Every year, the Alberta Securities Commission (ASC or Commission) publishes an Oil and Gas Review, providing guidance to reporting issuers actively engaged in the oil and gas sector to assist them with meeting their disclosure requirements. Highlights from the December 2019 Oil and Gas Review (the Report) include: (i) an update on the status of Alberta’s capital market; (ii) insights from the Commission’s 2019 review of oil and gas disclosure from reporting issuers that report under National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities (NI 51-101); (iii) an assessment of the quality of issuers' reserves estimate disclosure; and (iv) discussion of select oil and gas regulatory topics.
Oil and gas in the Canadian capital market
The Report highlights the steady decrease in the overall number of reporting issuers engaged in oil and gas activities stemming from increased regulatory, political, environmental and social scrutiny of the Canadian oil and gas industry in recent years. The ASC reports at the end of September 2019 there were 137 reporting issuers regulated by the Commission that were actively engaged in the industry, which is down from 302 reporting issuers at the end of 2012. The decline has disproportionately affected 'junior' issuers reporting production of less than 10,000 barrels of oil equivalent (BOE) per day. In 2014, this group represented 80 percent of all reporting issuers, including 'senior' issuers (greater than 100,000 BOE per day) and 'intermediate' issuers (10,000 to 100,000 BOE per day) actively engaged in the industry. At the end of September 2019, this number declined to 65 percent of reporting issuers actively engaged in the industry.
Reasons given by the ASC for the decrease in the total number of oil and gas reporting issuers from the end of 2018 to the end of September 2019 include, among others: (i) commencement of receivership, bankruptcy and insolvency, and/or Companies’ Creditor Arrangement Act proceedings; (ii) M&A activity (including privatization); and (iii) resulting from, or relating to, the issuance by the ASC of a Cease Trade Order. Changes to reporting issuer status for these reasons has disproportionately affected intermediate and junior issuers, which suggests a lack of available financial resources for these issuers to carry on as a going concern or keep up with public company reporting obligations. Further data from the Report shows the continuing trend of weak access to capital by oil and gas issuers overall. While capital raised by prospectus offerings increased marginally from 2018, 2019 did not see a major rebound in the amount of capital raised or number of offerings by oil and gas issuers. Overall, the oil and gas issuers in Alberta continue to face challenging circumstances.
Following Staff's review of oil and gas disclosure and associated evaluations from issuers that report under NI 51-101, the Report sets out a list of key areas of oil and gas disclosure that the ASC has identified for improvement. The key areas for improvement are as follows:
- Development timing for undeveloped reserves. Item 5.1 of Form 51-101F1 – Statement of Reserves Data and Other Oil and Gas Information (Form 51-101F1) requires disclosure of plans for development of proved undeveloped reserves and probable undeveloped reserves, including disclosure of the first attributed volumes in each of the most recent three financial years, and the basis for their attribution, development plans (including timing), and if applicable, the reasons for deferring development beyond two years. Staff emphasize that such disclosure must be meaningful and specific to each reporting issuer and allow reasonable investors to assess the issuer’s efforts to convert undeveloped reserves to developed reserves. Staff notes that disclosure is often general and lacking in the detail required for an investor to understand the reporting issuer’s development plans. Examples of disclosure that did not meet Staff’s expectations also included: (i) disclosure that did not differentiate between proved undeveloped reserves and probable undeveloped reserves; (ii) disclosure that did not include reasons for deferring development beyond two years; and (iii) factors impacting development timing that appeared to influence project commerciality (i.e., a timeframe exceeding five years absent a compelling rationale).
- Incorrect disclosure of production in press releases and investor presentations. NI 51-101 requires that any disclosure of production must include each product type and respective quantity measured at the first point of sale. This can be supplemented with additional information, but special care must be taken not to be misleading. Examples of disclosure that did not meet Staff’s expectations included: (i) disclosure of fluid types instead of product types; (ii) quantities not measured at the first point of sale; (iii) omissions of disclosure of certain product types and their specific quantities; (iv) disclosure of product type ratios instead of the required quantity of each product type; and (v) disclosure of BOE unaccompanied by the constituent product types and their respective quantities.
