Canadian Securities Administrators Amend Oil & Gas Disclosure Requirements
Updated: Jan 29, 2020
The Canadian Securities Administrators ("CSA" ) are making amendments to National Instrument 51-101 - Standards of Disclosure for Oil and Gas Activities and Companion Policy 51-101 - Standards of Disclosure for Oil and Gas Activities (the “Amendments”). Subject to ministerial approval requirements, the Amendments will come into force on July 1, 2015. CSA Staff Notice 51-324 Revised Glossary to NI 51-101 - Standards of Disclosure for Oil and Gas Activities and CSA Staff Notice 51-327 - Revised Guidance on Oil and Gas Disclosure are also being amended in connection with the Amendments.
The CSA published proposed amendments to NI 51-101 and CP 51-101 on October 17, 2013 for a 90 day comment period. Written comments received during and following this period, in conjunction with those obtained through oral communication with reporting issuers, independent qualified reserves evaluators and auditors and others were taken into consideration by the CSA in preparation of the Amendments.
NI 51-101 sets out both the general disclosure standards and specific annual disclosure requirements applicable to reporting issuers with oil and gas activities while CP 51-101 sets out the views of the CSA respecting the interpretation and application of NI 51-101. Under NI 51-101, reporting issuers engaged in oil and gas activities are required to provide annual disclosure, appoint an independent qualified reserves evaluator or auditor, facilitate communication between the board of directors and the independent qualified reserves evaluator or auditor and prepare, evaluate or audit all public disclosure of reserves and resources other than reserves in accordance with the requirements of Part 5 of NI 51-101. Part 5 of NI 51-101 mandates that reserves and resources other than reserves be prepared in accordance with the COGE Handbook and be evaluated or audited by a qualified reserves evaluator or auditor. NI 51-101 was implemented in 2003 and amended in 2007 and 2010.
Under NI 51-101, the disclosure of resources other than reserves is voluntary. In recent years, the CSA noted that the number of reporting issuers disclosing contingent and prospective resources has increased significantly. The CSA had observed certain early stage issuers disclose resources other than reserves to convey the potential of their assets and that this disclosure has occurred both within and outside of the annual disclosure requirements with varying degrees of consistency and completeness. The Amendments are intended to promote improved disclosure of resources other than reserves and associated metrics while simultaneously providing increased flexibility for oil and gas issuers that operate and report in different jurisdictions and recover product types not previously recognized by NI 51-101, and align NI 51-101 with the amended Canadian Oil and Gas Evaluation Handbook (COGE Handbook). This includes the guidelines for estimation and classification of resources other than reserves (ROTR Guidelines), which became effective July 17, 2014; and the detailed guidelines for estimation and classification of bitumen resources (Bitumen Guidelines) published on April 1, 2014.
Summary of the Amendments:
1. Alternative Resources Evaluation Standard. Numerous issuers reporting in Canada also access the U.S. capital markets and are subject to the SEC’s reserves disclosure regime. For example, SEC issuers who prepare financial statements in accordance with U.S. GAAP, as defined in National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards, have a requirement under Statement 19 of the Financial Standards Accounting Board to include reserves disclosure prepared in accordance with the U.S. regime within their financial statements. Certain issuers have sought and obtained a limited form of exemptive relief that allows them to disclose reserves prepared in accordance with U.S. requirements in addition to their reserves prepared under NI 51-101. The relief is required owing to an interpretation of sections 5.1, 5.2 and 5.3 of NI 51-101 that does not allow for any public disclosure of reserves other than estimates prepared in accordance with the COGE Handbook. Amended section 5.18 of NI 51-101 allows for disclosure from alternative regimes. The disclosure under the alternative regime must be accompanied by the disclosure required by NI 51-101, be made in respect of a regime which is comparable to the COGE Handbook, have a scientific basis and be based on reasonable assumptions. Those estimates must be prepared or audited by a qualified reserves evaluator or auditor.
