From guidance to law - amendments to NI 51-101 to codify prior guidance and supplement existing requirements
You may recall our post of March 2009 commenting on Canadian Securities Administrators (CSA) Staff Notice 51-327 – Oil and Gas Disclosure: Resources other than Reserves Data (the Staff Notice). With the Staff Notice, the CSA were attempting to plug what had previously been a rather significant hole in the disclosure requirements mandated by National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities (NI 51-101) by providing guidance on the disclosure of, among other things, standalone possible reserves, high, best and low case category estimates, the addition of resources across resource categories and other related topics.
Unfortunately, the CSA’s attempt to cut the flow of inadequate and potentially misleading resource reporting with the Staff Notice was unsuccessful. Misleading disclosure continues to pollute the capital markets and impair the ability of investors to compare issuers. As a result, the CSA took the next logical step by proposing amendments to NI 51-101 itself (the Amendments) on December 18, 2009 to codify the Staff Notice and make compliance mandatory, among other things.
The comment period for the proposed Amendments to NI 51-101 expired on March 19, 2010 with a limited number of comments received. As a result, the CSA published on October 15, 2010 a further notice advising that the Amendments (with immaterial adjustments) would become effective December 31, 2010.
The principle revisions to NI 51-101 contained in the Amendments are as follows:
1. Revisions Consistent with the Staff Notice
(a) Disclosure of High, Best and Low case category estimates
In keeping with the premise behind the original guidance in the Staff Notice, the Amendments will prohibit the reporting of a High estimate1 of recoverability at the exclusion of both low and best-case estimates on the basis that investors may not appreciate that the High estimate is not in fact the best measure of the volume of resources that will actually be recovered from the property and may overstate those resources beyond the expected range of outcomes. Further, and in the context of reserves disclosure, the Amendments will require that where disclosure is made of proved plus probable plus possible reserves, corresponding estimates of proved and proved plus probable reserves or proved and probable reserves will be required, minimizing the potential for investors to be misled by the presence of a large volume of possible reserves in the aggregated estimate.
(b) Adding Across Resource Categories
In an attempt to prevent the misleading disclosure that can result from the aggregation of different resource categories, each of which has a different chance of commerciality, the Amendments impose an outright prohibition on the summation of any estimated quantity or value of two or more of:
- Reserves (whether proved, probable or possible);
- Contingent resources;
- Prospective resources;
- Discovered Petroleum Initially-in-Place (or the unrecoverable portion thereof); and
- Undiscovered Petroleum Initially-in-Place (or the unrecoverable portion thereof).
One limited exception to the foregoing prohibition permits the disclosure of Total Petroleum Initially-in-Place, Discovered Petroleum Initially-in-Place or Undiscovered Petroleum Initially-in-Place if the estimates of, as applicable: (a) reserves; (b) contingent resources; (c) prospective resources; (d) the commercial, sub-commercial and unrecoverable portions of Discovered Petroleum Initially-in-Place; and (e) the commercial, sub-commercial and unrecoverable portions of Undiscovered Petroleum Initially-in-Place are also disclosed. Further, the issuer must include certain cautionary language related to such disclosure.
2. Additional Amendments to NI 51-101
In addition to the foregoing amendments that are intended to compel disclosure in a manner consistent with what had previously been suggested by the guidance of the Staff Notice, the Amendments are also intended to introduce more meaningful and comprehensive disclosure, decrease the cost of compliance and address certain inconsistencies in NI 51-101. Those amendments can be summarized as follows:
(a) Supplemental Disclosure using Constant Prices and Costs
As seasoned issuers will recall, prior to the last set of amendments to NI 51-101 in December 2007, reporting issuers were mandated to annually provide reserves data based on both constant and forecast prices and costs. With the amendments in December 2007, however, reporting issuers were thereafter mandated only to provide reserves data based on forecast prices and costs, with constant case information becoming voluntary supplemental disclosure. The Amendments effectively maintain this optionality, though, in recognition of the fact that an increasing number of issuers are utilizing the Form 51-101F1 as a template for resource disclosures, now recognize that similar optionality is permissible for resource reporting.
In addition, and for greater certainty, the Amendments also introduce a defined concept of what constitute “constant prices”. With amendments to the US Oil and Gas disclosure requirements that took effect January 1, 2010, the United States has moved to using a 12-month average price, excluding escalations based upon future conditions, for oil and gas reserves reporting. Recognizing that the most likely supplementary requirements that Canadian reporting issuers may be attempting to address for the benefit of their shareholders are those of the Securities and Exchange Commission, the Amendments define constant prices and costs for the purpose of such supplementary disclosure in a manner consistent with the relevant US oil and gas disclosure requirements.
(b) Supplemental Reporting of Reserves and Other Oil and Gas Information
Although reporting issuers are mandated to provide a summary of their reserves and other oil and gas information in the specified form annually, issuers have since the adoption of 51-101 and for a variety of reasons, routinely filed incremental oil and gas disclosure and at different periods. In the case of significant acquisitions or dispositions, mergers and capital raising activities, issuers have often released supplementary reserves and other oil and gas disclosure consistent with the obligations imposed by NI 51-101 on an annual basis.
The Amendments simply recognize this practice as acceptable, while noting that such incremental disclosure does not satisfy the annual filing obligation.
(c) Discussion of Significant Factors and Uncertainties Relevant to Properties with No Attributed Reserves
While, since its inception, NI 51-101 has mandated reporting issuers to identify and discuss those factors and uncertainties that might affect components of the reserves data being disclosed, it has been silent on the need to disclose similar factors and uncertainties as they relate to properties that have no attributed reserves. While reserves are arguably more relevant to the current and near term performance of an issuer and its production profile, and the economic considerations germane to the development of those reserves bear particular mention, the economic factors and uncertainties impacting properties with no attributed reserves may be just as significant in the longer term given the increasing importance of resources to an issuer’s value.
As a result, the Amendments attempt to address this imbalance by mandating a discussion of economic factors and uncertainties in both instances.
(d) Filing of Form 51-101F4 in lieu of News Release
NI 51-101 has historically required that issuers file a news release upon filing the annual reserves disclosure. This obligation has been replaced in the Amendments with the requirement to simply file on SEDAR a notification that such filing has occurred to the extent that the 51-101F1 is contained in and filed with the issuer’s annual information form, thereby saving issuers the associated costs of filing a press release while nonetheless identifying to the public that the filing has occurred and the obligation discharged.
1 High estimate is, in relation to reserves, the aggregation of proved, probable and possible reserves. High estimate is, in relation to resources, an optimistic estimate of the quantity that will actually be recovered, it being unlikely that actual remaining quantities recovered will exceed that estimate. On a probabilistic basis, there is at least a 10% probability that the quantities actually recovered will equal or exceed the High estimate.