Impact of Modernization of Oil and Gas Reporting Requirement on Value Relevance of Financial Statements of US Oil and Gas Registrants

This research study analyses the impact of modernization of the Oil and Gas Reporting Requirement on the value relevance of the financial statements of US Oil and Gas registrants. It includes a literature review, research methodology, data analysis, and recommendations for future research.

Running head: MSC OIL AND GAS ACCOUNTING
Msc Oil and Gas Accounting
Name of the student:
Name of the University:
Author note

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Abstract:
This research was aimed to analyse the financial statement impact through the modernization
of the Oil and Gas Reporting Requirement which was proposed Rule and effective from the
January 1, 2010. In addition to this, the report has analysed the impact of the same on the
previously applicable rule. The report portrayed an in-depth literature review of the previous
researches regarding the performance and reason of the modernisation program brought in by
the SEC and next to this it has traced the various changes occurred due to the same. As per
the analysis it could be stated that during 2009, 2008 SEC issued the final rule revising the
requirement of disclosure related to the oil and gas reserves. As per the final rule, SEC
reflects consideration of comments received from the stakeholders in response to the
proposed rule brought in by the SEC. It has also been found that it is necessary to make
amendments in the financial reporting procedures for the US organizations to ensure
transparency in their disclosures. The oil and gas industry is not an exception to this regime,
as this sector carries numerous benefits for different groups of stakeholders, however during
the research only few firms operating and Oil and Gas sector in US has been chosen that
restricts the finding of the study.
Key words: SEC proposed rule, SEC proposed rule effective from 2010, Modernization of
the Oil and Gas Reporting Requirement, Value relevance of the financial statements of
United State Oil and Gas registrants

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Table of Contents
CHAPTER 1: INTRODUCTION:.............................................................................................4
1. Introduction:.......................................................................................................................4
2. Background of the study:...................................................................................................5
3. Research aim and objective:...............................................................................................6
3.1 Research aim:...............................................................................................................6
3.1 Objective of the study:.................................................................................................7
3.2 Research question:.......................................................................................................7
4. Justification of the study:...................................................................................................7
5. Structure of the research:...................................................................................................8
6. Chapter summary:..............................................................................................................9
CHAPTER 2: LITERATURE REVIEW:..................................................................................9
1. Introduction........................................................................................................................9
2. A brief Overview:............................................................................................................10
3. The implications of the modernization:...........................................................................10
4. Some new rules under the amendment:...........................................................................11
5. Addition of new products:................................................................................................13
6. Communication with the SEC:.........................................................................................13
7. Impact on accounting literature:.......................................................................................14
8. Consistency with the rules of FASB and the IASB:........................................................14
8.1 Contradictory capitalisation approach between mining and oil and gas related activities:
..............................................................................................................................................15
8.2 Oil and Gas Reserves: Meaning and Importance...........................................................16
8.2.1 Types of Oil and Gas Reserves...............................................................................17
8.2.2 Oil and Gas Reserves in the contemporary period..................................................19
8.2.3 Importance of Oil and Gas Reserves.......................................................................21
8.3 Evolution of Reserves and their disclosure....................................................................23
8.4 Modernization of Oil and Gas Reporting: Reasons and Implications............................25
8.4.1 Reasons behind the Modernization of Oil and Gas Reporting................................25
8.4.2 SEC Modernization of Oil and Gas Reporting of 2009..........................................26
9. Road of modernization:....................................................................................................28
10. Role of Third Party Firm in oil and gas reserve modernization:....................................29
11. Conclusion:....................................................................................................................30
CHAPTER 3: RESEARCH METHODOLOGY:....................................................................31
1. Introduction:.....................................................................................................................31
2. Research Onion:...............................................................................................................32
3. Research design:...............................................................................................................33
3.1. Research philosophy:................................................................................................33
3.2 Research approach:....................................................................................................35
4. Objectives of the research:...............................................................................................36
4.1 Research aim:.............................................................................................................36
4.2 Objective of the study:...............................................................................................36
4.3 Research question:.....................................................................................................37

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5. Data Collection:...............................................................................................................37
6. Sampling method:............................................................................................................40
7. Conclusion:......................................................................................................................41
CHAPTER 4: DATA ANALYSIS...........................................................................................41
1. Introduction:.....................................................................................................................41
2. Deviations pertaining to the gas definitions in the Rule 4-10 of Regulation S-X............42
3. Financial statement analysis:............................................................................................45
4. Conclusion:......................................................................................................................48
CHAPTER 5: CONCLUSION AND RECOMMENDATION................................................48
1. Introduction......................................................................................................................48
2. Limitation of the research:...............................................................................................49
3. Findings:...........................................................................................................................50
4. Conclusion:......................................................................................................................52
5. Scopes for future research................................................................................................53
6. Recommendations............................................................................................................54
Reference:................................................................................................................................57
Table of figures
Figure 1: Different types of oil and gas reserves.....................................................................18
Figure 2: Share (In %) of World Gas Reserves (Continent-wise)...........................................20
Figure 3: Share (In %) of World Oil Reserves (Continent-wise).............................................20
Figure 4: Annual Proved Reserves of oil and natural gas in the USA over the years.............21
Figure 5: Research onion.........................................................................................................32
Figure 6: types of research philosophies..................................................................................34
Figure 7types of research approach..........................................................................................35
Figure 8: Various kinds of data collection methods.................................................................38
Figure 9: Spot prices quarterly average...................................................................................47

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CHAPTER 1: INTRODUCTION:
1.1 Introduction:
During 2009, Securities and Exchange (SEC) a proposed amendment to the disclosure
requirement of the oil and gas companies. It was aimed to encompass the issues that are
previously addressed to source the commission more general revelation of the disclosure
requirement to the firms. New amendment were proposed depending upon the continuing
review of the disclosure that shareholders receive in case they are enquire to make a decision
through voting decision and by the process followed in case those votes are lobbied.
Considering this fact, during 2008 SEC issued the final rule revising the requirement of
disclosure related to the oil and gas reserves. As per the final rule, SEC reflects consideration
of comments received from the stakeholders in response to the proposed rule brought in by
the SEC. as per the official notification of the SECC amendment, it can be seen that,
amendments were aimed to update and modernize the oil and gas disclosure requirements,
specifically in the case of item 102Regulation S-K, Industry Guide 2 and Rule 4-10 of
Regulation S-X in order to align them as per the current industry practices so as to adapt the
changes in technology.
This report is aimed to analyse the financial statement impact through the
modernization of the Oil and Gas Reporting Requirement which was proposed Rule and
effective from the January 1, 2010. In addition to this, the report will analyse and impact of
the same on the previously applicable rule. This section of the report will portray the research
aim, objective and questions and subsequently it will be analysed where it will depict the
target of the researcher. Moving forward, it will portray the structure of the research and
depict the desired finding of the same.

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1.2 Background of the study:
Oil and gas reserves are one of the most vital assets for the oil and gas enterprises.
One of the source of confusions for the investors in the oil enterprise is that the quantities of
reserves and its values are of uncertain estimates. The reserves are mainly classified based on
chance of recovery from the underground reservoirs. The SPE (Society of Petroleum
Engineers) first implemented definitions for the proved reserves in the year 1964. The Energy
policy conservation Act was passed in the year 1975, which in turn led to the definitions for
the proved reserves from SEC in 1978. The SEC has various investigative procedure, rules
and enforcement process unlike other enterprises involved with Oil and Gas sector.
According to the recent definition of SEC, the oil and gas reserves are the measured
remaining quantities of oil and gas and its related substances that is presumed to be
producible economically by the implementation of development projects to the known
accumulations (Davis 2012). The changes that have been occurred since the year 1978
includes- significant advancement in recovery and hydrocarbons characterization, growth as
well as improvement of spot markets and transportation for both oil and gas, establishment of
the economic production from the non- traditional resources. The reserves volumes as well
as values of traded oil and gas enterprise are not directly given on the balance sheet of the
company and therefore is attached to financial statements. The petroleum resources of the
companies in underground reservoirs cannot be counted in an asset. Only recoverable
amounts has been monetized to future cash flows and thus is considered as inventory.
Recoverability of the reserves is considered as the function of numerous variables involving
geology, feasible technology and those that are connected with uncertainty. The SPE
categorizes the reserves into various groups based on uncertainty as well as maturity of
recoverable volumes. Even the total volumes that are recoverable are uncertain but measures
future production under specified conditions. These conditions include- the economic

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conditions including commodity prices, completion as well as extracting resources,
geological information. Some of the US oil and gas companies such as Exxon and Chevron
have lowered their total reserve amounts owing to low prices. Since the reserve amount
estimation is not always done with proper objectivity, it can be showcase broad aspect of this
field.
The commission has been proposing revision to the reporting requirements of oil and
gas that exists in the present form in Regulation S-K as well as Regulation- S-X under the
Securities Act of 1934 and Securities Act 1933. This revision are mainly intended in
providing investors with comprehensive understanding of the oil and gas reserves that might
help investors in evaluating value of the oil and gas enterprise. In the past three decades
which have passed since implementation of these needs, there have been huge changes in oil
and gas sector. Moreover, these proposed amendments are mainly designed to update as well
as modernize oil and gas disclosure needs for aligning them with present practice as well as
changes in technology (Gipper, Lombardi and Skinner 2013). In addition to this, amendments
also simultaneously align full cost rules of accounting with revised disclosures. These
amendments also revise as well as codify the sector guide in the regulation S-K. Furthermore,
this harmonize the disclosures of oil and gas by the private issuers with disclosures for the
domestic issuers. After the initial implementation of oil and gas disclosure needs in the year
1978 and 1982, huge changes have occurred in this oil and gas sector. These changes include-
advancement in technology and huge changes in different kinds of projects where oil and gas
companies invest the capital. This study mainly reflects on and effect of modernization of oil
and gas reporting requirement on value relevance of financial statement of the US Oil and
Gas enterprises (Leuz and Wysocki 2016).

