proved reserves can be assigned to the properties, subject to the following conditions:

(1) Until such a determination is made, the properties shall be assessed at least annually to ascertain whether impairment has occurred. Unevaluated properties whose costs are individually significant shall be assessed individually. Where it is not practicable to individually assess the amount of impairment of properties for which costs are not individually significant, such properties may be grouped for purposes of assessing impairment. Impairment may be estimated by applying factors based on historical experience and other data such as primary lease terms of the properties, average holding periods of unproved properties, and geographic and geologic data to groupings of individually insignificant properties and projects. The amount of impairment assessed under either of these methods shall be added to the costs to be amortized.

(2) The costs of drilling exploratory dry holes shall be included in the amortization base immediately upon determination that the well is dry.

(3) If geological and geophysical costs cannot be directly associated with specific unevaluated properties, they shall be included in the amortization base as incurred. Upon complete evaluation of a property, the total remaining excluded cost (net of any impairment) shall be included in the full cost amortization base.

(B) Certain costs may be excluded from amortization when incurred in connection with major development projects expected to entail significant costs to ascertain the quantities of proved reserves attributable to the properties under development (e.g., the installation of an offshore drilling platform from which development wells are to be drilled, the installation of improved recovery programs, and similar major projects undertaken in the expectation of significant additions to proved reserves). The amounts which may be excluded are applicable portions of (1) the costs that relate to the major development project and have not previously been included in the amortization base, and (2) the estimated future expenditures associated

with the development project. The excluded portion of any common costs associated with the development project should be based, as is most appropriate in the circumstances, on a comparison of either (i) existing proved reserves to total proved reserves expected to be established upon completion of the project, or (ii) the number of wells to which proved reserves have been assigned and total number of wells expected to be drilled. Such costs may be excluded from costs to be amortized until the earlier determination of whether additional reserves are proved or impairment

occurs.

(C) Excluded costs and the proved reserves related to such costs shall be transferred into the amortization base on an ongoing (well-by-well or property-by-property) basis as the project is evaluated and proved reserves established or impairment determined. Once proved reserves are established, there is no further justification for continued exclusion from the full cost amortization base even if other factors prevent immediate production or marketing.

(iii) Amortization shall be computed on the basis of physical units, with oil and gas converted to a common unit of measure on the basis of their approximate relative energy content, unless economic circumstances (related to the effects of regulated prices) indicate that use of units of revenue is a more appropriate basis of computing amortization. In the latter case, amortization shall be computed on the basis of current gross revenues (excluding royalty payments and net profits disbursements) from production in relation to future gross revenues, based on current prices (including consideration of changes in existing prices provided only by contractual arrangements), from estimated production of proved oil and gas reserves. The effect of a significant price increase during the year on estimated future gross revenues shall be reflected in the amortization provision only for the period after the price increase occurs.

(iv) In some cases it may be more appropriate to depreciate natural gas cycling and processing plants by a

method other than the unit-of-production method.

(v) Amortization computations shall be made on a consolidated basis, including investees accounted for on a proportionate consolidation basis. Investees accounted for on the equity method shall be treated separately.

(4) Limitation on capitalized costs. (i) For each cost center, capitalized costs, less accumulated amortization and related deferred income taxes, shall not exceed an amount (the cost center ceiling) equal to the sum of: (A) The present value of future net revenues from estimated production of proved oil and gas reserves as defined in paragraph (k)(6) of this section; plus (B) the cost of properties not being amortized pursuant to paragraph (i)(3)(ii) of this section; plus (C) the lower of cost or estimated fair value of unproved properties included in the costs being amortized; less (D) income tax effects related to differences between the book and tax basis of the properties involved.

(ii) If unamortized costs capitalized within a cost center, less related deferred income taxes, exceed the cost center ceiling, the excess shall be charged to expense and separately disclosed during the period in which the excess occurs. Amounts thus required to be written off shall not be reinstated for any subsequent increase in the cost center ceiling.

(5) Production costs. All costs relating to production activities, including workover costs incurred solely to maintain or increase levels of production from an existing completion interval, shall be charged to expense as incurred.

(6) Other transactions. The provisions of paragraph (h) of this section, "Mineral property conveyances and related transactions if the successful efforts method of accounting is followed," shall apply also to those reporting entities following the full cost method except as follows:

(i) Sales and abandonments of oil and gas properties. Sales of oil and gas properties, whether or not being amortized currently, shall be accounted for as adjustments of capitalized costs, with no gain or loss recognized, unless such adjustments would significantly

alter the relationship between capitalized costs and proved reserves of oil and gas attributable to a cost center. For instance, a significant alteration would not ordinarily be expected to occur for sales involving less than 25 percent of the reserve quantities of a given cost center. If gain or loss is recognized on such a sale, total capitalization costs within the cost center shall be allocated between the reserves sold and reserves retained on the same basis used to compute amortization, unless there are substantial economic differences between the properties sold and those retained, in which case capitalized costs shall be allocated on the basis of the relative fair values of the properties. Abandonments of oil and gas properties shall be accounted for as adjustments of capitalized costs; that is, the cost of abandoned properties shall be charged to the full cost center and amortized (subject to the limitation on capitalized costs in paragraph (b) of this section).