2. Product Type and Production Group. Amendments to NP 51-101 imports and refines the product type definitions from the COGE Handbook for securities disclosure purposes. The concept of production group is removed. The inclusion of the definitions and removal of the production group concept gives greater emphasis to both the oil and gas sources and recovery processes, and moves away from grouping resources into conventional and unconventional categories. The CSA does not anticipate any issues regarding reconciliations of product types under Part 4 of Form 51-101F1 as a result of this change noting that the opening balance for December 31, 2014 should be taken from the product types listed in the Statement of Reserves Data as per Item 2.1 of Form 51-101F1; and that a reporting issuer should choose the closest product type if the substance produced does not exactly match one of the product types or if it matches more than one of the product types listed in NI 51-101.
3. Contingent and Prospective Resources. The Amendments provide clearer guidance for the disclosure of contingent resources data and prospective resources data in the annual filings, including requiring the disclosure of risked net present value of future net revenue within an appendix to the statement. In addition, the Amendments require those resources other than reserves estimates be prepared or audited by an independent qualified reserves evaluator or auditor.
4. Oil and Gas Metrics. The amended section 5.14 of NI 51-101 lists principle-based requirements to describe the standard, methodology and meaning of a publicly disclosed oil and gas metric. If there is no standard, a reporting issuer must also describe the parameters used in calculating the oil and gas metric and provide a cautionary statement.
5. Marketability of Production and Reserves. Reporting issuers are obligated by NI 51-101 to disclose production and resources based on the price that was or would be used at the point at which the product type is or could be sold. However, in certain scenarios it may not be appropriate, or even possible, to allocate a price at a point of sale. In respect of resources or sales of oil, gas or associated by-products, the volume may be measured at the point of sale to a third party (first point of sale), or of transfer to another division of the reporting issuer (alternate reference point) for treatment prior to sale to a third party. For gas, this may occur either before or after the removal of natural gas liquids. For bitumen or heavy oil, this is before the addition of diluent. The amendments to NI 51-101 clarify the concept of marketability in the reporting of oil and gas volumes. The amended sections 5.4 and 5.5 of NI 51-101 requires a reporting issuer to report volumes and values at the first point of sale of the particular product type, unless that point is not relevant, in which case, the reporting issuer can select a point of measurement prior to the first point of sale.
6. Abandonment and Reclamation Costs. CSA staff had observed, and had received commentary from industry about, inconsistency in the determination of what constitutes abandonment and reclamation costs for the purpose of the annual oil and gas disclosure. The Amendments clarify what constitutes abandonment and reclamation costs and require the disclosure of both abandonment costs and reclamation costs in the future net revenue disclosure and in the significant factors or uncertainties disclosure in the statement prepared in accordance with Form 51-101F1.
7. Reserves Presentation. The introduction of IFRS 11 highlighted the need for changes to the requirements in respect of the presentation of reserves data in the statement prepared in accordance The CSA expects the Amendments to be adopted in each jurisdiction of Canada, following the satisfaction of applicable ministerial approval requirements. The Amendments point to the COGE Handbook for the purpose of determining ownership and allow for flexibility in the manner of presenting resources for which a reporting issuer does not have control.
8. Other Amendments. The Amendments also clarify areas that have given rise to confusion, such as:
the requirement to obtain consent of the independent qualified reserves evaluator as it relates to the report prepared in accordance with Item 2 of section 2.1;
the date on which the independent qualified reserves evaluator or auditor is responsible for changes in the reporting issuer’s reserves data; and
the disclosure required when a reporting issuer has no reserves.
The CSA expects the Amendments to be adopted in each jurisdiction of Canada following the satisfaction of applicable ministerial approval requirements and, subject to such ministerial approval requirements, will come into force on July 1, 2015 with the Amendments applicable to Annual Filings not generally to apply until the year ending December 31, 2015. While the effective date of the Amendments is July 1, 2015, reporting issuers are required to immediately follow the latest requirements of the COGE Handbook including ROTR Guidelines and Bitumen Guidelines as currently required pursuant to NI 51-101. Reporting issuers with oil and gas activities should carefully review the Amendments and engage their respective legal and petroleum engineering consultants well in advance of the July 1, 2015 effective date.
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