes should be classified as reserves or contingent resources if its undeveloped reserves are not matured into developed reserves within five-years of their first reporting, and specific circumstances for a longer maturation time frame do not exist. When referring to projects with proved undeveloped reserves falling outside the five-year time limit, the SEC uses different wording throughout the Final Rule document issued in January 2009. This has resulted in apparently different interpretations of the requirements for projects to meet this criterion. Based on the wording used in 10-Ks and 20-Fs, public disclosures seem to range from only reporting the projects with undeveloped reserves that have been continuously disclosed for five-years or more in the annual filings, to reporting all projects that have been or will remain undeveloped for five-years or more from the time of their first disclosure date. Given the wording in the SEC Final Rule it is understandable that different interpretations of the regulations may emerge. This paper presents an analysis of the SEC language used in the Final Rule and related wording used in SEC comment letters from the last few years. Failing further clarity from the SEC, this analysis provides the authors' opinion on the required clarity required to ensure consistency in the way the SEC five-year rule should be interpreted and in the spirit of comparability among companies that provides the basis for the SEC requirement to report these undeveloped reserves as a separate item. Another area discussed in this paper relates to the wording used by the SEC regarding a project's undeveloped reserves volumes (i.e., its undeveloped reserves in barrels of oil equivalent) and the potential different interpretations the industry may give to the SEC Final Rule. A simple example is presented to provide clarity on the option that is most likely to meet the SEC requirements. Potential inconsistencies resulting from different interpretation are highlighted. The analysis and recommendations presented in this paper aim at creating consistent approaches leading to better comparability among oil and gas companies using an aligned interpretation of standards and requirements for reserves estimation, classification, categorization and disclosure.

This article, written by Senior Technology Editor Dennis Denney, contains highlights of paper SPE 124168, "Methodology for Integrated Reserves Management: Providing Regulatory Compliance and Im proving Decision Making," by Lev Virine, SPE, Project Decisions, and Doug MacDonald, SPE, Schlumberger Information Solutions, prepared for the 2009 SPE Annual Technical Conference and Exhibition, New Orleans, 4-7 October. The paper has not been peer reviewed. Effective corporate reserves-management systems enable tracking reserves to provide input for reporting to regulators and to serve as a decision-support system. Implementation of such reserves-management systems has challenges. Regulatory bodies, including the US Securities and Exchange Commission (SEC), require proper categorization of reserves on the basis of evaluating whether the volumes can be recovered economically in a timely manner. The reserves-management system should provide technical and economic volumes on the basis of up-to-date prices, capture and analyze uncertainties in the reserves volumes, provide secure data access and data archiving, and implement an approval and audit process. Introduction A method to integrate reserves management was developed that comprises three processes—data management, which ensures fast and secure access to reservoir data; economic and technical volume calculation; and a flexible reporting process. Reservoirs, as well as prospects, are organized within a corporate hierarchy. In accordance with SEC regulations and SPE/World Petroleum Council/American Association of Petroleum Geologists/Society of Petroleum Evaluation Engineers Petroleum Resources Management System (SPE-PRMS) guidelines, the data-management process captures proven, probable, and possible reserves, as well as discovered and undiscovered resources, for different petroleum products and companies with different working interests. Each category of each reservoir is associated with an economic case that contains information about costs, prices, and the fiscal regime. Economic volumes can be calculated on the basis of the results of economic evaluations of the reserves. Uncertainties in reservoir data are captured by use of multiple scenarios for each reservoir and category. A regional-pricing mechanism allows updating prices for all economic cases at a particular level of the corporate hierarchy. All changes to the economic-results data would be recorded and require approval. Challenges. Disclosure of oil and gas reserves is different from disclosure of company financial performance or production. While the financial performance of the company, at least in theory, can be calculated precisely, oil and gas reserves are uncertain by definition. Different proven methods of estimating reserves may yield different results. Moreover, different estimators that use similar methods may determine different numbers. New SEC regulations aim to improve transparency by providing investors with more information about the reserves. In particular, the new regulations permit disclosure of probable and possible reserves. It should be noted that information about probable and possible reserves also includes more uncertainties, compared with proven reserves.