(ii) Purchases of reserves. Purchases of oil and gas reserves in place ordinarily shall be accounted for as additional capitalized costs within the applicable cost center; however, significant purchases of production payments or properties with lives substantially shorter than the composite productive life of the cost center shall be accounted for separately.

(iii) Partnerships, joint ventures and drilling arrangements. (A) Except as provided in paragraph (i)(6)(i) of this section, all consideration received from sales or transfers of properties in connection with partnerships, joint venture operations, or various other forms of drilling arrangements involving oil and gas exploration and development activities (e.g., carried interest, turnkey wells, management fees, etc.) shall be credited to the full cost account, except to the extent of amounts that represent reimbursement of organization, offering, general and administrative expenses, etc., that are identifiable with the transaction, if such amounts are currently incurred and charged to expense.

(B) Where a registrant organizes and manages a limited partnership involved only in the purchase of proved developed properties and subsequent

distribution of income from such properties, management fee income may be recognized provided the properties involved do not require aggregate development expenditures in connection with production of existing proved reserves in excess of 10% of the partnership's recorded cost of such properties. Any income not recognized as a result of this limitation would be credited to the full cost account and recognized through a lower amortization provision as reserves are produced.

(iv) Other services. No income shall be recognized in connection with contractual services performed (e.g. drilling, well service, or equipment supply services, etc.) in connection with properties in which the registrant or an affiliate (as defined in § 210.1-02(b)) holds an ownership or other economic interest, except as follows:

(A) Where the registrant acquires an interest in the properties in connection with the service contract, income may be recognized to the extent the cash consideration received exceeds the related contract costs plus the registrant's share of costs incurred and estimated to be incurred in connection with the properties. Ownership interests acquired within one year of the date of such a contract are considered to be acquired in connection with the service for purposes of applying this rule. The amount of any guarantees or similar arrangements undertaken as part of this contract should be considered as part of the costs related to the properties for purposes of applying this rule.

(B) Where the registrant acquired an interest in the properties at least one year before the date of the service contract through transactions unrelated to the service contract, and that interest is unaffected by the service contract, income from such contract may be recognized subject to the general provisions for elimination of intercompany profit under generally accepted accounting principles.

(C) Notwithstanding the provisions of paragraphs (i)(6)(iv) (A) and (B) of this section, no income may be recognized for contractual services performed on behalf of investors in oil and gas producing activities managed by the registrant or an affiliate. Fur

thermore, no income may be recognized for contractual services to the extent that the consideration received for such services represents an interest in the underlying property.

(D) Any income not recognized as a result of these rules would be credited to the full cost account and recognized through a lower amortization provision as reserves are produced.

(7) Disclosures. Reporting entities that follow the full cost method of accounting shall disclose all of the information required by paragraph (k) of this section, with each cost center considered as a separate geographic area, except that reasonable groupings may be made of cost centers that are not significant in the aggregate. In addition:

(i) For each cost center for each year that an income statement is required, disclose the total amount of amortization expense (per equivalent physical unit of production if amortization is computed on the basis of physical units or per dollar of gross revenue from production if amortization is computed on the basis of gross revenue).

(ii) State separately on the face of the balance sheet the aggregate of the capitalized costs of unproved properties and major development projects that are excluded, in accordance with paragraph (i)(3) of this section, from the capitalized costs being amortized. Provide a description in the notes to the financial statements of the current status of the significant properties or projects involved, including the anticipated timing of the inclusion of the costs in the amortization computation. Present a table that shows, by category of cost, (A) the total costs exIcluded as of the most recent fiscal year; and (B) the amounts of such excluded costs, incurred (1) in each of the three most recent fiscal years and (2) in the aggregate for any earlier fiscal years in which the costs were incurred. Categories of cost to be disclosed include acquisition costs, exploration costs, development costs in the case of significant development projects and capitalized interest.

INCOME TAXES

(j) Income taxes. Comprehensive interperiod income tax allocation by the deferred method shall be followed for intangible drilling and development costs and other costs incurred that enter into the determination of taxable income and pretax accounting income in different periods. The excess of statutory depletion over cost depletion for income tax purposes shall be accounted for as a permanent difference in the period in which the excess is deducted for income tax purposes.

DISCLOSURE REQUIREMENTS

(k) Disclosure of oil and gas reserve information and historical financial data. The information specified by paragraphs (k)(1) through (4) of this section shall be disclosed in the body of the financial statements, in the notes thereto, or in a separate schedule or other presentation that is an integral part of the financial statements. The information in paragraphs (k)(5) through (8) of this section is not required to be audited and may be reported as supplementary information accompanying, but outside, the financial statements.

