Recently, the ASX has been consulting with industry groups and other stakeholders on possible changes to reporting requirements for listed Australian oil and gas companies, particularly in relation to their production and exploration activities. The aim of those changes would be to improve the certainty, timing and accuracy of those disclosures.
Exploration and production estimates and measures are fundamental to funding and valuing resources projects and companies. Consequently, part from changing and augmenting companies’ compliance obligations, any changes could also affect short-term company valuations (particularly for smaller companies), and, consequently, the manner and extent to which they can easily raise funds on in a difficult financial environment.
This update identifies some of the major themes of the ASX’s consultations.
Background to the ASX Issues Paper
Late last year, the ASX released “ASX Listing Rules Review Issues Paper: Reserves and Resources Disclosure Rules for Mining and Oil & Gas Companies” (Issues Paper). The Issues Paper considers updating and enhancing the reserves and resources reporting requirements applicable to ASX-listed mining and oil and gas exploration and production companies.
The ASX subsequently held consultation meetings throughout Australia with listed mining and oil and gas companies and a range of other key stakeholders including industry associations, investors, brokers, ASIC and professionals responsible for signing-off on reserves and resources estimates. In addition, the ASX received 122 written submissions in response to the Issues Paper.
Below, we outline the key proposed amendments as they relate to disclosure by mining companies. We then address the proposed amendments as they apply to oil & gas companies. In each case we also outline some of the concerns of key stakeholders on each of those proposed amendments,
Mining company mineral resources and ore reserves reporting and the JORC Code
2.1 Exploration and Production Targets
The ASX’s consultations revealed strong support for revising the reporting requirements relating to:
- the disclosure of exploration targets;
- the disclosure of the key assumptions underpinning initial, or materially changed, mineral resource and ore reserve estimates;
- defining the level of study for a maiden ore reserve declaration; and
- annual reporting and reconciliation of mineral resources and ore reserves.
With respect to (a), the ASX has proposed prohibiting disclosure by mining companies of exploration targets. Of course, industry is reluctant to support this proposal on the basis that exploration targets reflect a company’s strategic priorities and decisions around expenditure and investment. However, it is more sympathetic to including a cautionary statement regarding exploration targets where they are disclosed (which would be given the ‘same prominence’ and be in a ‘proximate location’ to the reported exploration target to minimise the potential for misinterpretation of such disclosures).
Similarly, the ASX also proposed prohibiting the disclosure of production targets based solely on exploration targets (particularly with regard to inferred resources, which reflect only a low level of geological confidence and therefore carry an increased risk that disclosure based on inferred resources may mislead investors).
On the other hand, industry contends that disclosure of production targets based solely of inferred mineral resources may be reasonable in certain circumstances.
At this stage it is unclear how the ASX will balance those industry concerns against submissions made in support of the prohibition. However, the ASX concedes that the divergence in views in this regard may in part be due to certain styles of mineralisation providing a better basis than others for the estimation of a production target based solely on inferred mineral resources.
With respect to (b), (c) and (d) above, those proposed revisions centre on tightening-up and being more prescriptive with respect to those particular requirements. However, industry has stopped short of supporting proposals for a Canadian-like approach requirement for the release of a technical report supporting mineral resource and ore reserves estimates for material properties.
2.2 The Code and ‘Competent’ Persons
Compliance with, and the lack of enforcement of, key principles of, the JORC Code regarding the “competence” of competent persons was a key point of concern in the Issues Paper. Consequently, the ASX is considering forming its own “panel of experts” to advise the ASX, among other things, on the adequacy of the disclosure of key technical information supporting disclosed exploration results and mineral resource and ore reserves estimates. Again, the implication appears to be that this proposal may result in a stricter approach and better enforcement in this regard than currently exists (principally, under the JORC Code).
2.3 New Rules!
The ASX also proposes to introduce supplementary reporting requirements in Chapter 5 of the ASX Listing Rules. Namely:
- When an initial, or materially changed, estimate of mineral resources or ore reserves for a material project is publicly reported for the first time, the company’s disclosure must include a summary of the key parameters for that disclosure and attach a completed JORC Table 1 prepared on an “if not, why not” basis.
- Annual reporting of mineral resources and ore reserves by companies as at their annual review date in tabular form by commodity and disaggregated by project, region, or any other classification as determined by the company on the basis of materiality (including reconciling aggregate resources and reserves estimates with estimates from the previous year).
- Clarifying the prohibition of disclosure of preliminary and low confidence estimates of mineralisation, including those estimates which are based on initial drilling or historical drilling (which may include guidance confirming that initial exploration target be reported in terms of potential tonnage and grade, and not less certain estimates of mineralisation).
Finally, ASX will work with the JORC to update the JORC Code in a number of corresponding areas. Judging from the Issues Paper and responses to it, those updates would be aimed at buttressing, and reinforcing the objectives behind, the ASX’s proposed amendments to the Listing Rules.
