to obtaining legal rights to explore for, develop, and/or produce wasting resources
on a mineral property.14 Legal rights may be acquired in a number of ways as
discussed at 5 below.
(c) Exploration – Exploration is the detailed examination of a geographical area of
interest that has shown sufficient mineral-producing potential to merit further
exploration, often using techniques that are similar to those used in the prospecting
phase.15 In the mining sector, exploration usually involves taking cores for analysis,
sinking exploratory shafts, geological mapping, geochemical analysis, cutting drifts
and crosscuts, opening shallow pits, and removing overburden in some areas.16 In
the oil and gas sector, exploration involves techniques such as shooting seismic,
core drilling, and ultimately the drilling of an exploratory well to determine
whether oil and gas reserves do exist.17
(d) Appraisal or evaluation – This involves determining the technical feasibility and
commercial viability of mineral deposits that have been found through
exploration.18 This phase typically includes:19
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(i) detailed engineering studies and drilling of additional wells by oil and gas
companies to determine how the reservoir can best be developed to obtain
maximum recovery;
(ii) determination by mining companies of the volume and grade of deposits
through drilling of core samples, trenching, and sampling activities in an area
known to contain mineral resources;
(iii) examination and testing by mining companies of extraction methods and
metallurgical or treatment processes;
(iv) surveying transportation and infrastructure requirements;
(v) conducting market and finance studies; and
(vi) making detailed economic evaluations to determine whether development of
the reserves is commercially justified.
(e) Development – Development is the establishment of access to the mineral reserve
and other preparations for commercial production. In the mining sector,
development includes sinking shafts and underground drifts, making permanent
excavations, developing passageways and rooms or galleries, building roads and
tunnels, and advance removal of overburden and waste rock.20 In the oil and gas
sector the development phase involves gaining access to, and preparing, well
locations for drilling, constructing platforms or preparing drill sites, drilling wells,
and installing equipment and facilities.21
(f) Construction – Construction involves installing facilities, such as buildings,
machinery and equipment to extract, treat, and transport minerals.22
(g) Production – The production phase involves the extraction of the natural
resources from the earth and the related processes necessary to make the
produced resource marketable or transportable.23
(h) Closure and decommissioning – Closure means ceasing production, removing
equipment and facilities, restoring the production site to appropriate conditions
after operations have ceased and abandoning the site.24
The above phases are not necessarily discrete sequential steps. Instead, the phases often
overlap or take place simultaneously. Nevertheless, they provide a useful framework for
developing accounting policies in the extractive industries. Accounting for expenditures
depends very much on the phase during which they are incurred; for example, as
discussed further below, costs incurred in the prospecting phase cannot be recognised as
assets, whereas most costs incurred in the construction phase should be capitalised.
2
MINERAL RESERVES AND RESOURCES
As noted in 1.1 above, IFRSs currently use the term ‘minerals’ and ‘mineral assets’ when
referring to the extractive industries as a whole. This is used as a collective term to
include both mining and oil and gas reserves and resources. For the purposes of this
chapter, consistency with the current wording in IFRSs will be maintained and
therefore, unless stated otherwise, ‘minerals’ and ‘mineral assets’ will encompass both
mining and oil and gas.
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This section discusses in some detail the underlying principles used by entities to
estimate the quantity of recoverable mineral reserves and resources for both mining and
oil and gas, that the entity owns or has a right to extract. At the commercial level, these
estimates are considered of paramount importance by stakeholders in making
investment decisions and are also fundamental in accounting for mining activities and
oil and gas activities.
The importance of estimating reserves and resources is matched by the difficulty in
doing so, both technically and methodologically. For example, there is no firm
consensus amongst regulators and the industries on which commodity prices should be
used in reserves and resources estimation (i.e. historical, spot or forward-looking). We
therefore aim to provide an introduction to this subject, and to explain the main
methods used to arrive at reserves and resources estimates, including the valuation
methods used once quantities have been estimated. In our view, without a sound grasp
of this aspect, it is difficult to make an informed judgement as to how to account for
mineral extraction activities.
