NAVIGATING SEC RESERVES REPORTING

Written by Adam Null and Ron Summers

Understanding the Nuances of the Five-Year Rule

§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.

Definitions

(a) Definitions. The following definitions apply to the terms listed below as they are used in this section:

(31) Undeveloped oil and gas reserves. Undeveloped oil and gas 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.

(ii) Undrilled locations can be classified as having undeveloped reserves only if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances justify a longer time.

The rule indicates that specific circumstances may justify a longer time, however, the SEC has made it clear that extenuating circumstances would be required for an extension.  Wright & Company believes that it would be highly unlikely to find a scenario where an extension would be granted for US onshore shale development.  Relevant Compliance and Disclosure Interpretations shown below.

Question 131.03

Question: In the definition of “undeveloped oil and gas reserves,” what “specific circumstances” would justify a time period longer than five years to begin development of those reserves?

Answer: Although several types of projects — such as constructing offshore platforms and development in urban areas, remote locations or environmentally sensitive locations — by their nature customarily take a longer time to develop and therefore often do justify longer time periods, this determination must always take into consideration all of the facts and circumstances. No particular type of project per se justifies a longer time period, and any extension beyond five years should be the exception, and not the rule.

As highlighted earlier, the rule states that undeveloped locations must be “scheduled to be drilled” within five years.  The SEC has further clarified that in this context, “drilled” means converted from undeveloped to developed and capable of production.  It is Wright & Company’s opinion that reserves associated with DUCs that will not be completed within the five-year period cannot be included in an SEC reserves report.  The SEC has referenced the following items in support of this interpretation.

S-K 1205(b)(4)

(4) 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.

S-X Rule 4-10(a)(8)

(8) Development project. A development project is the means by which petroleum resources are brought to the status of economically producible.

S-K Item 1208(c)(3)

(3) Productive wells include producing wells and wells mechanically capable of production.

Furthermore, the SEC has provided guidance around the reserves requirement that a development plan be adopted and the “intent to drill.”

Question 131.04

Question: The definition of “undeveloped oil and gas reserves” requires that the company have adopted a development plan with respect to the reserves. What constitutes adoption of a development plan?

Answer: The mere intent to develop, without more, does not constitute “adoption” of a development plan and therefore would not, in and of itself, justify recognition of reserves. Rather, adoption requires a final investment decision. [Oct. 26, 2009]

Key Takeaways

• Undeveloped Reserves: The five-year rule generally dictates that undeveloped reserves must be associated with locations scheduled to be drilled within that timeframe.
• “Drilled” Defined: The SEC clarifies that “drilled” signifies a well’s transition from undeveloped to developed and capable of production.
• Development Plan: A mere “intent to develop” is insufficient; a final investment decision is required to constitute the adoption of a development plan.
• Extenuating Circumstances: While the rule acknowledges that specific circumstances may justify a longer development timeline, such extensions are expected to be the exception, particularly for US onshore shale development.

Wright & Company Can Help

Navigating the complexities of reserves reporting can be challenging. Our team of experts can provide guidance to ensure your company’s reserves reporting remains:

• Accurate: Reflecting the true economic producibility of your reserves.
• Compliant: Meeting all applicable SEC regulations and guidelines when required.
• Aligned with Industry Best Practices: Incorporating the latest industry standards and interpretations.

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_{Disclaimer: This blog post provides general information and should not be considered legal or financial advice.  Sources for the information provided herein and the Wright & Company opinions include the SEC MODERNIZATION OF OIL AND GAS REPORTING revisions and additions to the Oil and Gas Rules in Regulation S-X and Regulation S-K, and the Divisions published “Compliance and Disclosure Interpretations.”}