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1.3 Research aim and objective:
1.3.1 Research aim:
This research work has the following aims:
 To understand how the fluctuation in the different factors provided in the treatment in
the final rule of SEC can affect the financial statement of the oil and gas companies
and how it can impact the value relevance of the same.
1.3.2 Objective of the study:
The object of the study are as follows:
 Examine how the changes and factors, from the prescribed treatment in the final rule,
have affected the financial statements of oil and gas companies and whether this has
led to an improvement in their value relevance
1.3.3 Research question:
To identify impact of the modernization of the Oil and Gas Reporting Requirement on the
value relevance of the financial statement of the US Oil and Gas registrants.
1.4 Justification of the study:
The modernization of the disclosures in the annual report helps in depicting the clear
valuation such as previously only one value was taken for identifying relevant revenues
generated by the company by selling oil (Kim 2013). However, now average valuation has
been taken to depict the actual value of the revenues that is generated during the year and the
research study has been done in order to provide knowledge to the corporate managers and
investors about the issues with the present financial accounting standards during the 2009
(Libby 2017). Some of the problems faced by these enterprises include- tax issues, contract
management, issues regarding technologies and so on. The oil and gas companies having
facing these problems over the years, which in turn affected their financial performance. This
research study will help the sharehlders of these oil and gas companies to address results of

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pre-tax differences between the IFRS and GAAP (Macve 2015). Moreover, it will help to
revaluate existing tax accounting methods. In addition to this, this study will also help the
shareholders to combat issues regarding existing contracts. Furthermore, the managers of
these oil and gas enterprise will also able to identify their technology issues and take action
accordingly (Alazzani and Wan-Hussin 2013).
1.5 Structure of the research:
In order to effectively undertake this research project, the whole thesis has been
divided into five chapters. The first chapter of the research study focuses on the background
of the research topic, research aims and objectives, justification of the research study and
structure of the research. The second chapter highlights on the review of literature relating to
the research topic that aligns with impact of the modernization of the Oil and Gas Reporting
Requirement on the value relevance of the financial statement of the US Oil and Gas
registrants. The next section of the research study will portray on the methods that had been
used while conducting the research study. The methods include- research philosophy,
research approach, research design, data collection method, data analysis, sampling design,
sampling technique and ethical considerations. The next section of this research study focuses
on the data analysis in which the data that are collected while conducting this research are
analysed by using few tools. The last section of this study focuses on the conclusion that is
drawn after conducting the reseach study. Furthermore, in this chapter the recommendations
are also provided to the managers and investors of these companies relating to the above-
mentioned problems.
1.6 Chapter summary:
From the above discussion it can be found that the research is aimed to identify
impact of the modernization of the Oil and Gas Reporting Requirement on the value
relevance of the financial statement of the US Oil and Gas registrants. For this purpose, in

9MSC OIL AND GAS ACCOUNTING
this section it has portrayed the research aim, objective and the questions that the researcher
wanted to research and it has provided a brief overview of the process utilising which the
project work will proceed further.
CHAPTER 2: LITERATURE REVIEW:
2.1 Introduction
The oil and gas industry being one of the crucial industries in the contemporary
framework, as discussed in the above section and the same having huge implications on other
industries across the globe, it becomes considerably important to have a robust accounting
and reporting model for the purpose of accounting the exploration as well as production
activities in the oil and gas market, in order to ensure transparency, efficiency and facilitation
of investment and economic decisions in the concerned field (Libby 2017).
There have been considerable debates, in this context, over the years, regarding the
appropriate accounting model in the aspects of the accounting regulation which
comprehensively captures the different transactions which take place in the oil and gas
industry across the globe, due to the existence of faults and limitations in the traditional
accounting practices used in this domain in the earlier times (Olah, Goeppert and Prakash
2011). There exist huge literary and empirical evidences regarding the different accounting
models and their evolution, benefits and limitations in the aspect of oil and gas accounting, in
the global framework, with the same getting developed and more inclusive with time.
Keeping this into consideration, the concerned section of the thesis tries to conduct an
extensive review of the literatures and scholarly evidences, present in the global scenario
regarding these aspects, with emphasis on the oil and gas reserves in the contemporary
period, especially in the domain of the United States of America.

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2.2 A brief Overview:
Reserves disclosures are going to undergo a vast amount of change because of the
introduction of the Securities and Exchange Commission of the Oil and Gas Requirements.
There are a variety of changes, which were initially expected, as this change was announced.
Some of the doubts were raised about the implications of this change in the form of
calculation under new requirements, impact on the volumes, whether there will be a decrease
or increase, or if the adoption of the change would be sudden, resulting in a fast pace shifting
or would it be slow and gradual process. All these various kinds of issues were important
from the perspective this change would be bringing.
2.3 The implications of the modernization:
The Securities and Exchange Commission had adopted a range of revisions to its oil and gas
reporting disclosure procedures, which were previously disseminated in Regulations S-K,
Regulation S-X and as well as Industry Guide 2. The recent amendments have been followed
in the Rule 4-to of Regulation S-X. The recent amendments have also updated the
Commission’s disclosure needs for the oil and gas manufacturing companies and classify
them into a new sub head 1200 to Regulation S-K. It would be necessary on the part of the oil
and gas companies of presenting disclosures to the new rules in registration statements and
annual reports which have been ending on after 31st December, 2009.
One of the most important and primary reasons for this amendment is to provide the investors
with a more expressive and inclusive understanding of the oil and gas reserves. This would
assist the investors in estimating the rightful value of these oil and gas reserves. This
amendment has been designed in order to modernise and update the oil and gas disclosures
needs for aligning them with the existent practices and changes in technology.
As the implications of these kind of new rules are so enormous, it was a sigh of relief for the
oil and gas companies, when it was announced that the companies will be required to report

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all the information about their oil and gas operations, including their oil and gas revenues, as
per the old rules and regulations, until the new ones are put into force (Qp.gov.sk.ca, 2018).
This will ensure comparability among the different kinds of disclosers, among the different
companies.
2.4 Some new rules under the amendment:
 Changes of oil and gas related definitions: Under the new rules, some of the terms
and definitions of the oil and gas related items have been revised in accordance new
amendment specifically in the Rule 4 to 10 of the Regulation S to X, in the prescribed
manner, given below:
 Average price: One of the major implication of the new amendment is the is the
usage of the 12 month average price instead of the current standard of a single day
price for the purpose of calculating reserves, which will ensure comparability of the
reserves.
 Dependable Technologies: the new amendment has made some significant changes
in the use of technologies in the arena of oil and gas, where as per the new
amendment it is required to make use of dependable, reliable and consistent
technologies, instead of the erstwhile field tests, which used to take place earlier.
 Modern resources: in accordance with the new rule, it is necessary for the companies
that all the non-traditional resources such as bitumen, shale and oil sands must be
included in the oil and gas reserves because of the fact that all the products of these
resources are produced from the using traditional resources only.
 Supporting definitions: The rules under the new amendment have added a lot of new
provisions, with regards to the addition of new kind of definitions to the various
supporting terms of the oil and gas industry. It includes new definitions of probable,
proved and possible reserves, along with a new definition of ‘reserves’.

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 Compounding of Disclosure requirements: The new amendment has brought a
series of changes in the industry specific disclosure needs and requirements. It has
been included in a new sub head known as Subpart 1200 in Regulation S to K. This
was previously seen in item number 102 of Regulation S to K (Kaiser and Yu 2012).
The new sub head includes the following items:
 Item number 1202: This includes Non-traditional resources as part of oil and gas
reserves, those kinds of technologies which are used to establish new or additional
reserves of oil and gas, different kinds of third party reports. In addition to this, the
new amendment does not require disclosures of the probable and potential reserves of
the company and as well as sensitivity of the prices of the reserves, which allows the
oil companies to show different approximations based on the future activities and
prices or the calculated prices of the company’s management.
 Various other important issues: There are a host of other issues which are taken
care of by the new amendment, some of which have been given below:
 Management Discussions and Analysis: the new amendment also takes into account
and includes all the guidance and necessary points regarding the different types of
issues, oil and Gas Company could face while preparing its management discussions
and analysis. It includes disclosures regarding technology, prices and allowance
conditions.
 Limitation of ceiling test for capitalised nature goods: The new alterations in the
rules also have an impact on the ceiling tests for the capitalised nature of goods.
Under the new amendment, the commission’s full cost method has been replaced by a
12 month average pricing method (Etherington, 2009). This was particularly done for
the disclosures of reserves quantity and for other accounting purposes.