SYNOPSIS In June 2016, the US Securities and Exchange Commission (SEC) 'proposed a revision to its disclosure requirements-related guidance under the Securities Act and Exchange Act for properties owned or operated by mining companies'. On 31 October 2018, the SEC released its adopted final rules for property disclosures for mining registrants - 'Modernization of Property Disclosures for Mining Registrants'. The amendments are aimed at providing investors with a more comprehensive understanding of a registrant's mining properties, which should help them make more informed investment decisions. The new rules replace the SEC's Industry Guide 7 as of January 1, 2021. This paper investigates how the new subpart 1300 of Regulation S-K may affect future updates to the Committee for Mineral Reserves International Reporting Standards (CRIRSCO) International Reporting Template, as well as international Reporting Codes. Critical changes such as the reporting of Mineral Resources exclusive of Mineral Reserves are discussed, the impact of third-party reporting regarding reducing Section 11 liability is considered, as is the trend of utilizing multiple qualified persons for technical reports. This paper highlights areas in the CRIRSCO and international Reporting Codes that may require consideration by Qualified and Competent Persons providing technical report summaries and Competent Persons Reports (CPRs). Keywords: SEC, 1300 of Regulation S-K, international Reporting Codes, CRIRSCO, Qualified/Competent Person, mineral reporting.

This article, written by Senior Technology Editor Dennis Denney, contains highlights of paper SPE 123793, "Modernization of the SEC Oil and Gas Reserves Reporting Requirements," by W. John Lee, SPE, Texas A&M University, prepared for the 2009 SPE Annual Technical Conference and Exhibition, New Orleans, 4-7 October. The paper has not been peer reviewed. Modernized US Securities and Exchange Commission (SEC) rules for reporting oil/gas reserves are now broadly consistent with SPE definitions and generally reflect public requests for specific changes in the previous rules. Disclosure requirements based on the revised definitions use annual average prices and allow wider use of reliable technologies. They also allow broader recognition of nontraditional resources, including those from oil sands, shales, and coal; optional disclosure of probable and possible reserves; and replacement of the "certainty" criterion for some reserves with a "reasonably certain" criterion. Official clarification of some of the new terms may be forthcoming. Here, the author provides his opinion of their intent. Introduction The SEC oil/gas reserves-reporting requirements in effect until the end of 2009 were adopted in 1978, with some associated requirements adopted through 1982. In the three decades since adoption of these requirements, the petroleum industry has experienced many changes. As examples, technology associated with recovery and characterization of petroleum accumulations has advanced dramatically; spot markets and transportation of sales products to market have grown and improved substantially; and economic production of nontraditional resources, such as bitumen from oil sands, has been established. These developments, and others, caused the SEC's reporting requirements to lag increasingly behind the capabilities of the petroleum industry. In 2007, the SEC created the position of "Academic Engineering Fellow" to help the commission's staff examine the need for modernizing its rules and to help the staff coordinate a project to propose modifications. In October 2007, the author was retained to fill this position. After review of public comments, the SEC approved and released final rules in December 2008. The new rules were published in the Federal Register of the National Archives and Records Administration on 14 January 2009. Official guidance clarifying the intent of unclear phrases that appear in the rules may come, eventually, from the SEC. Below are comments on some possible interpretations of these guidelines, although final interpretations lie only with the SEC. See the full-length paper for references and Web addresses to view them. Major Rules Changes These rules include revised reserves definitions, which are broadly consistent with the SPE/World Petroleum Council/American Association of Petroleum Geologists/Society of Petroleum Evaluation Engineers-Petroleum Resources Management System (SPE-PRMS) definitions (although important differences remain). Disclosure requirements based on the revised definitions include the following.

PurposeThis paper aims to summarize the requirements of a new US Securities and Exchange Commission (SEC) rule regarding certain communications relating to security-based swaps in the context of the SEC’s ongoing efforts to establish its regulatory regime for such swaps.Design/methodology/approachThis paper provides a close analysis of an SEC final rule that provides that certain communications relating to security-based swaps will not constitute “offers” for purposes of Section 5 of the Securities Act of 1933, under which generally offers or sales of a security must be registered or made pursuant to an exemption from registration. The paper also analyzes the prospects for a general exemption from registration requirements for security-based swaps involving eligible contract participants, and it places the final rule in the context of the SEC’s broader efforts to establish its final rules for security-based swaps.FindingsIn addition to detailing the requirements of the final rule, this paper concludes that it is unlikely that the SEC will decide, generally, to exempt many security-based swaps from registration requirements, and that it is likely that a significant amount of time will elapse before the SEC finalizes most of its remaining rules for security-based swaps.Originality/valueThis paper contains valuable information regarding the regulation of security-based swaps in the context of securities regulation and the SEC’s other rules for such swaps.

