Canada: Revised CSA Staff Notice 51-327 Guidance On Oil And Gas Disclosure

On December 29, 2011, the securities commissions released a revision to Canadian Securities Administrators Staff Notice 51-327. It is significant that the title was changed from "CSA Staff Notice 51-327 - Oil And Gas Disclosure: Resources Other Than Reserves Data" to "Revised CSA Staff Notice 51-327 - Guidance On Oil And Gas Disclosure" (2011 Revision).

The word "Guidance" is intended to signal a heightened level of concern at the commissions regarding the adherence by Oil and Gas Issuers¹ and their advisors to the spirit and intent of National Instrument 51-101 - Standards of Disclosure for Oil and Gas Activities (NI 51-101), the forms under that instrument NI 51-101F1, NI 51-101F2, NI 51-101F3 and NI 51-101F4; and the disclosure obligations of Oil and Gas Issuers under the securities acts and related instruments.

Clearly, the commissions are sending a message to remind everyone involved in the preparation of oil and gas disclosure, that there is more to be considered than just the requirements of NI 51-101.

At the end of 2010 the CSA Staff revised NI 51-101 by moving a number of the items that were then included in Staff Notice 51-327 into the national instrument. The 2011 Revision is intended to complete the process of alerting those involved in oil and gas disclosure to the expectations of the commissions in the preparation of that disclosure.

Often there exists a balancing act within the securities laws and policies between rule-based and principle-based regulation and disclosure. NI 51-101 is one of those places where it is very evident. The 2011 Revision is an example of this. The CSA Staff is looking for not just strict adherence to the instrument and its forms, but also best professional judgement and practices in responding to Oil and Gas Issuers' disclosure requirements.

The 2011 Revision includes:

• New guidance on the general responsibilities of Oil and Gas Issuers and the experts on whom they rely in formulating disclosure of oil and gas information;
• New guidance on specific disclosure topics;
• Expanded guidance on certain disclosure topics; and
• guidance carried forward from the original version of the Staff Notice with little or no change on certain disclosure topics.

To assist, the 2011 Revision offers:

• Context and cautions in NI 51-101 and the related forms:
• Forms of cautionary wording for non-mandatory disclosure for resources other than proved and probable reserves;
• Specific disclosure topics for discussion as examples of how general principles apply to specific situations, not to be taken as a check list but merely as guidance.

For purposes of clarity and consistency an alignment of definitions of classification and categorization of resources and reserves, between the COGE Handbook and the Handbook and the Society for Petroleum Engineers - Petroleum Resource Management System (SPE-PRMS). The CSA Staff proposes certain definitions from the SPE-PRMS be adopted:

• "class" should be used in the same manner as used by the SPE-PRMS to describe the chance of commerciality (reserves, contingent resources, etc.);
• "category" should be used in the same manner as used by the SPE-PRMS to describe the range of uncertainty within a class.  (Thus, for example, within the class of "reserves" are the categories of "proved", "probable" and "possible", and for other classes the estimation categories of "low case", "best case" and "high case");
• "resources" should be consistent with the CSA Glossary as a general term that may refer to all or a portion of total resources, with "total resources" as equivalent to "total petroleum initially-in-place" as defined in the COGE Handbook;
• "reserves data" should be used as defined in NI 51-101 as an estimate of proved reserves and probable reserves and related future net revenue; and
• "resources other than proved or probable reserves" refers to all other classes of resources as classified in the COGE Handbook, including possible reserves.

Responsibility for Disclosure of Oil and Gas Information

The 2011 Revision brings into focus the scope of responsibility for the preparation of oil and gas information:

The 2011 Revision comments go beyond just the issuer and its management to include the "experts" and "individuals or firms who provide professional services" who sign the Form 51-101F2 report and remind them that by signing the forms, qualified reserves evaluators and auditors are taking on a professional responsibility that reflects on their individual professionalism and the integrity of their profession.

The specific references to Canadian securities legislation is intended to remind those preparing oil and gas information that their scope of view should not be confined to just NI 51-101. The CSA Staff point out the areas of attention for both the issuers and their experts.

Oil and Gas Issuers – General Standards and Responsibilities

Oil and Gas Issuers must make their disclosure within the larger context of Canadian securities legislation and appropriate use of instructional guides in developing and reporting disclosure. There are four areas of guidance that are offered:

• Canadian Securities Legislation, Generally – Not every topic of disclosure is discussed specifically in NI 51-101 or elsewhere in  Canadian securities legislation; therefore attention must be given to the broader purposes, principles and prohibitions of Canadian securities legislation, including:
  • Misrepresentations or Misleading Statements;
  • Material Changes;
  • Requirements Applicable to Disclosure of Oil and Gas Activities including the provisions of NI 51-10
• COGE Handbook and Other Guides;
• Specific Description Rather than Commonly-used Wording; and
• Use of NI 51-101 Forms for Other Purposes.

Evaluators and Auditors – General Standards and Responsibilities

An independent qualified reserves evaluator or auditor who signs a report in Form 51-101F2 is representing that the disclosed information is not misleading and that the reserves data are free of material misstatement. The 2011 Revision contains guidance on views of the CSA Staff in such matters as:

• Professional Responsibility;
• Misrepresentations or Misleading Statements;
• Use of COGE Handbook and Other Guides;
• Expertise Required to Perform Evaluation; and
• Consent to Disclose Information from Report.

Specific Disclosure Topics

The 2011 Revision then goes on to discuss, by way of example, some specific areas where the CSA Staff have encountered problems, such as:

• Disclosure of After-Tax Net Present Values of Future Net Revenue (After-Tax NPV);
• Use of Barrels of Oil Equivalent (BOEs);
• Disclosure of Well-Flow Test Results;
• Evaluation, Classification and Disclosure of Unconventional Hydrocarbons, including:
  • Known Accumulation Criterion,
  • Use of Analogous Information,
  • Extrapolation from Existing Data,
  • Project Maturity,
  • Contingencies, including:
    • Economic Contingency
    • Non-Technical Contingency
    • Technical Contingency (Established Technology and Technology Under Development)
  • Disclosure of Contingent Resources, including:
    • Identification (Economic, Non-Technical and Technical)
    • Itemizing Contingencies (Established Technology and Technology Under Development)
  • Classification to Most Specific Class and Category of Reserve;
  • Stand-Alone Possible Reserves;
  • Aggregation of Resource Estimates for Several Properties;
    • Probabilistic Aggregation of Resource Estimates for Several Properties
    • Arithmetic Aggregation of Resource Estimates for Several Properties
  • Use of the Term "Best Estimate"; and
  • Prospective Resources.

The message coming out of the 2011 Revision is that Oil and Gas Issuers and reserves evaluators or auditors will need to familiarize themselves with this Staff Notice and should assume that the CSA Staff will be paying much closer attention to oil and gas disclosure in the future.

While the content of NI 51-101 and its forms is very technical and requires the expertise of qualified evaluators or auditors, it should be remembered that it is part of the securities regulatory regime and that the interpretation and application of securities laws and policies cannot be ignored.

Footnote

1. Reporting issuers that are directly or indirectly engaged in oil and gas activities.

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