Canada: Canadian Securities Administrators Adopt Amendments to Standards of Disclosure for Oil and Gas Activities

On December 30, 2010, new amendments adopted by the Canadian Securities Administrators (CSA) came into effect revising National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities (NI 51-101) and its related forms and companion policy (collectively, the "Instrument").  The amendments reflect the CSA's on-going efforts to ensure that public disclosure of reserves and resources by reporting oil and gas companies remains meaningful and understandable to the public.

Briefly, NI 51-101 requires reporting issuers in Canada engaged in oil and gas activities to disclose, on an annual basis, estimated quantities of their reserves and related future net revenue using forecast prices and costs.  Disclosure of estimated quantities and related future values of the issuer's resources is optional under the Instrument.  The amendments adopted by the CSA are not a fundamental overhaul of the Instrument but rather are intended to provide further guidance in the disclosure of reserves and, if applicable, resources, to clarify certain provisions of the Instrument and to modify certain annual filing procedures.  The more interesting changes to note are described below.

Press Release no longer required

Oil and gas issuers are no longer required to disseminate a press release announcing the filing of their annual reserves disclosure under NI 51-101.  This is expected to help reduce issuers' business costs by eliminating the costs associated with disseminating one additional press release.

However, oil and gas issuers who opt to incorporate their annual reserves disclosure in an Annual Information Form (AIF) will now have to file a new prescribed notice (NI 51-101F4) concurrently with the filing of the AIF on SEDAR.

Changes to signing requirements

The CSA have modified the signing requirements of the certifying report from the management and directors of the issuer (NI 51-101F3) which accompanies the reserves disclosure.  Previously, any two officers of the company could execute NI 51-101F3.  Now, under the amended Instrument, one of the executing officers must be the chief executive officer (CEO) of the company.

Furthermore, the amended Instrument now clearly prohibits an individual from executing NI 51-101F3 as both an officer and as a director of the issuer.  For oil and gas issuers that have only three directors, the amended Instrument now obligates all three directors to execute NI 51-101F3 if two of the directors simultaneously serve as officers of the issuer.

Further guidance on the disclosure of "resources"

Given the growing importance of resources data in the valuation of oil and gas producers, the amendments to the Instrument include further guidance for reporting issuers who choose to disclose estimated quantities and future values of their resources.

    (a) Meaning of "resources" 

Generally, "resources" refers to the remaining oil and gas deposits of a company, both known and unknown, that are currently not commercially recoverable whereas "reserves" refers to those remaining known oil or gas deposits of the company that are commercially recoverable under current conditions.  The term "resources" is not defined in the Instrument but instead a definition is imported from the Canadian Oil and Gas Evaluation Handbook (COGE Handbook).  However, the COGE Handbook permits "resources" to also mean the total oil and gas deposits originally existing at a given natural location including reserves.  In contrast, the reporting of any "resources" under NI 51-101 was intended to capture only those oil and gas deposits remaining in a given natural location and that did not constitute reserves.  To reflect this and to avoid confusing issuers who opt to disclose estimates of "resources", the CSA have amended the Instrument to change, where necessary, the term "resources" to "resources other than reserves".

    (b) Combining estimates from different "resource" categories now prohibited

NI 51-101 requires an oil and gas producer that opts to disclose estimates of its resources other than reserves to assign the estimates to the most specific subcategories of resources possible as set forth in the COGE Handbook.  For instance, the broadest resource category of "total petroleum initially-in-place", or total PIIP, is divisible into "discovered PIIP" and "undiscovered PIIP", and "discovered PIIP" itself is ultimately divisible into "production", "reserves", "contingent resources" and the "unrecoverable portion of discovered PIIP".  Similarly, "undiscovered PIIP" is further divisible into "prospective resources" and the "unrecoverable portion of undiscovered PIIP."  The amended Instrument makes clear that an issuer which opts to disclose estimates of resources other than reserves can no longer combine estimated quantities from different subcategories of resources but must report them separately.  By prohibiting the summation of estimates across resource categories, the CSA hopes investors will receive more consistent and meaningful disclosure of an issuer's assets.

Notwithstanding this general prohibition, estimates of total PIIP, discovered PIIP, and undiscovered PIIP, may be disclosed if estimates of the most specific subcategories that comprise each respective summed estimate are also disclosed.  If an issuer is unable to report estimates of the applicable subcategories, it may still yet report estimates of total PIIP, discovered PIIP or undiscovered PIIP, provided that it includes an explanation as to why it could not disclose the estimates of the applicable subcategories and includes prescribed cautionary language in its disclosure report.

    (c) "High" estimates of resources must now be accompanied with "low" and "best" estimates

Estimates of the recoverable quantities of resources other than reserves are categorized depending on their level of certainty, these being a low-case estimate (conservative), a best-case estimate (realistic) and a high-case estimate (optimistic).  Under the amended Instrument, where an issuer discloses the high-case estimate, then it must now also disclose the corresponding low-case estimate and best-case estimate.

Additional Changes

Additional changes that have been made under the amended Instrument include the following:

• Issuers that have properties with no attributed reserves will now be required to identify and discuss any significant factors and uncertainties that could affect the development of those properties.  Such factors may include any need to construct a major pipeline or any unusually high development costs.
• Issuers may now substitute a specific product type for the term "petroleum" when disclosing a resource estimate equivalent to petroleum initially-in-place even if the terminology is not found in the COGE Handbook.  Potentially then, terms such as "natural gas initially-in-place" or "bitumen initially-in-place" which are not set out in the COGE Handbook but may be more accurate descriptions of a particular issuer's resources, may now be used by an issuer in its disclosure report.
• Issuers will now be required to disclose any stratigraphic test wells completed in their most recent financial year in addition to any completed oil wells, gas wells and service wells.
• Issuers may now include supplementary disclosure of their estimates of resources using constant prices and costs to reflect the similar approach recently adopted in the United States.  Constant prices and costs requirements have also been updated with specific guidance for disclosure.

Josh Almario practice includes corporate finance and securities, mergers and acquisitions, corporate governance and general corporate matters. Noralee Bradley practice focuses on mergers and acquisitions, public and private placement financings, corporate and board governance and the purchase and sale of assets and shares.

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