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 Accounting treatment and absence of retroactive revisions: As per the new
amendment, there are accounting guidelines for stating any kind of changes in the
accounting figures which results from the amendments, which is considered as
indivisible from any kind of change in the accounting principle, which does not
necessarily require any kind of retroactive revision.
2.5 Addition of new products:
As per the new amendments there have been an addition of new varieties of products
compared to that of the previous products of oil and gas. There have been significant amount
of additions, under this arena and they have been classified under the head of the non-
traditional resources. These non-traditional resources include bitumen, oil and gas shale’s,
coal and gas hydrates (Grubert, 2012). The range of products also include non-renewable
natural resources which are to be upgraded into synthetic oil and gas. This has helped in
further classification of the products produced by the oil and gas companies. This
classification of the new variety of products would help in efficient reporting of the
happenings of the working of these kinds of oil and gas companies.
2.6 Communication with the SEC:
The new rules and guidelines regarding the various kinds of changes brought about by
the new provisions would require companies to know all the ins and outs of each of them. In
order to ensure smooth transition from the old laws to the new ones and their requirements,
the SEC and his or her office is always available, in order to quell any kind of doubts about
any of the provisions (Devold, 2013). In this regard, the SEC’s division office of corporation
of finance and the office of its Chief Accountant are always available to all the small,
medium and other companies for quelling their doubts about the different requirements
presented under the latest amendment.

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2.7 Impact on accounting literature:
The impact of the modernization of the oil and gas requirements upon the accounting
literature is as follows:
Prices used for accounting purposes: In the proposed rule, in the regulation S to X, the SEC
had planned for retaining the usage of a single-day, year-end price for different kinds of
accounting needs and requirements. This application, would have easily needed companies to
efficiently calculate reserves a total of two times, by using two diverse pricing assumptions
one for the purpose of disclosures and one for the different accounting purposes was
consistently opposed by critiques (Kaiser, 2013). Critiques have recommended that the
Commission synchronize equivalent rule changes both with the FASB and IASB for the
purpose of ensuring uniformity of the rules of the new amendment. Some critiques have
commented that the IASB is presently considering creation of a group of strategies for oil and
gas extraction activities, together with an explanation and definition of oil and gas reserves,
and has also suggested that the Commission line up its rules along those guidelines.
2.8 Consistency with the rules of FASB and the IASB:
The Staffs of the Securities and Exchange Commission is in the process of communicating
with the different staffs of the FASB in order to bring into line the standards used in FASB
proclamations with the Final Rule of the new amendment (Kan and Tomson, 2012). The SEC
will eventually introspect the matter of considering whether to delay the conformity date of
the Final Rule amendments on the basis of the progress of its negotiations with the two
premier financial regulation bodies, the FASB and IASB.
2.8.1 Contradictory capitalisation approach between mining and oil and gas related
activities:
In accordance with the present U.S. accounting guidelines, costs associated with proven
along with probable mining reserves may be capitalized for the purpose of conducting

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operations which includes extracting products through different kinds of mining methods,
like bitumen. As per the Final Rule, extraction of bitumen and all those activities which are
used for the purpose of producing oil and gas through the various mining procedures would
be incorporated under oil and gas accounting set of laws, which only authorize capitalization
of costs related with proved reserves (Weijermars, 2012). In addition to all this, the
guidelines related to mining activities have failed to provide any particular percentages for
creation of levels of certainty for proven or probable reserves for mining activities.
1.8 In-depth implication of modernization:
The new guidelines are considered more flexible , when compared to the previous
standards, for instance, operators can now book PUD locations which are larger than a single
well spacing from producing well. In addition to this, the new technologies make room for
the use of consistent and reliable technologies. The new rules and regulations are more of a
principle based nature, than the ones, which were previously used by the commission (Gong,
2013). While more regulation could lead to more demanding standards and regulations, but
this has not been the case with modernisation. However, there have been some flaws in the
new rules and regulations too, which have been overlooked by the Securities and Exchange
Commission. Some of these limitations are ignorance of rules, weak internal controls and
biased behaviour towards humans. There can be issues cropping up regarding the flouting of
rules by the companies, by taking undue advantage of the new flexible norms and the reliable
technologies. There might be cases, where people inadvertently make use of the technologies,
without having any kind of knowledge about the same, which might not be good for the
ensuring an effective performance.
1.9 Major changes at a glance:
There have been a range of changes in the new modernization of the oil and gas
company’s requirements. This includes definition of the current prices, non-traditional

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resources extraction has been considered and as well as included in the category of oil and
gas activities. There have been an increased use of the modern technology, with the new
requirements making use of the new technologies which are more reliable by nature. In
addition to all this, there has been an additional option of disclosing the probable and possible
reserves which have been allowed.
2.8.2 Oil and Gas Reserves: Meaning and Importance
There exist different assertions and perceptions regarding the term “oil and gas
reserves” and various scholars have tried to define the same from varied perspectives. In this
context, one of the most comprehensive definitions can be seen to be provided in the work of
Owen, Inderwildi and King (2010). Referring to the SEC definition, the authors highlight oil
and gas reserves to be the estimated quantities of oil, gas as well as related products to be
remaining, which are anticipated to be producible economically, at a particular point of time,
by applying development projects to the accumulations which are known (Sec.gov 2018).
This definition is augmented by Lee and Sidle (2010), according to whom, for any oil or gas
deposit to be considered as a reserve, some extent of commercial and technical certainty
regarding the extraction of such deposits has to be established, with the help of the existing
technologies in this domain.
2.8.2.1 Types of Oil and Gas Reserves
In this context, as Rui et al. (2017), highlights in their paper, the oil and gas reserves,
in the global framework, are usually classified into three broad categories, based on the
probable levels or certainty of their commercial extraction, the categories being as follows:

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(Source: Kan and Tomson 2012)
Thus, the term “3P”, in this context refers to the combination of all the three above-
mentioned oil and gas reserves (Mitchell, Marcel and Mitchell 2012). Thus, the term 3P, in
the context of oil gas reserves can be represented as follows:
3P = Proved Reserves + Probable Reserves + Possible Reserves
In this context, Inkpen and Moffett (2011), assert that any oil and gas deposit with
less than 10% possibility of being extractable commercially with the existing extracting
technologies, can be categorised under the domain of “contingent” resources or also
“recoverable” resources.
Thus, the definitions of the different oil and gas reserves can be diagrammatically shown as
follows:
Types of oil and gas
reserves
Proved Reserves – 90 per cent certainty
of commercial extraction
Probable Reserves – 50 per cent
certainty of commercial extraction
Possible Reserves – 10 per cent
certainty of commercial extraction

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Figure 1: Different types of oil and gas reserves
(Source: Sidle and Lee 2010)
In this aspect, an alternative division of the reserves of oil and gas, has been given in
the paper of Maggio and Cacciola (2012), where the reserves have been divided into the
following types:
Proved Reserves- This proves reserves of oil and gas, as per the assertions of Tsui (2011), are
those which can be accessed with the current technological aspects and economic conditions
present.

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Total Technically Recoverable Resources (TTR)- These are the total amount of oil and gas
reserves which can be extracted with the help of the technologies which exist in the current
framework, irrespective of the presence or absence of financial sense in doing so (Othman
and Jafari 2012).
Unproved Reserves- The authors define this as follows:
Unproved Reserves = TTR – Proved Reserves
These are those reserves which can be extracted, but with more improved technology
and the extraction may be beneficial in situations of higher prices and demands for oil and
gas and not profitable in the existing situations of technology, oil and gas prices and demands
for the same (Dayanandan and Donker 2011).
However, as Wu (2014), points out in his paper discussing about the oil and gas
reserves in China, in general, the volume and values of the reserves of the publicly traded oil
and gas companies are not seen to be directly reported in the balance sheets of the concerned
companies. The values are only seen to be attached in the financial statements of the
companies, which in turn leads to non-consideration of the reserves for the purpose of audits
by the accounting or financial companies (Wilson, Liebezeit and Loya 2013).
2.8.2.2 Oil and Gas Reserves in the contemporary period
The oil and gas reserves in the global scenario, can be seen to be present in different
continents, with the share of the oil and gas reserves in different continents being as follows:

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Figure 2: Share (In %) of World Gas Reserves (Continent-wise)
(Source: Gswindell.com 2018)
Figure 3: Share (In %) of World Oil Reserves (Continent-wise)
(Source: Gswindell.com 2018)
Thus, from the above figures, it is evident that the USA cumulatively contains a
significant share of both gas as well as oil reserves (share of the latter being much higher than
the share of the former) in the global scenario. However, both the volumes of the crude oil
reserves as well as natural gas reserves in the USA can be seen to be increasing substantially
over the last few decades, as can be seen from the following figure:

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Figure 4: Annual Proved Reserves of oil and natural gas in the USA over the years
(Source: Eia.gov 2018)
As is evident from the above figure, both the reserves of crude oil as well as natural
gas, in the USA, have decreased till 2004, before increasing considerably post 2004 and the
increasing trend can be seen to be persistent in the recent period.
2.8.2.3 Importance of Oil and Gas Reserves
The oil and gas reserves, in general, are of immense significance and the importance
have been discussed by different scholars across the globe. As discussed by Qiulin et al.
(2013), the reserves of oil and gas are of immense importance to different stakeholders in the
economy, the primary stakeholders being as follows:
 Operators
 Regulators
 Investors
 Politicians
 Regulators
Augmenting the views of the authors, Asche, Oglend and Osmundsen (2012), in their
findings, assert that the financial health of any E&P company, across the globe, depends