The SPE/WPC/AAPG/SPEE Petroleum Resources Management System (PRMS) published in March 2007 provides an international industry standard for classifying and reporting reserves and resources. Many companies have adopted PRMS directly, or in modified versions, as part of their internal asset management systems. However, publicly traded companies have historically been forced to maintain two sets of reserves and resources records: one for internal project and portfolio management, and one for regulatory disclosures. This may no longer be required for those issuers listed on U.S. stock exchanges. On December 29, 2008, the U.S. Securities and Exchange Commission (SEC) published revised rules for disclosure of oil and gas reserves that closely align with the evaluation principles and reserves guidelines contained in PRMS. The SEC mandates reporting of Proved Reserves while disclosure of Probable and Possible Reserves is now optional. These disclosures may be viewed as a subset of PRMS which also includes guidance on Contingent and Prospective Resources. While PRMS reserves are confined to projects that are economic based on internal price forecasts, the SEC requires use of 12-month historical average prices. However, the systems may be integrated with options to include supplemental assessments based on alternative pricing scenarios. Both PRMS and SEC accommodate deterministic and probabilistic estimates of "as sold" hydrocarbon products irrespective of the extraction method and interim processing required. This alignment allows the same resource evaluation to underpin both internal business processes (project tracking, portfolio management) and regulatory disclosures including reconciliations by category. It is now feasible to design a single database to support reporting requirements for both functions at multiple aggregation levels based on geographic area, product type, resource class, and resource category. Companies can now manage their business based on PRMS industry standards but accommodate SEC disclosures within a single integrated assessment system. In addition to allowing significant process efficiencies, a common system improves the linkage between technical and business analyses providing a clear audit trail.

This study examines the market reaction to proposed short-term borrowing disclosure regulations and documents a positive market reaction, indicating the usefulness of the disclosure from the vantage point of investors. The 2008 financial crisis, triggered in part by excessive bank borrowing, led to the failure of a number of major financial institutions, including one U.S. investment bank, Lehman Brothers. Investigating the reasons for Lehman’s failure, the bankruptcy examiner determined in March 2010 that the bank had improperly moved $50 billion off its balance sheet by misclassifying short-term trades as sales. This, and similar window-dressing at other major banks, precipitated a Securities and Exchange Commission (SEC) inquiry. In April 2010, the SEC informed Congress that it was considering new rules to discourage financial firms from reducing borrowing in anticipation of their quarter-end reports. Subsequently, in September 2010, the SEC unanimously voted for a proposed “Short-Term Borrowing Disclosure Rule” requiring additional quantitative and qualitative disclosure about short-term borrowing, with the primary objective of improving investors’ understanding of reported amounts of short-term borrowing. The rule would apply to all SEC registrants, with most disclosure required of Int Adv Econ Res (2012) 18:461–463 DOI 10.1007/s11294-012-9371-2

Summary This paper incorporates the findings of our previous publication (Morales and Lee 2022) and identifies, isolates, and quantifies elements in the annually disclosed proved reserves revisions that should not be considered technical or economic revisions. This has resulted in significantly different technical and economic revisions compared to those simplistically and directly derived using a common interpretation of the Financial Accounting Standards Board (FASB) Topic 932-235-50-5 (a) definition. We have assessed the reliability and comparability of the updated technical revisions when used to judge the reasonable certainty of the underlying proved reserves. We have carried out the analysis separating the proved reserves into developed and undeveloped. To derive a realistic data set to generate the updated technical and economic revisions, we reviewed more than 1,000 annual reports (10K and 20F Forms) and more than 600 comment letters from 141 companies filing annual reports to the Securities and Exchange Commission (SEC) during the period 2010–2020, extracting the information related to annual reserves changes and explicitly focusing on the disclosed revisions of previous estimates (RPE). We present evidence showing that the approach followed is robust and more reliable than the simple approach where technical revisions are estimated by simply subtracting the disclosed revisions due to price effects from the disclosed revisions in annual reports. The root causes for the significant differences between the simplistic approach and the one presented in this paper are mainly due to (1) including annual reserves changes due to nontechnical or economic factors as technical revisions, (2) using different interpretations of SEC and FASB regulations, and (3) not providing critical disaggregation information needed to estimate technical, economic, or other types of revisions correctly. Without proper consideration of these issues, the derived technical and economic revisions from disclosed data can be significantly distorted, affecting any conclusions derived. The annual average changes in technical revisions during a representative period, if correctly estimated, can provide an indication of both overstated and understated certainty of proved reserves estimates, which can impact a company’s relative valuation, asset impairment, internal depreciation, profit/loss, standardized measure, unit development costs, and other indicators based on proved reserves, making the reliability of the technical revisions and their actual upward or downward movements of paramount importance. We also highlight the significant different root causes driving the major differences between developed and undeveloped reserves in their annual technical revisions. The results indicate that for some companies that provide most of the information required for proper analysis, the certainty level of their disclosed developed and undeveloped proved reserves points toward an apparent overestimation of historically disclosed proved reserves. Our analysis shows the dubious quality and lack of reliability and comparability of the disclosed proved reserves revisions and highlights the limited value of existing guidance and current practices. We provide evidence that calls for FASB and SEC to provide complementary guidance in critical areas that currently limit the value, reliability, and comparability of the proved reserves revisions disclosed.