Mineral reserves and resources are often the most valuable assets of mining companies
and oil and gas companies and mineral reserve estimates are a very important part of
the way these companies report to their stakeholders. However, in an entity’s financial
statements, assets relating to extraction of mineral reserves and resources are generally
measured under IFRSs at their historical cost which, other than by coincidence, will not
be their market value. Currently, IFRSs do not require disclosure of reserves and
resources, though certain national standards (e.g. US GAAP) and stock exchange
regulators (e.g. US Securities and Exchange Commission (SEC), Australian Securities
Exchange (ASX), Toronto Stock Exchange (TSX), Johannesburg Stock Exchange (JSE),
Securities Commission Malaysia (SC) to name just a few) do. Having said this, there are
variances in what is required and what categories are disclosed, including differences
between mining and oil and gas.
Notwithstanding there are no specific disclosure requirements in IFRSs, reserves and
resources estimates are required in order to apply historical cost accounting under IFRS in:
• deciding whether to capitalise E&E costs, based on an expectation of future
commercial production from resource estimates (see 3.2 below);
• calculating the annual depreciation, depletion and amortisation charge under the
units of production method (see 16.1.3 below);
• calculating deferred stripping cost adjustments (applicable to mining companies
only – see 15.5 below);
• determining impairment charges and reversals under IAS 36 (see 11 below);
• determining whether a gain or loss should be recognised on transactions such as
asset swaps, carried interest arrangements and farm-in or farm-out arrangements
(see 6 below);
• determining the fair value of acquired mineral reserves and resources when
&n
bsp; applying the purchase method of accounting under IFRS
3 – Business
Combinations (see 8 below); and
• estimating the timing of decommissioning or restoration activities (see 10 below).
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Reserves and resources reporting in the mining sector and oil and gas sector have been
under development since the beginning of the twentieth century. However, reserves
and resources estimation techniques in the mining sector and oil and gas sector have
developed largely independently as a result of the different nature of the reserves and
resources involved. Therefore, the definitions and terminology used in the oil and gas
sector and mining sector are discussed separately at 2.2 and 2.3 below respectively.
Disclosure is discussed at 2.4 below.
The international efforts to harmonise reserve estimation and reporting are also
discussed below.
2.1
International harmonisation of reserve reporting
The project team concluded in the Extractive Activities DP (see 1.3 above) that the
nature and extent of the similarities between the CRIRSCO Template (mining) and the
PRMS reserve and resource definitions (oil and gas) indicate that these definitions are
capable of providing a platform for setting comparable accounting and disclosure
requirements for both mining and oil and gas activities. Therefore they recommended
that the CRIRSCO template and the PRMS definitions of reserves and resources are
suitable to use in a future IFRS for Extractive Activities. Nonetheless, there is some
tension between the definition of an asset in the IASB’s Conceptual Framework and the
assumptions underlying the reserves and resources definitions.25 The points of tension
highlighted in the DP include:
• the CRIRSCO Template and the PRMS both make use of entity-specific
assumptions that are applied to derive a reserve or resource estimate, whereas
IFRS typically requires that estimates should make use of economic assumptions
that reflect market-based evidence, where available; and
• the CRIRSCO Template and the PRMS require that certain conditions must
exist before a resource can be converted into a reserve. In contrast,
management’s intentions are not a feature of the Conceptual Framework’s
definition of an asset.
While the DP recommended the use of the CRIRSCO Template and PRMS, it also
recommended that the alternative option of using the United Nations Framework
Classification for Fossil Energy and Mineral Resources (UNFC) should be reconsidered
if an Extractive Activities project is added to the IASB’s active agenda.26
In 2009, the SEC revised its oil and gas reserves and resources estimation and
disclosure requirements. The primary objectives of the final rule – Modernization
of Oil and Gas Reporting (Release No. 33-8995) – were to increase the transparency
and information value of reserve disclosures and improve comparability among oil
and gas companies, including comparability between domestic registrants and
foreign private issuers. Although the SEC has revised its oil and gas requirements,
a similar revision process has not been undertaken for mineral reserves and
resources. As a result, despite calls from both the CRIRSCO and the Society for
Mining, Metallurgy and Exploration (SME) to consider the need for convergence
given the increasing overlap between oil and gas and mining in such areas as tar
sands and oil shales, no progress has been made in achieving convergence between
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the SEC requirements and the various other requirements. Key differences that still
remain include:
• the SEC does not allow the term ‘resources’ to be used in reports;
• the SEC states that final or bankable feasibility studies need to be completed before
new greenfield reserves and resources can be declared; and
• the SEC requirement for oil and gas companies to use 12-month average prices
under SEC Release No. 338995, to represent existing economic conditions to
determine the economic producibility of oil and gas reserves for disclosure
purposes; and
• the SEC requirement for mining companies to use three year trailing average rather
than forward-looking commodity prices in reserve estimation under SEC Industry
Guide 7.