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considerably on their oil and gas reserves. The authors also suggest that the reserves of oil
and gas of the companies also have influence on the following financial measures, like as
follows:
 Finding and development costs
 Depletion
 Reserve life index
 Replacement ratio of reserves
 Amortization
In this context, Holditch (2013), indicates towards another crucial significance of the
oil and gas reserves of the E&P companies. As per the assertions of the author, reserves of oil
and gas are also immensely crucial for the companies to gain access to the capital markets
across the globe. Huber (2012), in this context, also discusses the importance of oil and gas
reserves in the political scenario of the world. As the author argues, with the presence of large
volumes of oil and gas reserves, the political power dynamics also change in the international
scenario. In the contemporary global economic and political scenario, “Petroleum Politics” is
a term gaining increasing popularity (Francisco and Baechler 2013). The reserves of oil and
gas being scarce and mostly non-renewable, the countries holding the same have influence on
the political scenario across the globe and much of the global political decisions, are thus,
taken in favour of them or are influenced to be so.
2.2.3.1 Importance of Oil and Gas Reserves for the investors
Cameron (2017), in his empirically evidenced elaborate research paper, rightly
highlights the implications which the oil and gas reserves of different companies have on the
decisions of the investors venturing in this domain. As the author highlights, much of the
credibility and security of a company and its access to the capital market, across the globe,
largely depends on the oil and gas reserves which the concerned company has. Augmenting

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these assertions, Paik (2012), argues that the credit ratings of the oil and gas companies
highly depend on their oil and gas reserve volumes and the banks also lend fund to the
companies by emphasizing on the level of reserves they have, which are treated as collateral.
As investing in different companies is always a decision surrounded by both the
prospects of returns and possibilities of risks, thus, rational investors generally tend to focus
on and invest in those companies whose market positions and values are more secured and
whose chances of profitability and sustainability are high (Damodaran 2012). The oil and gas
industries are also not any exception and the investors in this industry also look for
prospective and profitable companies for investing and earning profits in a sustainable
manner. In this context, as suggested by Shuen, Feiler and Teece (2014), the investors in this
sector, takes the reserves of oil and gas with the companies as one of the primary indicators
for influencing their decisions to invest in the companies. According to the authors, higher
values of reserves of oil and gas, leads to higher level of perception of security on part of the
investors regarding the concerned company and the investors also perceive the profitability of
the concerned companies to be high, thereby investing on such companies with large reserves
(Ramos and Veiga 2011).
2.8.3 Evolution of Reserves and their disclosure
With the increasing importance of oil and gas in the global commercial and economic
scenario and with the need for the same scarce resources being felt by all the industries and
businesses as well as households across the globe, the notion of reserves and their disclosure
methods have evolved significantly over the years and can be seen to be discussed and
explained widely by different scholars across the globe. As discussed by Benes et al. (2015),
the term “reserves” has been a moving target in the global scenario and was first
conventionally and comprehensively defined by the American Petroleum Institute (API), in

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order to facilitate their studies of oil reserves in the USA. In 1946, these studies were
augmented by the American Gas Association (AGA).
The inclusion and adoption of the definitions of proved reserves, was initiated in
1964, by the Society of Petroleum Engineers (SPE), in considering the values and volumes of
oil and gas reserves with the different companies (Sorrell et al. 2010). Followed by the same,
the “Petroleum Reserves Definition” was published by the World Petroleum Congress and
the SPE. However, Andersen and Aslaksen (2013), points out that the definition of oil and
gas reserves and the methods of evaluation and disclosure of the same, underwent
considerable change and international generalisation in 2007, with the release of the
“Petroleum Resources Management System” by the SPE/WPC/AAPG, where they set forth
international standards and conventions for definition, evaluation as well as codification of
the oil and gas reserves. This was purposefully done in order to make the calculation and
evaluation of oil and gas reserves easily understandable and uniform across the globe, in
order to reduce any kind of confusion arising in the process of the same.
In spite of the presence of many definitions of the term “oil and gas reserves” and the
freedom of the operators to choose the definitions they want to take, Lovejoy and Homan
(2015), suggest that, in general, the SEC definition of the term is used as the international
legal standard for the same and the same is used by the operators to report their proved
reserves of oil and gas. As per the Final Rule of the SEC, the proved oil and gas reserves are
conventionally defined as those quantities of gas and oil, which are economically producible
with a reasonable certainty (analysing by engineering and geoscience data), from a particular
period, from the reservoirs which are known, in the existing economic situations, government
rules and operational framework (Ling, Ping and Xizhen 2011).
Thus, it can be asserted from the above discussion of the existing literary and
scholarly works, that the definition of reserves of oil and gas and the valuation and

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codification processes have developed immensely over the years and with time the same have
become more complex, inclusive as well as international uniform over the years, in the global
framework.
2.8.4 Modernization of Oil and Gas Reporting: Reasons and Implications
Grubert (2012), in his paper, highlights the decision of Modernization of reporting of
Oil and Gas reserves, which was implemented in 2009, by the Securities and Exchange
Commission (SEC) of the USA, which in turn changed the reporting standards and methods
used prior, to a considerable extent.
2.8.4.1 Reasons behind the Modernization of Oil and Gas Reporting
The primary reasons behind the revision of the existing regulations for reporting the
oil and gas reserves, which was done at the end of December, 2008, by the SEC, as pointed
out by Grubert (2012), can be cited to be as follows:
 The regulations, which were previously followed (since 1978) were far more rule
oriented, thereby ignoring the aspects of improvement of the technological aspects
and changes in the economic situations in the global scenario, which in turn have
considerable implications on the extraction of oil and their valuation and contribution
to productivity (Cortese 2011).
 Kaiser and Yu (2012) highlights that the traditional and conventional methods of oil
and gas reporting, which used to be widely implemented prior the Modernised SEC
regulation, had various loopholes regarding understanding of the term “reserve” itself,
which often led to intended as well as unintended mistakes on parts of the companies,
regarding accounting and reporting for their oil and gas reserves.
 One of the primary reasons behind the initiation of the Modernization program for oil
and gas reporting, as highlighted by Ayoola and Olasanmi (2013), was the increasing
instances of unfair practices on part of the oil and gas companies across the globe, of

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that of over-estimating the values of their oil and gas reserves at the time of reporting
(mostly intentionally), in order to increase their prospects and credibility in the capital
markets as well as in the eyes of the loan providing banks and investors across the
globe, as higher reserves, are generally taken to be symbol of high security and
profitability of the concerned companies (Lee 2011). This, in turn, hampered the level
of transparency of the values of the reserves of different companies in the eyes of
investors, whose decisions were also seen to be negatively affected by the same.
All these factors could be seen to be hampering the economic and investment
activities in the concerned industry and also had negative implications on the level of
confidence of the investors in the industry. The rigid regulations and lack of uniformity in the
old regulations also contributed to the confusions regarding the definitions of the reserves, the
advantages and legal loopholes of which were exploited by many companies. To avoid these
problems of over-estimation of reserves and resources overbooking and also in order to
include the consideration of the development of technological aspects as well as to bring in
more transparency in the accounting and financial reporting systems in the oil and gas
industry, the Modernisation Program was initiated and implemented by the SEC of the USA
(Olsen, Lee and Blasingame 2011).
2.8.4.2 SEC Modernization of Oil and Gas Reporting of 2009
Macdonald and McVean (2010), in their paper, discusses about the exogenous as well
as endogenous changes which occurred over the years, since the implementation of the
traditional definitions of 1978, in the oil and gas industry as well as in the global economy
and technological aspects as a whole. As the authors point out, the primary and most
significant changes in this context are as follows:
 Huge development in the technological and infrastructural aspects of recovery and
characterization of hydrocarbons

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 Economic production of materials from the non-traditional sources like those of
bitumen from oil sands and other similar products
 Improvement in the spot markets as well as development of more efficient
transportation methods for oil and gas in the international scenario
All these factors, as per the assertions of the authors, led to the creation of
Modernization Program by the SEC of the USA.
The primary objectives of the SEC, behind designing and implementing the
Modernization Program for reporting oil and gas reserves, as pointed out by Hastenreiter et
al. (2012), are as follows:
 Provision of protection and more transparency to the investors, in the aspects of the
actual valuations of the reserves present with different E&P companies
 Keeping the clarity and comparability of the different reserves consistent and not
sacrificing the same in order to bring more transparency in the industry
 To make the final definitions more consistent with the definitions and terms which
were already in circulation in the PRMS, such that the international compliance level
to the definitions and new rules are improved
Augmenting the views put forward in the above discussion, DiPeso (2011), in his paper
emphasizes on the primary areas of limitations which the Modernisation program aims to
revise and rectify, the areas pointed out by the author, being as follows:
 Pricing nature (Single day and year end)
 Exclusion of extractions from the non-traditional sources like that of extraction of
bitumen, from the conventional methods of oil and gas reporting
 Limitations in including the vast range and types of technologies which are applicable
for extraction of oil and gas (given that this aspect is an ever-changing and improving
one)

