United States: Trends In SEC Staff Comments On Oil And Gas Disclosures

In 2008, the Securities and Exchange Commission (SEC) adopted modernized rules relating to oil and natural gas disclosures by exploration and production companies. The rules became effective on January 1, 2010. This alert briefly summarizes some of the more frequently issued comments during 2014 by the staff of the SEC's Division of Corporation Finance (Staff) with respect to the oil and natural gas disclosure rules found in Items 1201-1208 of Regulation S-K. Oil and gas producing issuers should consider these comments as they finalize their annual reports on Form 10-K for their most recently completed fiscal year.

Staff Comments Generally

Many of the Staff's comments addressed issuers' failure to comply with specific oil and gas disclosure rules and requirements. To ensure compliance with SEC disclosure requirements and to mitigate the risk of Staff comments, issuers should ensure that their disclosure controls address compliance with all of the SEC's disclosure requirements, including the oil and gas disclosure rules.

During 2014, the Staff generally resolved the comments on oil and gas disclosures by allowing issuers to present in their comment response letter the disclosure that they would have included in their Form 10-K and promise to provide such disclosure in future filings rather than actually amend the previously filed Form 10-K. One exception to this general observation is where the comments related to the reserve report. In these instances, the Staff generally required amendments to the previously filed Form 10-K and reserve report. Oil and gas producing issuers should not assume that the Staff will allow them to resolve comments in future filings, and therefore should ensure compliance with all of the oil and gas disclosure rules to mitigate the possibilities of incurring the time and expense associated with preparing an amended filing.

Reserves and Reserve Reports

  • Failure to file attachments to the reserve report, such as appendices, tables, tables of contents or exhibits, that contain supplemental information referenced in the reserve report. Issuers that do not want to file this information should remove from the report any references to the supplemental information.
  • Do not disclose estimates of quantities or values of oil and gas resources other than proved, possible and probable reserves (for example, do not disclose an estimate of the "gross recoverable reserve potential" relating to each of an issuer's undrilled future exploration prospects or estimates provided by the United States Geologic Survey or other entity).
  • The Staff believes that information in the reserve report should correlate with the disclosure in an issuer's filing. Thus, if a reserve report presents probable and possible reserves, such reserves must also be disclosed in the filing in accordance with Item 1202 of Regulation S-K or expect the Staff to ask to file a revised reserve report that does not include such reserves.
  • Reserve disclosures must satisfy all the disclosure requirements of Item 1202(a) of Regulation S-K, including separate tabular disclosure for developed and undeveloped proved, probable and possible reserves. Moreover, issuers must not aggregate proved, probable and possible reserves into one total reserve estimate, and issuers must break down the development status of each reserve category in the required tabular disclosure. Despite not being specifically listed as one of the categories of reserves that must be separately disclosed in the required tabular disclosure, the Staff considers natural gas liquids (NGLs) to be a separate product type that must be disclosed in a separate category if an issuer has material reserves of such product.
  • Disclose the different levels of uncertainty relating to the unproved reserve estimates and the technologies used to estimate unproved reserves.
  • Disclose the technologies used to establish the appropriate level of certainty for material additions to its reserve estimates included in the total reserves disclosed.
  • Provide the qualifications of (1) the issuer's technical person who is primarily responsible for overseeing the preparation of the reserve estimates, and (2) where a third party engineer conducted a reserve audit, the third party engineer's technical person primarily responsible for overseeing the reserves audit.
  • The reserve report must include all the specific disclosures set forth in Item 1202(a)(8) of Regulation S-K. For example, the report must include (1) a discussion of the primary economic assumptions, including the benchmark price prior to adjustments for price differentials, the reference benchmark or sales pricing point, and the average realized price over the producing life of the properties, and (2) the basis for computing oil equivalent amounts.

Proved Undeveloped Reserves

The "five-year rule" generally prohibits the booking of proved undeveloped reserves (PUDs) for more than five years unless justified by "specific circumstances" and is a topic on which the Staff frequently comments. With the recent volatility in commodity prices, issuers should expect the Staff to continue to focus on this topic in 2015 and should be sure to focus on their PUD disclosures this year. In addition to Staff comments on this topic, oil and gas producing issuers should consider the Staff's disclosure guidance.1 Among other things, the guidance provides a non-exclusive list of factors issuers should consider in determining whether or not "specific circumstances" exist to justify recognizing PUDs beyond the five-year limit and notes that a "final investment decision" must be made before undeveloped reserves can be booked.

Staff comments on this topic include:

  • Discuss the extent to which PUDs will not be developed within five years from the initial disclosure of such reserves or affirmatively state that no material amounts of PUDs will remain undeveloped beyond such time period. 
  • Discuss the specific reasons why any material amount of PUDs remain undeveloped for five years or more after initial disclosure.
  • Disclose material changes to PUDs during the year and the reasons for the changes, such as revisions, extensions/discoveries, acquisition/divestiture, improved recovery and the amounts converted during the year from proved undeveloped to proved developed.
  • Disclose the amount of capital expenditures made in converting PUDs to proved developed reserves.

Oil and Gas Production

  • Specify the production, average sales price and historical unit production costs (without the effect of production taxes) by geographical area and in total for each of the last three years.
  • Include production quantities, by final product sold (regardless of quantity), for each field that contains 15% or more of total proved reserves. Separate disclosure is required for oil, natural gas and NGLs.

Drilling Activities

  • Disclose the number of dry exploratory, net productive and dry development wells drilled in each of the last three years.

Present Activities

  • Describe ongoing activities, such as the number of wells in process of being drilled, completed or shut in awaiting infrastructure.

Delivery Commitments

  • State details concerning commitments to deliver fixed and determinable quantities of oil or gas under existing contracts or agreements.
  • Describe the steps that will be taken to ensure that available reserves and supplies are sufficient to meet delivery commitments.

Oil and Gas Properties

  • Include lease and concession expiration dates separately for gross and net acreage amounts and denote whether such expiring acreage is developed or undeveloped.
  • Provide total gross and net developed acreage by geographic area.


1. See SEC Division of Corporation Finance, Compliance and Disclosure Interpretations, Oil and Gas Rules (last updated May 16, 2013), available at http://www.sec.gov/divisions/corpfin/guidance/oilandgas-interp.htm.

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