Canada: ESTMA Three Reporting Cycles In

As the extractive sector completes a third reporting cycle under Canada’s Extractive Sector Transparency Measures Act (ESTMA), the uncertainty around reporting requirements among participants has receded. However, as requirements continue to evolve, certain challenges remain, particularly with respect to joint ventures.

In light of the recent progression of the Department of Natural Resources (NRCan) from awareness and education toward monitoring and enforcement, it is increasingly important for entities subject to ESTMA to ensure compliance and proper diligence in meeting reporting requirements.

Recent changes

NRCan’s Technical Reporting Specifications were updated in 2018 and now specify that consolidated ESTMA reports will only be available where the subsidiary reporting entity is wholly owned by its parent reporting entity. Previously, the Technical Reporting Specifications allowed reporting entities to consolidate payments made by their non-wholly owned subsidiaries (that are themselves reporting entities) into a single report. These reports will now need to be made separately for each reporting entity.

It is imperative that entities that are, or may in the future become, reporting entities consider ESTMA reporting obligations as part of due diligence in transactions involving oil, gas, and mineral assets, similar to consideration of due diligence under anti-bribery legislation.

In addition, the process for registering with NRCan to obtain an ESTMA identification number and for filing an ESTMA report was changed November 1, 2018. NRCan is now requiring that all reporting entities enrol and submit ESTMA reports through NRCan’s eServices Portal. We recommend reporting entities set up their eServices Portal accounts well in advance of their filing deadlines to ensure that the proper filing authorizations are in place.

Challenges in joint ventures

Notwithstanding NRCan’s updated Guidance document and detailed explanations on its FAQs webpage, the application of ESTMA to various joint-venture arrangements remains challenging. We recommend that parties drafting new or revising existing joint venture agreements for projects in the extractive sector include provisions that expressly provide for the disclosure of information required to meet reporting obligations under ESTMA and comparable legislation in other jurisdictions.

This will be especially important for ensuring that non-operators have access to information required to report payments attributed to them under ESTMA’s payment attribution rules, but also for ensuring operators are able to disclose reportable information without breaching their confidentiality obligations (which may be an issue for entities operating in jurisdictions that are not subject to similar reporting requirements).

How ESTMA compliance will be managed and who will report will depend on the circumstances of each joint venture.

All parties reporting under ESTMA

Where all parties to a joint venture are reporting under ESTMA, the parties may elect either to have (i) the operator report 100% of the reportable payments made by the operator on behalf of the joint venture or (ii) each party (operator and non-operator) report its proportionate share of payments made by the joint venture on its behalf and attributable to it (without duplication). Regardless of the approach taken, non-operators must report all of the payments that they make directly.

Not all parties subject to ESTMA

Where a joint venture located outside of Canada involves an operator who is not subject to ESTMA, non-operators that report under ESTMA will be required to report their pro rata share of payments made by the operator (or other non-operators) on their behalf. This will be true even where the operator is subject to the equivalent reporting requirements of other jurisdictions.

Where a joint venture located outside of Canada involves an operator who is subject to ESTMA, but some or all of the non-operators are not required to report under ESTMA (including non-operators who are subject to the reporting requirements of other jurisdictions), the operator will be required to report up to 100% of the reportable payments that it makes, including the pro rata share of payments made on behalf of non-operators that are not subject to ESTMA.

Canadian operator not required to report under ESTMA

Despite the fact that a joint venture is located in Canada (and is therefore subject to ESTMA), non-operators may not always be able to rely on the operator to report all reportable payments. Where (i) an operator is not a publicly listed company and does not meet the size requirements to report under ESTMA or (ii) the operator reports under ESTMA but certain payments fall below the de minimis threshold for the operator (and are therefore not reportable by the operator), non-operators may still be required to report their pro rata share of certain payments made by the operator.

Due diligence

In light of regulatory scrutiny and the potential for considerable penalties for non-compliance with ESTMA, it is imperative that entities that are, or may in the future become, reporting entities consider ESTMA reporting obligations as part of their due diligence in transactions involving oil, gas, and mineral assets, similar to consideration of due diligence under anti-bribery legislation.

Companies not directly involved in the extractive sector may still have reporting obligations under ESTMA. For example, a private equity company may not have active management of its portfolio companies, but it may still have ESTMA reporting obligations if it controls entities in the sector.

All parties in transactions involving oil, gas, or mineral assets will need to consider the implications for ESTMA reporting requirements and similar reporting requirements in other applicable jurisdictions (notably, the European Union and Québec).

Selling parties. Vendors will want to ensure they continue to have access to the records they need for their own ESTMA reporting obligations. Notwithstanding that a vendor may no longer control the relevant assets or entities, the vendor will remain responsible for ESTMA reporting during the period that the vendor had control over the relevant assets or entities.

Buying parties. Purchasers will want to ensure they receive adequate assurances concerning past compliance with ESTMA reporting obligations to support both a due diligence defence and an indemnity claim in the event of non-compliance by vendors. This will be especially important in share purchase transactions or any other arrangement where any ESTMA-related liability will be assumed by the purchasers.

Controlling investment companies. We note that companies not directly involved in the extractive sector may still have reporting obligations under ESTMA. For example, notwithstanding that a private equity company may not have active management involvement in its portfolio companies, it may still have ESTMA reporting obligations if it controls entities involved in the extractive sector.

Enforcement activity expected

Now that ESTMA has been in effect for nearly three full reporting cycles, we understand that NRCan has begun to staff for monitoring of compliance and, eventually, enforcing reporting obligations. NRCan is currently reaching out to certain companies involved in the extractive sector that have not filed ESTMA reports to confirm their compliance with ESTMA. We expect enforcement of reporting obligations will ramp-up, and NRCan has advised that it expects, within approximately a year, to begin auditing ESTMA reports that have been filed.

In addition, we note that U.S.-based companies involved in the extractive sector that are listed on Canadian exchanges but that otherwise have no connection to Canada are nonetheless subject to ESTMA and may have ESTMA reporting obligations.

We recommend that companies that were not previously aware of their ESTMA reporting obligations immediately reach out to NRCan and file all outstanding ESTMA reports (being proactive prior to being contacted by NRCan as part of compliance action).

Looking forward

Although the use of ESTMA reports is still relatively new, we anticipate that as NRCan and civil society groups begin to scrutinize companies in the extractive sector and their ESTMA reports more closely, the importance of management oversight and due diligence will become increasingly important to protect companies’ reputations and mitigate the risk of liability.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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