CSA Revises Guidance on Oil and Gas Disclosure (Revised CSA Staff Notice 51-327)

Davis LLP Securities & Corporate Finance Bulletin

January 24, 2012


On December 29, 2011, the Canadian Securities Administrators (“CSA”) issued Revised CSA Staff Notice 51-327 Guidance on Oil and Gas Disclosure (the “Notice”). This Notice provides guidance on compliance with certain aspects of National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities (“NI 51-101”) and discusses observations made by CSA staff in reviewing disclosure in light of recent amendments to NI 51-101.

The Notice includes new guidance on the general responsibilities of oil and gas issuers and reserves evaluators and auditors (“reserves evaluators”), new guidance on certain disclosure topics such as disclosure of after-tax net present value (“NPV”) of future net revenue, use of BOEs, and disclosure of well-flow test results; and expanded guidance on the evaluation, classification and disclosure of unconventional hydrocarbons, including revised guidance on disclosure of contingent resources and classification of resources. The Notice also re-affirms the CSA's previously-published guidance on stand-alone possible reserves, aggregate of resource estimates for several properties, use of the term “best estimate” and prospective resources.

New Guidance

Responsibility for Disclosure of Oil and Gas Information

The Notice reminds issuers, their management and directors and their reserve evaluators of the importance of the fundamental objectives of Canadian securities legislation and the various sources of requirements, restrictions and standards that may apply to formulating disclosure. The fundamental principles emphasized by the CSA staff are that any disclosure should not contain a misrepresentation or be misleading, that any material changes should be disclosed promptly, and that disclosure relating to oil and gas activities must adhere specifically to the requirements outlined in NI 51-101.

Misrepresentations or Misleading Statements Specifically

The Notice provides specific examples of disclosure that, in the view of CSA staff, could be materially misleading or untrue. The examples provided by the CSA staff relate to disclosure surrounding contingent and prospective resources – such as disclosure of a contingent resource for which there is no flow test or good analog, results of an evaluation for a reservoir based on a production process that has not previously been used in that type of reservoir, use of information that is not truly analogous to report reserves, and disclosure of unconventional resources using a project scenario that is not reasonable with regard to timing or cost and which may result in misleading disclosure with respect to the value of a project.

The CSA staff also advises that a misrepresentation or a misleading statement also includes incidents where there is a failure to state facts that may be required or necessary to be stated – such as disclosure of petroleum initially-in-place (“PIIP”) without clarifying whether it is discovered or undiscovered, disclosure of a contingent resource without providing information as to its economic viability, disclosure of a resource of any class or category without adequate disclosure of the associated significant economic factors or significant uncertainties that are specific to the issuer that may affect the associated project, disclosure of a contingent resource with only general or vague mention of the contingencies, and disclosure of a short-term peak rate for a well test without providing additional disclosure on the test.

Disclosure of After-Tax NPV of Future Net Revenue

The Notice advises that the fundamental objective of after-tax NPV of future net revenue disclosure is to provide information to an investor that can be used to make investment decisions. To assist investors, issuers should footnote the disclosure of an after-tax NPV with information appropriate to their circumstances and should generally include an explanation of the method and assumptions used in the calculation, which should reflect their specific circumstances and the approaches taken.

Use of BOEs

Acknowledging that NI 51-101 requires conversion of Mcf to Bbl to be carried out using a ratio of 6:1, the Notice advised that when the value ratio is significantly different from the energy equivalency of 6:1, an issuer may be required to provide additional disclosure in order to avoid misleading disclosure. For example, a value ratio of 20:1 at the time the disclosure is made would require an explicit statement to the effect that a conversion using a 6:1 ratio would be misleading as an indication of value. The Notice specifically states that the results of using conversion ratios other than 6:1 may be disclosed, provided an explanation is given.

Disclosure of Well-Flow Test Results

The Notice provides specific guidance on information that should be included when well-flow test results are disclosed by an issuer. Issuers are cautioned that disclosing the results of short-term tests, “rates up to”, or short-term peak rates as daily rates would be misleading without additional explanation.

Expanded Guidance on Specific Disclosure Topics

Evaluation, Classification and Disclosure of Unconventional Hydrocarbons

The Notice provides expanded guidance primarily for the evaluation and disclosure of unconventional hydrocarbons and includes specific topics and guidance on matters such as: (i) the "known accumulation" criterion, (ii) the use of analogous information, (iii) extrapolation from existing data, (iv) project maturity; and (v) contingencies. As the Notice is very technical and specific in this regard, please refer to the Notice for an in depth explanation of such guidance.

Specifically, the Notice provides guidance on the requirements that need to be met in order to meet the “known accumulation” criterion for classifying a volume of hydrocarbons as discovered PIIP. The Notice also acknowledges that there is currently limited guidance on what constitutes a “good analogy” or what “geologically comparable” or “nearby” means, and the Notice provides a useful discussion on what the CSA staff considers to be good practices on the use of analogous information. Issuers are reminded that although extrapolation from existing data is acceptable, the issuer must be able to demonstrate certain characteristics with respect to the reservoir that are outlined in the Notice.

The Notice also discusses at length the requirement under NI 51-101 that disclosure of contingent resources be accompanied by a discussion of “specific contingencies which prevent the classification of the resources as reserves”. The CSA staff cautions that generic, “boiler-plate” contingencies can be misleading. Contingencies should be categorized as economic, non-technical or technical; and the Notice provides specific examples of each as well as recommendations as to how these should be addressed in any disclosure materials. Issuers are cautioned that any drilling or testing that is required to confirm the presence of a known accumulation beyond reasonable distances of extrapolation from an existing data point are not contingencies but prerequisites for identifying a known accumulation.

Classification to Most Specific Class and Category of Reserves

The Notice provides clarification on Sections 5.9(2)(c) and 5.1.6(2) of NI 51-101. The Notice reminds issuers that estimates of resources other than reserves be classified in the most specific category of resources and that where disclosure of total, discovered and undiscovered PIIP is provided, disclosure of each of the subcategories that make up total PIIP, discovered PIIP and undiscovered PIIP is required.

Guidance Carried Forward From December 30, 2010

The Notice re-affirms the guidance previously published by the CSA staff in December 2010 on stand-alone possible reserves, the potential pitfalls when aggregating resource estimates for several properties, the use of the term “best estimate” and prospective resources. In particular, the CSA staff re-affirms its previous position that although disclosure of stand-alone possible reserves is permissible in situations, disclosing possible reserves on a property for which no proved or probable reserves volumes have been assigned may be misleading and issuers are encouraged to consider the factors outlined in the Notice as well as include cautionary statements with respect to such reserves. The overriding theme is that if an issuer were to disclose stand-alone possible reserves, there should be an intention to develop the stand-alone possible reserves within a reasonable time. The Notice also provides a numeric example of permissible and non-permissible aggregation of resource estimates as well as guidance on the use of the term “best estimate”. With respect to prospective resources, issuers are reminded that a mandatory cautionary statement is required under NI 51-101 and issuers may be required to also disclose information with respect to the chance of discovery and the chance of development.


The new Notice provides guidance on a number of specific disclosure topics. In particular, new and expanded guidance is provided on disclosure and evaluation of non-conventional hydrocarbons and contingent resources. We strongly recommend that issuers review and consider the guidance and recommendations set forth in the Notice when discussing oil and gas activities.

Please note that this is a summary of the most significant aspects of the staff Notice. If you have any questions concerning this bulletin or the Notice, please contact the authors or your usual contact at Davis LLP.