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 Limitations in the aspects of disclosure of only proved oil and gas reserves
2.9 Road of modernization:
The road to modernization is towards the new requirements of the SEC for the oil and
gas reserves hasn’t exactly been smooth. It had its own journey of ups and downs, before
being implemented. The 1978 definitions and the rules prescribed by the SEC, had come
under severe fire and criticism, with the usage in the next 30years. As has been outlined by
Lee (2009), there had occurred some major changes in the definitions, since the year 1978.
Some of them included changes in the form of important developments in the process of
retrieval and depiction of hydrocarbons (Merrill and Schizer, 2013). Along with this, some
modifications had also occurred in the development and improvement prospects of the
markets and the conveyance of the oil and gas. In addition to these two major changes,
change were also seen in the formation of economic manufacturing from the resources which
were non-traditional in nature, for example Bitumen and oil sands. A clamour of change in
the status quo had also taken place, which had paved the way for the modernization of the
requirements of the SEC, in respect of the oil and gas. It starts in the year 2007, when the
Securities and Exchange Commission had retained Mr John Lee, in the position of an
Academic Engineering fellow, for the purpose of studying of the need of updating to the SEC
requirements and the need for the necessary modifications (Seelke et al., 2013). In the month
of October, in 2007, the SEC had issued a concept release, which had the details of the
history of the SEC rules, which were related to the oil and gas, and various other issues which
were related to the disclosure of oil and gas reserves. It also included a request for
commenting on the set of fifteen questions along with the topics mentioned above. After
going through each of those and the further studies on the topics along with the act of
consideration of around a total of 81 comments, which had been received during the period of
the 60 days, the commission gave out Proposed Rules on the day of 26th June, in the year

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2008. After these operations and studies, another 60 day period had followed. In this 60 days
period, a total of at least 71 comments were received (US SEC, 2008). On the day of 29th
December, in the year 2008, the commission’s modernisation and up gradation exertions had
taken shape in the shape of the release of the Final Rules of the SEC. All these rules were
applicable and held valid to all the connected filings which had been made with the Securities
and Exchange Commission on the 26th of the month of October, in the year 2009 (Aalto and
Temel, 2014). Along with this, the updated version of the question and the answers on oil and
gas, in the topic of ‘Compliance and Disclosures Interpretations’ (US SEC, 2009). In this
way, the new requirements of the Securities and Exchange Commission with regards to the
oil and gas reserves were established and created. This led to the changes in the various kind
of provisions, from expansion of the line of products, increased us of new technologies and
the changing of a number of definitions and a whole lot of other issues.
2.10 Role of Third Party Firm in oil and gas reserve modernization:
There were various third party engineering firms which were regularly used
throughout the oil and gas industry for the purpose of audit reserves approximations made by
the operators or for the purpose of carrying out full reserves evaluations. A reserve audit as
has been defined as per the (US SEC 2008), it is a procedure of reviewing of certain facts and
assumptions underlying a reserve estimate which had been prepared by another party, and
providing the opinion with regards to the appropriateness of the kind of data used for this
purpose.
Although, the guidelines of modernization do not necessarily require reserve audits of the
E&P companies. If an operator indicates that a third party has conducted an audit, review of
the processes and the valuation of their reserves, then in such cases, the concerned operator
must make a number of disclosures regarding the third party concerned. Nevertheless, the
new rules and regulations have not openly defined the kinds of third party operators (Pleines

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and Wöstheinrich, 2016). On the other hand, the new rules prescribed by the SEC, require a
small summary of the third party’s conclusions with regards to the estimates of the reserves.
Specifically as per the new regulations, that in the case of providing any kind of opinion on
the rationality of the projected reserves and quantities, it should provide a value with a
difference of not more than 10 percent or else the subject reserves information would not
meet the minimum audit standards. There also exists many companies which might designate
to provide a contract to any third party company for a full and comprehensive evaluation of
their oil and gas reserves (Pleines and Wöstheinrich, 2016). On the other hand, there are some
cases, where the third party independently calculates all the reserves based on the information
and the data provided by the operator. Thus in this way, it can be seen that the third party
firms play a major role in ensuring the precision and accuracy of the reserve requirements of
all these oil and gas companies (Sundalsfoll and Bjerke, 2014). Although each of these oil
companies have the liberty of choosing or electing any of the third party companies for the
purpose of checking their works and scrutinizing their reserves, they can ensure the
authenticity of their work, by verifying it, through the independent third party companies,
which have not been elected or chosen by them. This would also ensure their adherence to the
principles of effectively preparing their reports of their oil and gas reserves, eliminating the
role of foul play.
2.11 Conclusion:
From the above discussion it can be seen that there have been considerable debates, in
this context, over the years, regarding the appropriate accounting model in the aspects of the
accounting regulation which comprehensively captures the different transactions which take
place in the oil and gas industry across the globe, due to the existence of faults and limitations
in the traditional accounting practices used in this domain in the earlier times. With the SEC
rule effective from January 1, 2010, agency tried to bring in transparency and balance in the

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disclosure of in the financial statement. It starts in the year 2007, when the Securities and
Exchange Commission had retained Mr John Lee, in the position of an Academic
Engineering fellow, for the purpose of studying of the need of updating to the SEC
requirements and the need for the necessary modifications. In the month of October, in 2007,
the SEC had issued a concept release, which had the details of the history of the SEC rules,
which were related to the oil and gas, and various other issues which were related to the
disclosure of oil and gas reserves. This led to the changes in the various kind of provisions,
from expansion of the line of products, increased us of new technologies and the changing of
a number of definitions and a whole lot of other issues. Literature review section highlights
that the SEC has performed as per the demand of the stakeholders and to bring in
transparency in the disclosure of the oil and gas firms.
CHAPTER 3: RESEARCH METHODOLOGY:
3. Introduction:
Research methodology forms the all-important part of any dissertation and this one is
not an exception to this. It forms the crux of the entire research as it helps in formulating and
finding out all the important conclusions about the particular research topic. In this study, the
impact of the modernization of the SEC requirements of the oil and gas industries have been
research upon. Therefore this chapter largely focuses on the type of methodology, which is
used in the completing of this particular research. This would allow the researcher to properly
explain all the process of the entire research and the types of analysis conducted along with
the kind of methods used for the purpose of completing the project. This data collection
process, the analysis and the method of conducting the research helped in understanding the
impact of modernization of the Oil and Gas Reporting Requirement proposed Rule(effective
1 January 2010) on the value significance of the financial statements of United State Oil and
Gas registrants along with the function of analysing the work, this section would also help in

32MSC OIL AND GAS ACCOUNTING
depicting which kind of research design has been used here, it would also include and depict
the particular model for analysing the data, which has been used by the researcher in the
discussion section (Papavinasam, 2013). All the aspects of the secondary data which has been
the primary source of this research has been used and depicted in the section of the research
methodology (Neuman, 2013). All of this, makes research methodology, one of the pivotal
aspects of any dissertation. While projecting the section of the model, this particular chapter
would help in displaying the primary and the most important steps, which were used in the
process of effectively conducting this research.
3.2 Research Onion:
Research opinion is another aspect of this research methodology part. It helps in
efficiently depicting all the processes and the stages involved in this research, depending on
the research, which has been performed. It is segregated into two parts, the inner layer and
the outer layer (Mackey and Gass, 2015). The outer layer depicts the larger aspect of the
entire research work, whereas the inner layer takes us through the various insights of the
research work, showing detailed methods and steps of the supplementary work involved.

33MSC OIL AND GAS ACCOUNTING
Figure 5: Research onion
(Source: Sarantkos 2012)
3.3 Research design:
Research design refers to a particular set of methods and processes which are used in
the process of collection and analysis of the measures of the different variables which are a
part of the research problems. This design reflects the different study types, the research
problems, all the hypothesis, all the dependent and independent variables, along with the
methods employed for collecting all the data. Research philosophy again, forms one of the
most important aspects of the research design and for this project, it has been highlighted
below:
3.3.1. Research philosophy:
There are mainly three kinds of philosophy of research, which are in any particular research
work. They are as follows:
 Positivism philosophy

34MSC OIL AND GAS ACCOUNTING
 Interpretivism philosophy
 Realism philosophy.
A pictorial presentation has been given below:
Figure 6: types of research philosophies
(Source: Author’s own creation)
These three kinds of research philosophies occupies an important position in case of any kind
of dissertation. Positivism refers to that scenario, where the statistical data and figures are
positively taken into consideration. Interpretivism on the other hand, refers to such a situation
when a research has been done on a social issue. In these kinds of cases, the mentality and the
cultures of the people who are staying in a particular society becomes all the more important.
On the other hand, in case of realism, both the aspects are taken into account. In the case of
realism, human emotions as well as data are taken into account for the purpose of effectively
carrying out the research work. For the purpose of knowing the impact of the modernization
of the oil and gas requirements, the case of positivism has been taken. This is because this