Oil and Gas – Reserves and Resources
3.1 P1, P2, P3 and When to Use Them
The Society of Petroleum Engineers “Petroleum Resources Management System” (SPE-PRMS) for resources and resources reporting is increasingly the dominant and preferred international reporting standard internationally. Indeed, although it is not formally required, the majority of Australian oil and gas companies already use SPE-PRMS. Consequently, it is perhaps unsurprising in a market as globalised as oil and gas that industry broadly supports formally adopting SPE-PRMS for reserves and resources reporting in Australia. Additionally, the ASX is also considering:
- annual reserves and resources reporting requirements;
- clarification of the requirement to disclose drilling and exploration results;
- requiring the disclosure of key assumptions underpinning reserves and resources estimates; and
- the professional qualifications and experience requirements for qualified reserves and resources evaluators.
Interestingly, the ASX appears to have closely observed North American and, in particular, Canadian practice in these areas. It is generally considered that Canadian disclosure requirements are more comprehensive than their Australian counterparts. While these more rigorous requirements may place a greater compliance burden on ASX listed oil and gas companies, they will also bring the ASX more in line with international best practice for oil and gas related disclosure (and, consequently, closer to generally accepted international disclosure practice on international capital markets).
3.2 Keeping the Peace
Australian companies (and, in our experience, their foreign joint venture partners) have, for some time, voiced concerns as to the requirement for Australian listed oil and gas companies to regularly report drilling progress irrespective of the materially of the information reported (as required by Guidance Note 8). The Issues Paper proposes removing that requirement and instead rely upon the obligation in Listing Rule 3.1 to report the progress of drilling and exploration progress where the relevant information would be expected to have a material effect on the price or value of the entities securities. Unsurprisingly, the removal is widely supported by industry.
3.3 Mum’s the Word
The Issues Paper also proposes to revise the type and amount of drilling information which must be disclosed under listing rule 5.9 to included information required under Guidance Note 8 (if this guidance is removed) and related information in relation to wells, any tests undertaken and the results of those tests. However, reservations have been expressed about the proposal on the basis that this data is commercially sensitive would likely require significant interpretation and analysis to make it useful to investors (which analysis might not be available at the time of the results are known and need to be disclosed).
The Issues Paper also suggests disclosure of key technical data and the assumptions supporting the booking of material reserves and resources. Industry strongly opposes disclosures requirements which might require disclosure of commercially sensitive and confidential information (for example, long term commodity price assumptions or commodity pricing under long term sale contracts). In particular, industry is hesitant to support any proposal which may place listed Australian companies at a competitive disadvantage to global oil and gas companies not subject to the same disclosure requirements. The ASX will need to balance increased transparency with capital market competitiveness in considering these proposals.
3.4 What’s the Convention?
Currently unconventional oil and gas companies disclose their resources and reserves in accordance the JORC Code or the SPE-PRMS. Some concern was raised about this inconsistency and presumably the affect this may have on the market given the relative valuations of different unconventional oil and gas companies using the different resource estimation methods.
The Issues Paper indicates that the ASX will work to consider ways in which reporting requirements can be harmonised in this regards (particularly in the context of competing state and territory statutory and other requirements).
Paying the Piper
Non-government organisations and other interested stakeholders recommended that the Issues Paper be extended to consider increasing disclosure requirements regarding payments made to host governments by ASX-listed mining and oil and gas exploration and production companies. It was suggested that the ASX introduce mandatory requirements similar to those being enacted in the US and proposed for the European Union.
These submissions contend that the disclosure of such payments on a project-by-project basis would promote better governance of natural resources and facilitate the distribution of resource revenues to the benefit of local communities in resource rich countries where there is a high incidence of poverty. This information was also identified as being useful for investors in assessing the financial, political and reputational risks faced by particular companies.
The ASX has indicated that it considers these matters are more appropriately dealt with by the Australian Government, given they relate to financial reporting and concern broader public policy issues. As such, the ASX has referred the matter to the Commonwealth Government and has not indicated that it proposes to introduce disclosure obligations in relation to payments to host governments at this time. However, with Australian companies playing a growing role in emerging markets, and given trends in the US and Europe in this regard, it would not be surprising if some broader policy proposals were made by the Federal Government in this regard.
Digging Up the Detail
Overall, while the Issues Paper and consultations around it, indicate that a more prescriptive approach will be taken to the reporting requirements for Australian resources companies, many of the proposals do reflect a move more towards internationally accepted best practice. Consequently, while many companies (particularly smaller ones) may feel the weight of perceived increased regulatory and compliance requirements, and have concerns of the impact of those requirements on their short term valuations in a difficult financial environment, the medium to long term implications for Australian capital markets of following a more internationally acceptable and transparent approach should be beneficial to those markets and the participants in them.
While less usually means more, an approach more consistent with those adopted in key competing resource focussed capital markets such as Toronto, London and New York, should serve the local market and its participants better in the future.