Regulatory Path Dependency in Securities Regulation: Evidence from Israel and U.S.

The Role of Academic Research in SEC Rulemaking: Evidence from Business Roundtable v. SEC

ABSTRACTTo shed light on the role that academic research plays in Securities and Exchange Commission (SEC) rulemaking, this paper examines the SEC's patterns of consumption of academic research from 2007 through 2017. We show how the Business Roundtable v. SEC ruling in 2011 increased consideration given to academic research during SEC rulemaking. We find that after the ruling, the SEC cites more papers in its proposed rules and, in particular, more papers that illustrate the costs of regulation. This change in academic citations results in fewer negative comment letters on proposed SEC regulations. We survey academics whose research was cited by the SEC, and the majority respond that the SEC's description of their work is completely or mostly accurate. When we survey general academics, their average rating of the SEC's accuracy is lower, although the rating improves regarding specific SEC quotes citing academic research. Although there is still room for a more substantive discussion of research, having a higher standard of cost‐benefit analysis leads to a more balanced discussion of academic research.

Purpose – To explain proposed rules and amendments recently issued by the USA Securities and Exchange Commission (SEC) that would impose more detailed reporting requirements for investment advisers that file Form ADV. A companion article describes the SEC’s proposed registered investment company reporting rules which were issued simultaneously. Design/methodology/approach – Describes the SEC’s reasoning for collecting more detailed data, introduces the proposed separate account reporting requirements for SEC-registered investment advisers, explains proposed amendments to Part 1A of Form ADV, describes a proposed codification of SEC staff positions that provide for so-called “umbrella registrations” by closely related advisory firms, and details two proposed amendments to Advisers Act Rule 204-2, the books and records rule, which would require investment advisers to maintain additional materials related to the calculation and distribution of performance information. Findings – Many questions still remain as to how the final rules will eventually take shape; however, it is evident that investment advisers will be subject to a wider array of reporting requirements. Investment advisors are likely to incur increased costs as a result of the proposed rules and amendments, and production of the reports could necessitate a revamp of their various internal procedures. Also, access to additional and enhanced information will have consequences for investment companies with respect to SEC examinations and enforcement activity. Practical implications – Investment advisers should understand that detailed new regulatory reporting is coming and, more specifically, separately managed account clients of investment advisers should be made aware of the proposed reporting requirements. Originality/value – Practical guidance from experienced investment funds lawyer.

SUMMARY: Regulators and legislators have focused significant attention on financial statement restatements in recent years, and the U.S. Securities and Exchange Commission (SEC) and financial statement users view restatements as audit failures. The SEC (2000, 2003a) suggests that shareholder voting on auditor ratification will be impacted by perceptions of audit quality. In this paper we examine shareholder voting on auditor ratifications in 2005 or 2006 following restatement announcements by SEC registrants. We find that shareholders are more likely to vote against auditor ratification after a restatement when compared with votes at (1) firms without restatements or (2) restating firms in the preceding period. Overall, the results provide empirical support to the SEC's assertion that shareholder voting on auditor ratification will be related to perceptions of audit quality, and also support recent actions by shareholder activists to require all firms to submit the selection of the auditor for a ratification vote by shareholders.

Improvements in SEC Economic Analysis Since Business Roundtable: A Structured Assessment

Purpose – To explain proposed rules recently issued by the US Securities and Exchange Commission (SEC) that would dramatically expand both public and non-public reporting of portfolios and other data by US registered investment companies. A companion article covers new reports proposed at the same time for investment advisers that file Form ADV with the SEC. Design/methodology/approach – Explains how the proposed rules intend to rescind Form N-Q and adopt a new portfolio holding form, Form N-PORT, which would require expansive monthly portfolio and risk reporting; describes amendments to Regulation S-X which would both enhance and standardize derivatives disclosures in fund financial statements; and details the reporting requirements for a new annual ‘census-style’ reporting form, Form N-CEN, which would replace an obsolete existing SEC form, Form N-SAR. Findings – While it still remains to be seen how the final rules will be written, it is clear that US registered investment companies will be subject to broader reporting requirements. Investment companies are likely to incur increased costs due to the detailed nature of the information being requested and the frequency with which they will be required to file. Access to additional and enhanced information will have consequences for investment companies with respect to SEC examinations and enforcement activity. Practical implications – Senior management and boards of investment companies should understand the basic framework of the proposed requirements. An operations and finance working group may need to be established by companies in order to coordinate the planning and preparation process for the requirements. Firms also should determine whether their service providers have the necessary resources to assist in complying with the proposed filing requirements. Originality/value – Practical guidance from experienced investment funds lawyer.