35MSC OIL AND GAS ACCOUNTING
particular research is majorly independent on the intricacies of human psychology. Thus in
this regard more of secondary kind of data has been used.
3.3.2 Research approach:
Research approach is the way a particular research has been approached upon. The
research design has been mainly classified into two main parts, which are the inductive
approach and the other one being the deductive approach. They are mainly classified into
four main types, which are quantitative, qualitative, pragmatic research approach which are
also known as mixed methods and the emancipatory approach. The inductive one includes the
emancipatory and the mixed approach. On the other hand, the deductive approach includes
both the quantitative as well as the qualitative approach. The pictorial presentation has been
given below:
Figure 7types of research approach
(Source: Author’s creation)
Inductive research approach is that type of research where both the theory as well as the
model which has been developed by the researchers are taken into consideration. Thus, if
both the theory and the model aspects are being taken into account, it can be termed as the
inductive research approach. In the case of the current research work, the deductive research

36MSC OIL AND GAS ACCOUNTING
approach mechanism has been employed (Popli, Rodgers and Eveloy, 2013). This is because
for the purpose of completing this research, the perspectives of the authors who have carried
out research on similar types of topics have been analysed and have been taken into account.
For the purpose of effectively performing the entire research with the help of the necessary
secondary data, the author of the current research would study the findings which have been
used by the past authors.
3.4 Objectives of the research:
Objectives of a research are the most important aspect of conducting the entire
research. It tells the users of the research, as to why this particular research has been
conducted. It is these objectives, which guides the preparation of the entire research. Some of
the most important aspects of the research objectives are the research questions. These
questions tells the users of the research dissertation, as to why this research has been
conducted in the first place (Ritchie, 2013). In the case of this research dissertation, research
questions have also been prepared, for the purpose of which, this research has been
conducted. The research questions pertaining to this research has been provided below:
3.4.1 Research aim:
This research work has the following aims:
To identify impact of the modernization of the Oil and Gas Reporting Requirement on the
value relevance of the financial statement of the US Oil and Gas registrants.
3.4.2 Objective of the study:
The object of the study are as follows:
 To identify the impact of the Oil and Gas Reporting Requirement amendment of the
US Oil and Gas registrants
 To demonstrate what are the changes in the new disclosure module of the SEC
program

37MSC OIL AND GAS ACCOUNTING
 To depict the factors what has been changed in the new disclosure
 To identify the factors that has caused the change in the new protocol for the financial
statement of the Oil and Gas registrants
3.4.3 Research question:
Research question of the following research is as follows:
 What changes in the financial statement has been changed in the new SEC program
 Why new SEC modernisation program has been introduced
 What are the factors that have changed in the new financial model
 What are the factors that has caused change in the SEC program for the Oil and Gas
registrants?
3.5 Data Collection:
Data collection refers to the process of verifying the different sources of data and the process
of collecting them, from the selected sources. Special emphasis and focus must be presented
on this aspect for the research, because a lot of things are riding on this. The data collected
from the different sources would ultimately impact the quality of the research and the
conclusion of the research (Bryman, 2017). In order to make sure that the results and the
conclusion of the research are authentic and verifiable, taking information from the correct
source is very vital.
Mainly there exists three different types of data collection methods, which are as follows:
 Qualitative method
 Quantitative method
 Mixed method
A pictorial representation of the types of data collection methods has been provided below:

38MSC OIL AND GAS ACCOUNTING
Figure 8: Various kinds of data collection methods
(Source: Author’s own creation)
Qualitative methods: These kind of methods takes a closer look into the description part, it
takes an approach through which the data is not quantified, and it is observed and is not
computed. It consists of conducting in-depth interviews, focus groups and different kinds of
surveys. Here the main objective is to observe the data and not to convert it into any kind of
attributable or numerical form (Sultan and Wong, 2013). These kinds of methods are useful
in cases where the aspect of human psychology is involved as these kinds of cases cannot be
quantified in any form.
Quantitative methods: Quantitative data is focuses on the numerical range of things. These
kinds of data are necessarily required for the purpose of acquiring appropriate and accurate
kind of data, where logical measurements is required. It mainly consists of experimental
studies, interviews as well as questionnaires. Some of these have been explained below:
 Interviews: it is one of the most sought after methods of quantitative data, where a
face to face exchange of communication is performed. It is indeed a time consuming

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method but on the other hand it is highly reliable for its direct contact with the
interviewee.
 Questionnaires: it is one of the most convenient ways of quantitative data collection.
It can be done in more than one time and multiple questionnaires can also be
conducted. The copies of the different sets of questions which are to be asked can be
distributed which would be asked to the relevant people, in order to collect the
information and the data for the purpose of completing the research. It is thus one of
the easiest ways of collective data as per the convenience of the person to person.
 Experimental Study: Quantitative research always depends more on the quantitative
facts. One of the most important methods of collecting accurate facts and data is
experimenting and regularly noting of the results. In this case, an experiment provides
a great amount of help.
Mixed Methods:
In some cases, there are situations which demands the usage of both the qualitative as well as
the quantitative methods of data collection. It is the systematic integration of both these
methods of quantitative data as well as qualitative data. The basic premise on which this
method is based is that such integration of both the methods permits a more authentic,
comprehensive and complete utilization of data, which makes it much more reliable. These
kinds of methods are employed in the field of social sciences. It consists of collection of both
the quantitative as well as qualitative data, using rigorous processes for the purpose of
analysing each of these methods, integration of these data during the process of analysis and
discussion.
For the purpose of conducting this particular research regarding the impact of modernisation
of the regulations of the SEC with regards to the oil and gas industry, qualitative
methodology has been used (Frels and Onwuegbuzie, 2013). In this particular research, the

40MSC OIL AND GAS ACCOUNTING
impact on the fiscal terms such as Royalty, expenses are found to be profound. The impact of
the modernization of the regulations, which have been recommended by the SEC on the fiscal
terms of the oil and gas companies have been analyzed. For this purpose, qualitative methods
have been used. This would help to ensure an in-depth understanding of the impact of the
modernization of the rules and regulations of the Securities and Exchange Commission.
3.6 Sampling method:
A research work is complete only when some sampling is done for completing the
entire research work. The sampling procedure is very important as it provides real time
information and helps in effectively understanding the various intricacies involved in the
research (Witten et al, 2016). This is one of the most important aspects, as it provides the
important samples on which the whole report is based. Primarily a researcher takes the help
of the following two research sampling methods which are:
 Probability Sampling
 Non-probability Sampling
When a research work is being carried out without taking into consideration adequate number
of respondents and the entire sampling is done by the researcher himself or herself, then this
kind of sampling is called probability sampling. In the case of probability sampling,
objectivism is used, as a mathematical aspect is taken into consideration (Meyers, Gamst and
Guarino, 2016). On the other hand, if the respondents is predefined and all the data
collections is done by ensuring that adequate number of them is taken, it is then known as
non-probability sampling. Here the notion of subjectivism creeps in and it is depends on the
discretion of the researchers. In this scenario of determining the impact of the modernization
of the rules and regulations recommended by the SEC upon the financial statements and
reports of the various oil and gas companies, non-probability sampling has been used.

41MSC OIL AND GAS ACCOUNTING
In the present case of the research, two companies of the United States have been used. These
two companies deal with oil and gas related products and services. These two companies are
ExxonMobil and Chevron Corporation. For conducting this research, the financial reports or
the annual reports of these two companies for the year 2009 and 2011. Through the annual
reports of both these companies for these two different years, special emphasis would be laid
on the financial statements of each of them. The main purpose behind this is the purpose of
witnessing the key impact upon the financial statements of these two oil and gas companies
due to the changes proposed by the Securities and Exchange Commission. Most importantly,
one of the most focal point of the research is to look into the financial statement analysis
because of the changes brought about by the SEC. the impact of this on the various items of
company’s annual report’s financial items such as payment and annual charges, bonuses,
royalties, cost recovery, sharing of crude oil, amount of taxation, training and technology and
amount spent on sustainable development.
3.7 Conclusion:
From the above discussion it can be found that the analysis of the research will be
based on the descriptive and qualitative type research work, where it will utilise two firms’
annual report of 2009 and 2011 so as to discuss the difference in the financial statement
occurred due to the new rule implemented by SEC since 1st January 2010. It has also
portrayed that the research work will be done utilising the non-probability sampling, where
only two firms will be chosen for the analysis of this research work.
CHAPTER 4: DATA ANALYSIS
4.1 Introduction:
The discussions in this section relates to the revisions in the Securities and Exchange
Commission in the oil and gas sector. The various types of the main regulation of the
disclosures relates to the Regulation S-K and Regulation S-X along with the guideline which

42MSC OIL AND GAS ACCOUNTING
are prescribed in the industry guide 2. The different perspectives of the discussion in this
section highlights on the overview of the new rules and suggests the changes pertaining to the
oil and gas definition as prescribed in the rule 4-10 of regulation S-X. This includes the
various types of the changes as prescribed with the average price, first of mouth pricing and
introduction of the reliable technologies (Brelsford 2015). The changes are also included
with the various discussion as per the use of the non-traditional resources and eliminating the
certainty test. The second aspect of the discussion has been stated with the consolidation of
the disclosure requirements as per the subpart 1200. This includes the new rules which has
been prescribed in the Item 1201. General instructions and Item 1202. Reserves. Some of the
other perspectives of the discussions under this concept are seen to be associated to the “Item
1203. Proved Undeveloped Reserves (PUDs)”. The last section of discussion relates to the
MD&A Guidance along with the test limitation which are stated as per the capitalization cost
and the full cost method (Breeda Comyns and Figge 2015).
4.2. Deviations pertaining to the gas definitions in the Rule 4-10 of Regulation S-X
The significant nature of new amendments and the rules of the revised current oil and
gas definitions according to the Regulation S-X is listed as follows:
Average price
This rule is required for the application of the 12-month average price rather than the
current single day price for calculation of the reserves and enhancing comparability of the
reserves and improving the comparability of the reserves among the gas and oil and also
reducing the possible causes of the short-term volatility from the seasonal impacts (Wan et
al. 2016).
First-of-the month pricing
The aforementioned rule relates to the way in which the direct companies are known
to use the first of the month pricing system and also apply the various types of the concepts

