(v) A part of an operating interest owned may be exchanged for a part of an operating interest owned by another party. The purpose of such an arrangement, commonly called a joint venture in the oil and gas industry, often is to avoid duplication of facilities, diversify risks, and achieve operating efficiencies. Such reciprocal conveyances represent exchanges of similar productive assets, and no gain or loss shall be recognized by either party at the time of the transaction. In some joint ventures which may or may not involve an exchange of interests, the parties may share different elements of costs in different proportions. In such an arrangement a party may acquire an interest in a property or in wells and related equipment that is disproportionate to the share of costs borne by it. As in the case of a carried interest or a free well, each party shall account for its own cost under the provisions of this section. No gain shall be recognized for the acquisition of an interest in joint assets, the cost of which may have been paid in whole or in part by another party.

(vi) In a unitization all of the operating and nonoperating participants pool their assets in a producing area (normally a field) to form a single unit and in return receive an undivided interest (of the same type as previously held) in that unit. Unitizations generally are undertaken to obtain operating efficiencies and to enhance recovery of reserves, often through improved recovery operations. Participation in the unit is generally proportionate to the oil and gas reserves contributed by each. Because the properties may be in different stages of development at the time of unitization, some participants may pay cash and others may receive cash to equalize contributions of wells and related equipment and facilities with the ownership interests in reserves. In those circumstances, cash paid by a participant shall be recorded as an additional investment in wells and related equipment and facilities, and cash received by a participant shall be recorded as a recovery of cost. The cost of the assets contributed plus or minus cash paid or received is the cost of the participant's

undivided interest in the assets of the unit. Each participant shall include its interest in reporting reserve estimates and production data.

(vii) If the entire interest in an unproved property is sold for cash or cash equivalent, recognition of gain or loss depends on whether, in applying paragraph (c) of this section, impairment had been assessed for that property individually, or by amortizing that property as part of a group. If impairment was assessed individually, gain or loss shall be recognized. For a property amortized by providing a valuation allowance on a group basis, neither gain nor loss shall be recognized when an unproved property is sold unless the sales price exceeds the original cost of the property, in which case gain shall be recognized in the amount of such excess.

(viii) If a part of the interest in an unproved property is sold, even though for cash or cash equivalent, substantial uncertainty usually exists as to recovery of the cost applicable to the interest retained. Consequently, the amount received shall be treated as a recovery of cost. However, if the sales price exceeds the carrying amount of a property whose impairment has been assessed individually in accordance with paragraph (c) of this section, or exceeds the original cost of a property amortized by providing a valuation allowance on a group basis, gain shall be recognized in the amount of such excess.

(ix) The sale of an entire interest in a proved property that constitutes a separate amortization base is not one of the types of conveyances described in paragraphs (h)(2) and (h)(3) of this section. The difference between the amount of sales proceeds and the unamortized cost shall be recognized as a gain or loss.

(x) The sale of a part of a proved property, or of an entire proved property constituting a part of an amortization base, shall be accounted for as the sale of an asset, and a gain or loss shall be recognized, since it is not one of the conveyances described in paragraphs (h)(2) and (h)(3) of this section. The unamortized cost of the property or group of properties a part

of which was sold shall be apportioned to the interest sold and the interest retained on the basis of the fair values of those interests. However, the sale may be accounted for as a normal retirement under the provisions of paragraph (d) of this section with no gain or loss recognized if doing so does not significantly affect the unit-of-production amortization rate.

(xi) The sale of the operating interest in a proved property for cash with retention of a nonoperating interest is not one of the types of conveyances described in paragraphs (h)(2) and (h)(3) of this section. Accordingly, it shall be accounted for as the sale of an asset, and any gain or loss shall be recognized. The seller shall allocate the cost of the proved property to the operating interest sold and the nonoperating interest retained on the basis of the fair values of those interests.

(xii) The sale of a proved property subject to a retained production payment that is expressed as a fixed sum of money payable only from a specified share of production from that property, with the purchaser of the property obligated to incur the future costs of operating the property, shall be accounted for as follows: If satisfaction of the retained production payment is reasonably assured, the seller of the property, who retained the production payment, shall record the transaction as a sale, with recognition of any resulting gain or loss. The retained production payment shall be recorded as a receivable, at an amount reflecting appropriate consideration of imputed interest thereon. The purchaser shall record as the cost of the assets acquired the cash consideration paid plus the present value of the retained production payment, which shall be recorded as a payable. The oil and gas reserve estimates and production data, including those applicable to liquidation of the retained production payment, shall be reported by the purchaser of the property. If satisfaction of the retained production payment is not reasonably assured, the transaction is in substance a sale with retention of an overriding royalty that shall be accounted for in accordance with

subparagraph (5)(xi) of this paragraph.

