Canadian investors can expect to see more details on oil and natural gas reserves reporting in annual reports starting this spring because securities commissions across Canada have adopted uniform, updated reporting standards for public companies.
The Alberta Securities Commission (ASC) developed the proposal for the Canadian Securities Administrators (CSA). Unlike the US, Canada does not have a federal securities commission.
CSA is an umbrella organization representing 13 provincial and territorial securities commissions.
Public oil and gas companies whose stock is traded on exchanges in Canada must hire independent reserves evaluators or auditors to report on their oil and gas reserves and related future net revenue estimates.
A summary of that report along with other information about reserves is to be filed publicly every year.
Stephen Murison, ASC vice-chairman, helped draft the proposals that led to the new regulations, effective Sept. 30, 2003.
The first reports to be filed under the new regulations will begin appearing in March and April, Murison said. The filing is due at the same time as the companies' audited annual financial statements.
"What this does is convert our oil and gas reporting by public companies in Canada to what we call a 'continuous disclosure requirement.' In the past, our focus was on prospectus; if people wanted to raise money, we had rules about oil and gas reserves disclosureU. What we now say is that all public companies have to file each year information about their reserves, related cash flow, and other information about their oil and gas activities."
No specific company or incident prompted the changes, he said. Meanwhile, US companies have reported increased scrutiny concerning reserve reports.
And Royal Dutch/Shell Group recently announced it overestimated its proved oil and natural gas reserves by 3.9 billion boe (see related story, p. 28).
Defining reserves
All public companies trading on Canadian stock exchanges are required to engage an independent, qualified professional reserves evaluator or reserves auditor. The independent professional must belong to a recognized professional association and must have a certain amount of experience. They also must comply with new mandatory evaluation and audit standards.
"We will accept either a reserves evaluation from scratch or a reserves audit in which the company has done the work in-house, but the company has to have had an independent qualified professional from outside review it and give a clean audit report," Murison said. The Canadian Oil Gas Evaluation Standards are outlined in a handbook that was developed by evaluation professionals, he said.
"Another important element that is incorporated both in our rule and in this evaluation handbook is some new reserves definitions. We had, somewhat like the SEC still has, reserves definitions that we found left more wiggle room than we wanted," he said. Canada's previous reserve definitions dated back to the early 1980s, he said.
Companies reporting proved reserves are supposed to target a 90% probability that realized reserves will equal or exceed the estimate. The percentage for probable reserves is 50%, and it is 10% for possible reserves. Disclosure of both proved and probable reserves is mandatory. "That is the difference from the SEC filings, where proved [reserves numbers are] all you will see. Although in public disclosures that are not filed with the SEC, it's not at all unusual to see people talking about probable [reserves figures]. We think both are important, so we require disclosure of both as well as the related cash flow estimates," Murison said.
Rule change logistics
The rule changes stemmed from an updating of many securities regulations in Canada, Murison noted. Although Canadian oil and gas capital markets have witnessed "a couple of hiccups," Murison said that these incidents happened after the rule revision process already was well under way.
"We began several years ago with a really intensive public consultation process. In 1998 we commissioned a task force [made up] mostly of industry and investor representatives. They worked for a couple years and came up with recommendations to us as to what information they thought would be useful and important to the investor," Murison said.
Public companies listed on the stock exchanges in Canada are subject to the rule regardless of where they are based, he said.
Some larger Canadian companies engaged in the US capital markets face the burden of having to submit two sets of reserve reports: one for the US and one for Canada. Murison said that Canadian stock market regulators are to consider exemptions on a case-by-case basis.
"The general thrust of the exemption request is for companies with their focus on capital markets in the US and the US investor," he said. "Our primary focus is on Canadian investors, wanting them to be able to compare between investments, and understand what is happening.
"Canadian companies with heavy involvement in the US capital markets will continue to be able to produce reserve estimates in accordance with SEC requirements with supplemental material to Canadian investors," Murison said.
