In light of significant changes that have taken place in the oil and gas industry since the Securities and Exchange Commission's (SEC) current oil and gas reserves disclosure requirements were adopted between 1978 and 1982, the SEC recently published a proposed rule (Proposed Rule) requesting public comment on revised oil and gas company reporting requirements. The Proposed Rule is intended to provide investors with a more accurate and comprehensive picture of the oil and gas reserves that a company holds by aligning the disclosure requirements with current practices and changes in technology. In addition, companies would be required to provide additional information regarding the independence and qualifications of the preparer or auditor of their reserves estimates. The Proposed Rule will be of particular interest to Canadian oil and gas issuers that have been complying with the SEC's oil and gas reserves disclosure policies.
Background
The SEC's current oil and gas reserves disclosure requirements, which are set out in Item 102 of Regulation S-K, Item 4 and Appendix A of Form 20-F and Rule 4-10 of Regulation S-X, were adopted nearly 30 years ago. Since that time, significant changes have occurred in the oil and gas industry and markets, including technological advances and changes in the types of projects in which oil and gas companies invest their capital. In recognition of these changes, on December 12, 2007 the SEC issued a concept release requesting public comment on possible revisions to the oil and gas reserves disclosure requirements.
The comment period for the concept release closed on February 19, 2008. A number of commenters had suggested that the SEC look to Canadian National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities (NI 51-101) and the Petroleum Resources Management System (PRMS) for guidance. Many of the proposed new and revised definitions classifications in the Proposed Rule are based on both NI 51-101 and PRMS.
Proposed Revisions
The Proposed Rule sets forth a number of revisions to the current oil and gas disclosure requirements on which the SEC has requested public comment. Highlights of the Proposed Rule include:
- allowing previously excluded resources, such as oil
sands, to be classified as oil and gas reserves;
- permitting the use of new technologies to calculate
proved reserves;
- allowing companies to disclose probable and possible
reserves;
- requiring companies to report oil and gas reserves using
an average price based on the prior 12-month period;
- requiring companies to report the independence and
qualifications of the preparer or auditor of their reserves
estimates; and
- requiring the filing of reports by companies that rely on
a third party to prepare reserves estimates or conduct a
reserves audit.
If adopted, compliance with the revised disclosure requirements would take effect for registration statements filed on or after January 1, 2010 and for annual reports on Forms 10-K and 20-F for fiscal years ending on December 31, 2009 and thereafter. To maximize comparability of disclosure, the SEC does not intend to allow early adoption of the revised disclosure requirements.
A copy of the Proposed Rule can be found on the SEC's website at: http://www.sec.gov/rules/proposed/2008/33-8935.pdf. Comments are due on or before September 8, 2008.
Kevin Cramer is a partner in the Business Law Department of the firm's New York office where he practices U.S. securities and M&A law. Mark Shubitz is an associate in the Business Law Department in the firm's New York office. His practice focuses on securities and corporate finance. Stan Magidson is a partner in the Calgary office of Osler, Hoskin & Harcourt LLP, heading up Osler's business law practice in Western Canada. He has extensive experience in mergers and acquisitions (negotiated and unsolicited), corporate finance and corporate governance matters.
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