43MSC OIL AND GAS ACCOUNTING
which are seen to be associated to the formulation of the 12-month average required for the
preparation of the pricing estimates (B. Comyns and Figge 2015).
Reliable Technologies
As per the rules prescribed under the reliable technologies the reserves systems are
seen to use the reserves estimates instead of the current prescribed specific field of test. The
extension of this has created new possibility for the reserves which have been already
previously established (Wan et al. 2016).
Non-traditional Resources
The different perspectives of the rules prescribed under this concept relates to the
non-traditional resources. This may include the components such as oil sands, bitumen, and
shale. Some of the other components of the oil and gas reserves are seen with the use of the
mining reserves which are applicable in the products produced by using the traditional
resources (Snow 2014).
Eliminating the certainty test
The different nature of the amendments relates to the undeveloped reserves which are
proved and based on the use of the reasonable certainty standard instead of the regular
certainty standard which are required by the prior rules (Sec.gov. 2018).
Disclosure Requirement in Subpart 1200
The rulings under this is associated to the use the use of Subpart 1200 in Regulation
S-K. This new subpart requirement for the gas and oil industries are seen to eb based on the
item 102 as per the Regulation S-K and Industry Guide 2. Some of the various types of the
inclusions under the new subpart are issued as follows:
Item 1201 Reserves -This includes the codification of the reserves taken from the disclosures
related to the “Item 102 of Regulation S-K”. The various types of the disclosure under this
item are listed as follows:

44MSC OIL AND GAS ACCOUNTING
 Use of the non-traditional resources
 Technologies used for the establishment of the new or the added services as there are
no rules for specifying the technologies required by the established reserves.
 Preparation of the third-party reports. This is essential in case a company decides to
represent its oil and gas disclosures as per the estimation of the reserves which will be
conducted as per the reserved audit process and prepared by the third party (Abukova,
Dmitrievsky and Eremin 2017).
Undeveloped reserves as per Item 1203
This is based on the narratives as per the disclosures of the information pertaining to
the information listed below:
 Total quantity of the PUDs at the end of the year
 Changes in the material under the PUD which has occurred in a certain year including
the PUDs converted into the developed resources.
 Providing the explanation of the reasons for the material concentrations pertaining to
the PUDs in the individual fields and the countries which has remained undeveloped
in the last five years of time after the PUD disclosure (Breda Comyns and Figge
2015).
Item 1204. Production
This relates to the codification taken from the disclosure of the various types of the
production disclosure which are seen to be associated to the different types of the guide 2.
This provides thee greater clarity for the separate production disclosure for the countries
(Makarov 2014).
Items 1205-1208:

45MSC OIL AND GAS ACCOUNTING
The guide 2 also provides the disclosure requirements which are in regulation to the
S-K without the use of substantive changes related to the present activities and drilling
activities.
Other Significant Issues
The MD&A Guidance release is conducive in providing the guidance for the issues
related to the oil and gas by including the disclosure for the material changes for technology.
In addition to this, the amendments change as per the full cost of the commission is seen to
use the 12-month average price for the reserves quantity disclosure and purpose of
accounting. The adoption of the accounting treatment (Global Reporting Initiative 2016). The
accounting treatment and retroactive revision are related to the use of the various types of the
figures of the data which are seen to be based on the accounting principle which are
inseparable in nature and does not require retroactive revision (Abukova, Dmitrievsky and
Eremin 2017).
4.3 Financial statement analysis:
(Source: Cdn.exxonmobil.com 2018)
Changes in oil and gas definitions in Rule 4-10 regulations S-X, where average
pricing was previously not present in the annual report of Exxon Mobile Corporation, as the
company is using the worldwide average retaliations for crude oil and natural gas.

46MSC OIL AND GAS ACCOUNTING
(Source: Cdn.exxonmobil.com 2018)
The ruling of 2009 is relevantly followed by Exxon Mobile Corporates, where in eh
annual report all the added based on technologists have in filed tested before listing it in the
annual report. Hence, Exxon Mobile Corporation depicts the Rule 4-10 regulation in the
annual report. Item 1201-General Instructions has been adequately depicted in the annual
report of Exxon Mobile Corporates.
(Source: Cdn.exxonmobil.com 2018)
Item 1202-Reserves has been depicted adequately by the company in their annual
report, which could be identified from the above figure. Moreover, the figure also supports
the disclosure of item 1203 proved underdeveloped reserves of the organization.
Furthermore, the production disclosures are also conducted, which has been listed under the
item 1204. Lastly, Exxon corporation adequacy conducts the disclosure of the items from
1205-1208 in their annual report.

47MSC OIL AND GAS ACCOUNTING
Figure 9: Spot prices quarterly average
(Source: Chevron.com 2018)
The change in price of oil and gas are depicted in Rule 4-10 regulations S-X, where
average pricing has been used by Chevron Corporation in their annual report after
modernization.
(Source: Chevron.com 2018)
After the changes in modernization Chevron Corporation has adequately listed the
technological reliability used by the company. The ruling of Rule 4-10 regulation is
adequately depicted in the annual report of the company. Item 1201-General Instructions has
been adequately depicted in the annual report of Chevron Corporation.

48MSC OIL AND GAS ACCOUNTING
(Source: Chevron.com 2018)
The above figure indicates that chevron has fulfilled the requirement of Item 1202-
Reserves and item 1203 proved underdeveloped reserves. Moreover, the organization
supports the listed item in the annual report such as Item 1204, 1205-1208 in their annual
report.
4.4 Conclusion:
CHAPTER 5: CONCLUSION AND RECOMMENDATION
5.1 Introduction
As can be seen from the above discussion, the aspects of oil and gas reserves and their
accounting and reporting have been of immense importance in the contemporary period, as
with time and with increasing threats of scarcity of extractible and economically producible
oil and gas resources, the importance of the same and the implications of proper and
transparent reporting and accounting has been felt across the globe.

49MSC OIL AND GAS ACCOUNTING
Keeping the faults and limitations in the conventional reporting methods for oil and
gas reserves (1978), into consideration, primarily of that of ignorance of inclusion of new
technologies in the aspects of extraction of economically producible oil and gas as well as of
the problem of over-estimation and lack of transparency for the investors, the SEC of the
USA brought forward the Modernisation programs for the oil and gas reserves reporting.
The concerned thesis, keeping the fact of modernisation of the oil and gas accounting
into consideration, tries to assess the evaluate and discuss the features of the Full Cost and
Successful methods of accounting in the field of oil and gas companies in the USA. The
thesis also focusses on finding the extent to which the financial statement information
includes the information relevant for the producers and on the impacts of the growth of oil
and gas reserves of the companies on their share prices and capital market credibility in the
eyes of the probable and potential investors.
5.2 Limitation of the research:
This research intended to identify the impact of oil and gas reporting requirement
amendment of the gas and oil organizations functioning in US. However, in order to conduct
the analysis, only two organizations have been selected from the entire industry. Therefore, it
is inherent that the outcomes obtained could easily be questioned, as a small sample size from
the entire population has been selected. This is a major limitation of the entire research, as
data from more organizations could have been collected, which would help in enhancing the
overall research quality.
However, there are certain organizations in the US oil and gas industry that have not
published their financial reports, due to which it was not possible for the researcher to gather
adequate data. Moreover, the limited timeframe of the research has restricted the research to
collect additional data. Along with this, qualitative research technique could have been used
in this research by interviewing the key accountants of the different oil and gas companies in

50MSC OIL AND GAS ACCOUNTING
US to support the final research outcomes. Hence, the unavailability a larger sample and
conduction of interviews with the key company personnel have been the major impediments
that affected the overall outcome of the research.
5.3 Findings:
After critical conduction of the overall research, it has been found that oil and gas
reserves are extremely crucial for different groups of stakeholders in the economy. From the
organizational perspective, oil and gas companies are highly beneficial for the organizations
in gaining access to the capital markets. From the governmental perspective, the availability
of greater volumes of gas and oil reserves changes the dynamics of political power in the
global scenario. The investors normally prefer to invest in those organizations having secured
market values and positions and the oil and gas industry of US comes under this category.
This is because the main motive of the investors is to make profits sustainably.
The inclusion and adoption of the definitions of proved reserves was initiated in 1964
by the Society of Petroleum Engineers (SPE) in considering the values and volumes of oil
and gas reserves with the different companies. As per the Final Rule of the SEC, the proved
oil and gas reserves are conventionally defined as those quantities of gas and oil, which are
economically producible with a reasonable certainty (analyzing by engineering and geo
science data), from a particular period, from the reservoirs which are known, in the existing
economic situations, government rules and operational framework.
The rigid regulations and lack of uniformity in the old regulations also contributed to
the confusions regarding the definitions of the reserves, the advantages and legal loopholes of
which were exploited by many companies. In order to avoid these problems of over-
estimation of reserves and resources overbooking and also in order to include the
consideration of the development of technological aspects as well as to bring in more
transparency in the accounting and financial reporting systems in the oil and gas industry, the