2.2
Petroleum reserve estimation and reporting
The ‘SPE/WPC/AAPG/SPEE Petroleum Resources Management System’ (SPE-PRMS),
which was published in 2007, is the leading framework for the estimation and reporting
of petroleum reserves and resources. It was prepared by the Oil and Gas Reserves
Committee of the Society of Petroleum Engineers (SPE) and reviewed and sponsored
by the World Petroleum Council (WPC), the American Association of Petroleum
Geologists (AAPG) and the Society of Petroleum Evaluation Engineers (SPEE), and
subsequently supported by the Society of Exploration Geophysicists (SEG).27 The
definitions and guidelines in the SPE-PRMS, which are internationally used within the
oil and gas sector, deal with:28
• classification and categorisation of resources;
• evaluation and reporting; and
• estimation of recoverable quantities.
Most of the major regulatory agencies have developed disclosure guidelines that impose
classification rules similar to, but not directly linked to, the SPE-PRMS, and most
typically mandate disclosure of only a subset of the total reserves and resources defined
in the SPE-PRMS. For example, the SEC specifies that only Proved Reserves should be
disclosed,29 but now allows for optional disclosure of probable reserves.
The Oil and Gas Reserves Committee of the SPE has recently completed the revision
of the Petroleum Resources Management System (PRMS). The SPE Board approved
the revision in June 2018. The updated PRMS is a consensus of input collected from
consulting and financial firms, government agencies, and exploration and
production (E&P) companies. The process included a public comment period, and
required input and approval by six sponsoring societies: the World Petroleum
Council, the American Association of Petroleum Geologists, the Society of
Petroleum Evaluation Engineers, the Society of Exploration Geophysicists, the
European Association of Geoscientists and Engineers, and the Society of
Petrophysicists and Well Log Analysts.
2.2.1
Basic principles and definitions
The following graphically presents the SPE-PRMS resources classification system:30
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Figure 39.1:
Resources classification framework
PRODUCTION
RESERVES
rcial
Low
Best Estimate
High
P)
1P
2P
3P
mme
P2
Co
P1
P3
ity
Proved
Probable
Possible
al
ace (PII
cier
-pl
ed PIIP
CONTINGENT RESOURCES
-in
scover
>
1C
2C
3C
comm
Di
itially
ercial
C1
C2
C3
e of
mm
m in
hanc
oleu
Sub-co
Unrecoverable
PROSPECTIVE RESOURCES
Increasing c
Total petr
1U
2U
3U
ed PIIP
P90
P50
P10
scoverdi
Un
Unrecoverable
Low
Range of uncertainty
High
Not to scale
The horizontal axis reflects the range of uncertainty of estimated quantities potentially
recoverable from an accumulation by a project, while the vertical axis represents the
chance of commerciality, which is the chance that a project will be committed for
development and reach commercial producing status.31
The SPE-PRMS defines proved, probable and possible reserves as follows:
• ‘Reserves are those quantities of petroleum anticipated to be commercially
recoverable by application of development projects to known accumulations from
a given date forward under defined conditions. Reserves must further satisfy four
criteria: discovered, recoverable, commercial, and remaining (as of the evaluation’s
effective date) based on the development project(s) applied. Reserves are further
categorized in accordance with the range of certainty associated with the estimates
and may be sub-classified based on project maturity and/or characterized by
development and production status.’32
• ‘Proved Reserves are those quantities of petroleum, that, by analysis of geoscience
and engineering data, can be estimated with reasonable certainty to be
commercially recoverable from known reservoirs and under defined technical and
commercial conditions. If deterministic methods are used, the term “reasonable
certainty” is intended to express a high degree of confidence that the quantities
will be recovered. If probabilistic methods are used, there should be at least a 90%
probability that the quantities actually recovered will equal or exceed
the estimate.’33
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• ‘Probable Reserves are those additional Reserves which analysis of geoscience and
engineering data indicate are less likely to be recovered than Proved Reserves but
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 633