- Incorrect or inadequate disclosure of type wells (type curves) and related information. Staff notes that press releases, prospectuses, investor presentations and other disclosure have increasingly incorporated type wells and related information, such as recoverable volumes and related future net revenue. Staff reminds issuers that use of type well disclosure and related information may fall into the definition of "analogous information" under NI 51-101. Consequently, such disclosure would be subject to the requirements of NI 51-101 and the Canadian Oil and Gas Evaluation Handbook (COGE Handbook). Examples of disclosure that did not meet Staff’s expectations were: (i) vague or contained limited production data; (ii) not categorized into reserves or resources other than reserves; and (iii) not prepared or audited in accordance with the COGE Handbook or by a qualified independent reserves evaluator or auditor.
- Incorrect disclosure of annual reserves reconciliation. Item 4.1 of Form 51-101F1 requires annual reserves reconciliation disclosure of changes in estimates of gross proved reserves (in total), gross probable reserves (in total) and gross proved plus probable reserves (in total) by country, product type and reserve category. The Report notes that common deficiencies related to this item included: (i) volumes for opening balances or closing balances not matching the previous year’s balances; (ii) erroneous recording of negative volumes, including through inappropriate technical revisions; (iii) use of inaccurate dates for changes in reserves due to acquisitions and dispositions; (iv) missing or inconsistent units of measure; (v) use of categories not specified; and (vi) missing detail accompanying disclosure in individual reserve change categories.
Insight into reserves estimates
The Report also provides insight into reserves estimates, the quality of which Staff notes, can be judged through a review of disclosure made in the reserve change ‘technical revisions’ category required to be disclosed in Item 4.1 of Form 51-101F1. In particular, technical revisions can provide insight into whether estimates have met the certainty levels for particular reserves categories, and therefore, are in accordance with the COGE Handbook. The Report summarizes Staff’s review of the disclosure of oil and gas activities conducted by reporting issuers principally regulated by the ASC in 2018. Among other things, Staff found that generally, gross proved plus probable reserves (in total) have remained relatively constant for juniors and intermediates, and appear to approximate the associated certainty levels described in the COGE Handbook. Conversely, gross proved plus probable reserves (in total) for seniors have been slightly negative each year since 2014. This suggests that the certainty levels for proved plus probable reserves are not being met. The Report notes that the ASC will pay particular attention to negative technical revisions in its future reviews of disclosure.
The ASC ends the report with a discussion on the following select oil and gas regulatory topics helpful to stakeholders:
- Ownership and disclosure. The Report states that all disclosure required under Form 51-101F1 be at the last day of the reporting issuer’s most recent financial year and for the financial year then ended. Reporting issuers must have a direct or indirect ownership, working or royalty interest in the reserves disclosed in Item 2.1 of Form 51-101F1. It further provides that disclosure of reserves, contingent resources or prospective resources must not be misleading to a reasonable person, and that an explanation must be provided if the ownership or control of the reserves or resources would be unclear to a reasonable person. It also provides that any additional information provided be presented separately from the required disclosure. Finally, reporting issuers and independent qualified reserves evaluators or auditors must ensure they are aware of their respective responsibilities as they pertain to the reporting issuer’s annual filing requirements.
- Disclosure of product types and by-products. The Report clarifies which activities constitute "oil and gas activities" for the purposes of disclosure under NI 51-101. This definition excludes any activity that (i) occurs after the first point of sale; (ii) relates to the extraction of a substance other than a product type and its by-products; or (iii) extracts hydrocarbons as a consequence of the extraction of geothermal steam. Section 1.1 of NI 51-101 sets out the relevant product types and the definition of a by-product for the purposes of disclosure.
- Availability of funding. The Report clarifies that disclosure of reserves does not require disclosure as to the likelihood of the reporting issuer gaining the funding required for the development of such reserves. However, item 5.3 of Form 51-101F1 requires disclosure regarding the reporting issuer’s expectations as to the sources and associated costs of funding for estimated future development, and the effect of those costs on funding. Securities laws further require discussion of any proved or probable undeveloped reserves, the development of which the reporting issuer has deferred beyond two years.
Click here to read the full text of the Report.