Exemption. This paragraph shall not apply to filings under the federal securities laws by any registrant meeting all of the conditions described below for each of the two most recent fiscal years, based on its annual consolidated financial statements:

(i) Gross revenues from sales or transfers of oil and gas (as defined in paragraph (k)(4)(ii) of this section) do not exceed 10 percent of total revenues;

(ii) Income after taxes (but before extraordinary items) from oil and gas producing activities, including

amounts applicable to investees accounted for under the equity method, does not exceed 10 percent of consolidated income before extraordinary items; and

(iii) The "Present Value of Estimated Future Net Revenues" (see paragraph (k)(6)(ii) of this section), including amounts attributable to investees accounted for under the equity method, plus the net capitalized costs

of unproved properties, do not exceed 10 percent of total assets.

(1) Disclosure of method of accounting. The reporting entity shall disclose on the face of its balance sheet that it is adhering to the successful efforts method of accounting or the full cost method of accounting.

(2) Disclosure of capitalized costs. The aggregate amount of capitalized costs relating to oil and gas producing activities and the aggregate amount of the related accumulated depreciation, depletion, amortization, and valuation allowances shall be reported as of the end of each period for which a complete set of (annual or interim) financial statements is presented, with separate presentation for each geographic area for which quantities of proved reserves are presented in accordance with paragraph (k)(5) of this section. If the capitalized costs of unproved properties are significant, aggregate amounts shall be reported separately for capitalized costs related to unproved properties and capitalized costs related to proved properties. Capitalized costs of support equipment and facilities may be disclosed separately or included, as appropriate, with capitalized costs of proved and unproved properties.

(3) Disclosure of costs incurred in oil and gas producing activities. The financial statements shall disclose the amounts of each of the following types of costs for each year for which an income statement is required (whether those costs are capitalized or charged to expense at the time they are incurred):

(i) Property acquisition costs (disclose separately the costs of acquiring proved properties, if significant). (ii) Exploration costs.

(iii) Development costs.

(iv) Production (lifting) costs. Exploration, development, and production costs include depreciation of support equipment and facilities used in those activities rather than the expenditures to acquire support equipment and facilities. Production (lifting) costs do not include depreciation, depletion, and amortization of capitalized acquisition, exploration, and development costs. If some or all of

those costs are incurred in foreign countries, the amounts shall be disclosed separately for each of the geographic areas for which reserve quantities are disclosed in accordance with paragraph (k)(5) of this section and for any other foreign geographic area in which significant costs have been incurred without discovery of significant proved reserves. Also, disclose the aggregate amount of depreciation, depletion, amortization, and valuation provisions relating to oil and gas producing activities, presented separately for each of these geographic areas. If the reporting entity's share of the oil and gas reserves of its investee companies accounted for by the equity method is reported in conformity with paragraph (k)(5) of this section, disclosure shall also be made of the investor's share of its investee's capitalized costs and costs incurred in oil and gas producing activities.

(4) Revenues from producing oil and gas. (i) For each full fiscal year for which an income statement is required, disclose, for each geographic area for which reserve quantities are disclosed in accordance with paragraph (k)(5) of this section, the net revenues from oil and gas production related to each of the following, if significant: (A) Proved developed oil and gas reserves, (B) reserves applicable to long-term supply or similar agreements with foreign governments in which the entity acts as producer (see paragraph (k)(5) of this section), and (C) the entity's proportional interest in reserves of investees accounted for by the equity method.

(ii) Net revenues shall be computed by subtracting production (lifting) costs from gross revenues that are determined in accordance with the provisions of this subparagraph, as presented below. The following accounting practices shall be applied in determining gross revenues from sales or transfers of production of oil and gas:

(A) Sales to unaffiliated entities shall be included in gross revenues at the amount received in sales transactions attributable to net working interests, royalty interests, oil payments interests (see paragraph (h) of this section), net profits interests, etc., of the reporting entity. Production or sever

ance taxes should not be deducted in determining gross revenues. Royalty payments and net profits disbursements should be excluded from gross

revenues.

(B) Sales and transfers to unconsolidated affiliated persons and to other operations (such as refineries, chemical plants, etc.) of the reporting entity shall be separately disclosed and accounted for in the same manner as described in paragraph (k)(4)(ii)(A) of this section except that such sales and transfers shall be valued at estimated market prices based on the prices of comparable products using posted field prices, if applicable, or amounts estimated to represent prices equivalent to those that could be obtained in a competitive arm's-length market environment, giving recognition to transportation costs, quality differences, and arrangements with and regulation by governments.

(5) Disclosure of estimated quantities of proved oil and gas reserves. Net quantities of proved reserves and proved developed reserves of crude oil (including condensate and natural gas liquids) and natural gas shall be reported as of the beginning and the end of each fiscal year for which an income statement is required. "Net" quantities of reserves include those relating to the operating and non-operating interests in properties as defined in paragraph (b)(1) of this section. Quantities of reserves relating to royalty interests owned shall be included in "net" quantities if the necessary information is available; if reserves relating to royalty interests owned are not included because the information is unavailable, that fact and the reporting entity's share of oil and gas produced for those royalty interests shall be reported for each year for which a complete set of financial statements is presented. "Net" quantities shall not include reserves relating to interests of others in properties owned by the reporting entity.

(i) Changes in the net quantities of proved reserves of oil and of gas during each fiscal year for which an income statement is required shall be reported. Changes resulting from each of the following shall be shown sepa