51MSC OIL AND GAS ACCOUNTING
Modernization Program was initiated and implemented by the SEC of the USA. The reason
was to ensure transparency in financial reporting policies of the organizations operating in the
oil and gas sector of US.
There were various third party engineering firms which were regularly used
throughout the oil and gas industry for the purpose of audit reserves approximations made by
the operators or for the purpose of carrying out full reserves evaluations. A reserve audit as
has been defined as per the US SEC 2008, it is a procedure of reviewing of certain facts and
assumptions underlying a reserve estimate which had been prepared by another party, and
providing the opinion with regards to the appropriateness of the kind of data used for this
purpose.
Considerable definitions have been related to the gas definitions, according to Rule 4-
10 of the Regulation S-X. This rule is required for the application of the 12-month average
price rather than the current single day price for calculation of the reserves and enhancing
comparability of the reserves and improving the comparability of the reserves among the gas
and oil and also reducing the possible causes of the short-term volatility from the seasonal
effects. The different perspectives of the rules prescribed under this concept relates to the
non-traditional resources. This may include the components such as oil sands, bitumen, and
shale. Some of the other components of the oil and gas reserves are seen with the use of the
mining reserves which are applicable in the products produced by using the traditional
resources.
In addition, it has been found that the MD&A Guidance release is conducive in
providing the guidance for the issues related to the oil and gas by including the disclosure for
the material changes for technology. In addition to this, the amendments change as per the
full cost of the commission is seen to use the 12-month average price for the reserves quantity
disclosure and purpose of accounting in terms of the adoption of the accounting treatment.

52MSC OIL AND GAS ACCOUNTING
The accounting treatment and retroactive revision are related to the use of the various types
of the figures of the data which are seen to be based on the accounting principles, which are
inseparable in nature and does not require retroactive revision.
Item 1204 Production provides thee greater clarity for the separate production
disclosure for the countries. Item 1205-1208 also provides the disclosure requirements which
are in regulation to the S-K without the use of substantive changes related to the present
activities and drilling activities. Two US oil and gas organizations have been selected for this
research, which include Exxon Mobil and Chevron Corporation. It has been found that Item
1202-Reserves has been depicted adequately by the company in their annual report, which
could be identified from the above figure. Moreover, the figure also supports the disclosure of
item 1203 proved underdeveloped reserves of the organization. Furthermore, the production
disclosures are also conducted, which has been listed under the item 1204. Finally, both
organizations’ adequacy conducts the disclosure of the items from 1205-1208 in their annual
report.
5.4 Conclusion:
Based on the above evaluation, it could be stated that during 2009, Securities and
Exchange (SEC) a proposed amendment to the notice and access proxy rules so as to remove
the regulatory impediments which can reduce the shareholder’s response rate to the proxy
solicitations by permitting issuers and different persons so as to utilize the notice and access
model effectively. New amendments were proposed depending upon the continuing review of
the disclosures that the shareholders receive in case they are enquire to make a decision
through voting decision and by the process followed in case those votes are solicited. This
research has analyzed the financial statement impact through the modernization of the Oil
and Gas Reporting Requirement which was proposed Rule and effective from the January 1,
2010.

53MSC OIL AND GAS ACCOUNTING
It has been found that it is necessary to make amendments in the financial reporting
procedures for the US organizations to ensure transparency in their disclosures. The oil and
gas industry is not an exception to this regime, as this sector carries numerous benefits for
different groups of stakeholders. The researcher has used the philosophy of positivism,
deductive research approach and descriptive research design for conducting the overall
research. Probability sampling in the form of sample random sampling has been used for
selecting the samples from the total population. Research has been carried out on two major
oil and gas companies of US that include Exxon Mobil and Chevron Corporation. It has been
found that both the organizations have conformed adequately to the new reporting regimes, as
prescribed by the SEC for disclosing their financial reports. However, the lack of availability
of data on the other companies of the industry and limited timeframe has restricted the
researcher to make an accurate prediction on financial transparency of the sector.
5.5 Scopes for future research
The aspects of oil and gas reporting and accounting have been gaining immense
importance in the contemporary global economic and commercial scenario, especially post
Globalisation and trade liberalisation as much of the industrial progress and economic
development of many places across the world are dependent on their oil and gas reserves and
trades in the same field.
The concerned research, in this context, by studying the different aspects of the
modernization of oil and gas reserve reporting and its implications on the accounting and
other aspects of the oil and gas industry in the USA, paves the path for extensive future
research in this broad and increasingly significant field. The primary limitation of the
concerned thesis is that due to time and cost constraint the thesis hugely emphasizes on the
oil and gas industry of the USA and the reporting aspects of the same. However, there are
many other countries across the world, with companies holding significant oil and gas

54MSC OIL AND GAS ACCOUNTING
reserves and having immense implications on the global political, economic and commercial
domains. Also, with time the technological development and infrastructural as well as
transport innovations have been leading to revolutionary changes in the aspects of
identification, extraction and usage oil and gas. The sources previously not taken into account
are now considered as potential oil and gas reserves and many unconventional sources and
materials are also included in the current domain, which in turn indicates towards need for
consistent and efficient development of ways of reporting oil and gas reserves in the global
framework, with less errors and more accuracy.
All these aspects and the ever developing and modifying oil and gas industry in the
USA as well as in all parts of the world, open huge scope for future researches in the
concerned field, especially in the aspects of implications and needs for continuous
modernisation in the reporting and accounting of such reserves and what impacts the same
can have on the overall profitability of the companies, the investors as well as on the global
economies as a whole. The aspects of implementation of the modernised ways of accounting
and reporting of oil and gas reserves and the faults and limitations of the same in the coming
years, can also be one of the primary arenas of study for the future researches which can take
place in the concerned field in a global framework.
5.6 Recommendations
As is evident from the findings of the analysis of the concerned thesis, the
implementation of the Modernization Programme on part of the SEC, USA has brought
considerable changes in the aspects of reporting and accounting standards of the oil and gas
reserves of the companies, not only in the USA but also in all other parts of the world as the
standards of SEC are legally accepted and mostly used by companies and operators in all
parts of the world to maintain uniformity and parity.

55MSC OIL AND GAS ACCOUNTING
The Final Rule of the SEC regarding Modernization of reporting of oil and gas
reserves can be seen to be bringing in considerable changes in the aspects of pricing (from
year end to 12-month average), PMRS standards, extraction from unconventional resources,
technological inclusions, definitions of reserves, clarity and transparency, treatment of
underdeveloped reserves and many other aspects. The changes can already be seen to be
incorporated in the operational frameworks of the oil and gas companies, especially in
relation to the accounting aspects in the oil and gas sectors.
However, although these changes are brought about with the positive intension of
increasing efficiency in extraction, usage and accounting of the reserves with the oil and gas
companies and for increasing the level of transparency for the investors and decreasing
rigidity in the notion of reserves in the face of development of new technologies, the same is
only possible if the following aspects are taken into consideration by the companies as well
as other stakeholders in the oil and gas industry in the contemporary period:
a. Awareness Generation- Given the changes in the different aspects of reporting of oil and
gas reserves, it is of utmost importance for all the concerned companies and related
stakeholders in this field to be aware of the changes and their implementations in the real
scenario. Lack of awareness of the changing accounting and reporting methods can lead to
creation of immense confusion, thereby hampering the transparency, which is one of the
primary goals behind the initiation of modernization.
b. Legal aspects- The legal domains have to be strengthened such that the fallacies and loop
holes which were present in the traditional reporting and accounting aspects of oil and gas
reserves, are not repeated in the new amendments, which aim to nullify the chances of wrong
estimation and portrayal of volumes of oil and gas reserves by the companies with the
intentions of increasing their credit points in the capital market and credibility in the eyes of
the investors.

56MSC OIL AND GAS ACCOUNTING
c. Continuous development and flexibility- While implementing the changes, as suggested
by the Final Rules of the SEC, it has also to be kept into consideration that the technologies
in the domain of oil and gas extraction have been continuously changing and the same is also
expected to change in the coming years, which may facilitate inclusion of those oil and gas
resources which are not considered as reserves in the current period. These aspects of
continuous change and inclusion of new resources have to be taken into consideration and
there should be flexibility in the new rules of reporting (unlike the traditional ones which the
new rules replace) regarding acknowledgement of changes in accounting and reporting
aspects in this field.
d. Uniformity and parity- International uniformity needs to be maintained in implementing
the new regulations in order to maintain parity and uniformity given the highly integrated and
inclusive global commercial scenario in the contemporary period.
With these aspects taken into consideration, the implementation of the new methods
of reporting in the oil and gas industry can have positive implications for the investors, the
companies as well as the other stakeholders in the concerned industry in the long run
scenario.

57MSC OIL AND GAS ACCOUNTING
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