(xiii) The sale of a proved property subject to a retained production payment that is expressed as a right to a specified quantity of oil or gas out of a specified share of future production shall be accounted for in accordance with subparagraph (5)(xi) of this paragraph.

FULL COST METHOD

(i) Application of the full cost method of accounting. A reporting entity that follows the full cost method shall apply that method to all of its operations and to the operations of its subsidiaries, as follows:

(1) Determination of cost centers. Cost centers shall be established on a country-by-country basis.

(2) Costs to be capitalized. All costs associated with property acquisition, exploration, and development activities (as defined in paragraph (a) of this section) shall be capitalized within the appropriate cost center. Any internal costs that are capitalized shall be limited to those costs that can be directly identified with acquisition, exploration, and development activities undertaken by the reporting entity for its own account, and shall not include any costs related to production, general corporate overhead, or similar activities.

(3) Amortization of capitalized costs. Capitalized costs within a cost center shall be amortized on the unit-of-production basis using proved oil and gas reserves, as follows:

(i) Costs to be amortized shall include (A) all capitalized costs, less accumulated amortization, other than the cost of properties described in paragraph (ii) below; (B) the estimated future expenditures (based on current costs) to be incurred in developing proved reserves; and (C) estimated dismantlement and abandonment costs, net of estimated salvage values.

(ii) The cost of unusually significant investments in unproved properties and major development projects may be excluded from capitalized costs to be amortized, subject to the following:

(A) Costs of acquiring and evaluating unproved properties may be ex

cluded only if the costs incurred are unusually significant in relation to the aggregate costs to be amortized (e.g., the costs of acquiring major offshore leases). All costs of acquiring such properties and related exploration costs shall be excluded from the amortization computation until it is determined whether or not proved reserves are attributable to the properties. Until such a determination is made, the properties shall be assessed individually to ascertain whether impairment has occurred (see paragraph (c) of this section). If the results of the assessment indicate impairment, the amount of the impairment shall be added to the costs to be amortized.

(B) Costs of major development projects may be excluded from amortization only if unusually significant development costs must be incurred prior to ascertaining 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). In such cases, a portion of the development costs identified with such a project may be excluded from the costs to be amortized until the proved reserves added as a result of the project are ascertainable or until it is determined that impairment has occurred.

(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) Mineral property conveyances and related transactions. The provisions of paragraph (h) of this section, "Mineral property conveyances and related transactions if the successful ef

forts 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 reserves in place and abandonments of properties 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. 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 for such a sale, total capitalized 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.

(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) Drilling arragements. Consistent with the provisions of paragraph (h) of this section, no income shall be recognized from sales of unproved properties or participation in various forms of drilling arrangements involving oil and gas producing activities (e.g., carried interest, turnkey wells, management fees, etc.) if the sales of unproved properties or drilling arrangements related thereto, in substance, will provide for the receipt or retention of an economic interest in any form in the properties. Circumstances in which income may be recognized are limited to situations where (A) the cash consideration received from the sale of unproved properties or drilling arrangements involving oil and gas

producing activities exceeds the total cost of the properties plus any exploration and development costs to be subsequently incurred, or (B) the cash compensation represents reimbursement for amounts currently charged to expense. In the case of partnership or joint venture operations undertaken by the entity that involve more than one property, the determination of whether the cash compensation exceeds the cost of the properties shall be made based on the entity's participation in the total operations of the partnership or joint venture, rather than on a property-by-property basis. If the cash consideration received represents reimbursement for organization, offering, general and administrative expenses, etc., such compensation may be recognized as income only to the extent that costs have been currently incurred and charged to expense.

(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 and, to the extent possible, the

potential future impact on the amortization rate. In addition, indicate the nature of the costs by category and the approximate date on which costs were first incurred with respect to each such property or project.

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 quantities of proved oil and gas reserves and historical financial data. The following data 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.

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 subparagraph (4)(ii) of this paragraph) 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 subparagraph (6)(ii) of this paragraph), 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