11th May 2016
A Competent Person’s Report (CPR) is an independent technical report on the oil and gas assets (or mineral assets) of a company. It is normally required for an Initial Public Offering (IPO) in the oil and gas (or mineral mining) sector and for other material transactions such as mergers, acquisitions and takeovers involving a listed company in this sector. While the term CPR is used for the London Stock Exchange (LSE) and other European exchanges, other terms such as Qualified Person’s Report or Technical Expert’s Report may be used for such a report elsewhere in the world.
The aim of a CPR is to provide a responsible, unbiased and independent opinion on the technical aspects of the company, with the ultimate purpose of informing and protecting investors.
This article discusses the Competent Person’s Report and its preparation, particularly in the context of the London Stock Exchange.
The London Stock Exchange
The London Stock Exchange (LSE) has two markets, the Main Market (further subdivided into Premium and Standard Markets) and AIM (formerly called the Alternative Investment Market). The Main Market is a major international stock exchange, established in 1698 and has strict eligibility requirements. It is regulated by the UK Listing Authority (UKLA) / Financial Conduct Authority (FCA). The UKLA is responsible for overseeing and approving the Prospectus (Listing Particulars) of each applicant for admission to the Main Market. Listing on the Main Market requires adherence to ongoing disclosure, transparency and reporting rules.
The Main Market is also regulated by the European Securities and Markets Authority (ESMA). Regulation is documented in: “The consistent implementation of Commission Regulation (EC) No 809/2004 implementing the Prospectus Directive”, last updated in March, 2013 (ESMA/2013/319), which sets out various requirements regarding the CPR.
AIM was established in 1995; it has simplified procedures and regulation compared with the Main Market. For example no trading record or minimum market capitalisation is required for listing on AIM, making it more attractive to smaller and start-up companies. AIM is regulated directly by the LSE and is not subject to ESMA guidelines. Admission is controlled by a Nominated Advisor (NOMAD), often a commercial bank, which also takes on responsibility for ensuring the company meets disclosure requirements after listing. The CPR requirements for AIM are described in “Note for Mining and Oil & Gas Companies”, last issued in June, 2009.
Minimum Requirements for a Competent Person
The ESMA and AIM requirements to be classified as a ‘Competent Person’ are similar: professional qualification is required along with membership of an appropriate and recognised professional association. The Competent Person should have at least five years of relevant experience in the estimation, assessment and evaluation of the type of mineral or fluid deposit under consideration (e.g. oil or gas). In practice, it is usually the case that the “Competent Person” will be a firm of consultants, rather than an individual person, and the person signing off on the CPR will typically have anything from 20 to 40 years’ experience rather than just 5 years.
The Competent Person should be independent from the applicant (listing company), its directors, senior management and advisors. The remuneration of the Competent Person should be by way of a fee that is in no way linked to admission or value of the applicant, as this would compromise the independence of the Competent Person. It is also stipulated in the CPR requirements of AIM that the Competent Person should not be a sole practitioner; ESMA does not require this but in practice it is virtually impossible for a single person to prepare a CPR as a multi-disciplinary team is usually involved.
Contents of a CPR
The ESMA and AIM requirements regarding the contents of a CPR are also similar.
There should be an overview of the licences held by the company, with expiry dates and obligations (e.g. exploration wells, or minimum expenditure) and a list of assets associated with each of the licences. A geological overview is usually included, which should be written in such a way as to be accessible to readers with basic geological understanding. Where production has taken place from one or more of the assets, produced petroleum volumes and associated operating expenditures should be provided for at least the previous three years.
A key part of the CPR is concerned with the statement of the Reserves and Resources associated with each of the licences, with a brief description of how and by whom these were estimated. There are (unfortunately) numerous sets of standards that define Reserves and Resources and give guidelines for how they are to be estimated (see future article or contact the authors), but only the SPE PRMS and COGEH are recognized by both of the London Markets, while the Norwegian system is also allowed on the Main Market only. All classes of Resources are generally reported, i.e.
- Reserves (Proved, Probable and Possible): those quantities of petroleum that are anticipated to be commercially recoverable by application of development projects to known accumulations from a given date forward under defined conditions;
- Contingent Resources (Low (1C), Best (2C) and High (3C) estimates): those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations, but the applied project(s) are not yet considered mature enough for commercial development due to one or more contingencies; and
- Prospective Resources (Low, Best and High estimates together with an estimate of the “Geological Chance of Success”): those quantities of petroleum that are estimated, as of a given date, to be potentially recoverable from undiscovered accumulations by application of future development projects.
A second key part of the CPR is a “valuation of Reserves”, which is required for AIM but optional for the Main Board. In fact, what is presented in the CPR is not a “market valuation”, but an “economic evaluation of Net Present Value”. Market valuation of the listing entity is performed by the Sponsor or NOMAD in setting the share price. The economic evaluation in the CPR usually takes the form of an estimate of the post-tax Net Present Value (NPV), at a 10% discount rate, of the forward cash-flow of the projects associated with production of the Reserves, under certain economic assumptions, which must be clearly stated. Sensitivities to key economic assumptions, such as oil and gas prices, project costs, discount rates, etc., are usually also presented.
Preparation of a CPR
A CPR must be an independent opinion on the technical aspects of the company, but it will rely a great deal on auditing existing interpretations, provided by the listing company. Budget and time constraints generally preclude a complete reworking of the original data, which can be very extensive. Data are normally provided to the Competent Person in a variety of industry standard digital formats. A kick-off meeting is typically held during which technical workflows can be discussed.
A multi-disciplinary approach is usually required for the preparation of a CPR, which is made much more efficient and consistent by using a multi-disciplinary team in a single location. The team would typically cover all of the following disciplines (depending on data availability and project maturity):
- Reservoir Engineering
- Production Engineering
- Facilities and Cost Engineering
- Commercial/Petroleum Economics
The typical workflow can perhaps best be understood in reverse order. The final step in any evaluation of Reserves volumes is a cash-flow calculation, which serves to establish that the development project is economic and to determine the economic limit for production (the end of project life). For assets governed by a Production Sharing Contract (PSC) or similar type of contract, the cash-flow calculation is also needed to determine the Contractor’s net entitlement.
Running the cashflow calculation obviously requires an understanding of the applicable contract terms and fiscal regime, the basis for product pricing and any applicable tariffs. It also requires estimates of future production and the associated costs. The Competent Person may estimate these independently or audit and accept (potentially with some modification) those proposed by the company. Where independent estimates are made, these are usually done with simple methods, such as “decline curve analysis”, which is essentially a process of identifying trends in current production rates and extrapolating these into the future. Such simple calculations often serve as checks on more complex modelling work in an audit process. Costs may be estimated or audited using the Competent Person’s in-house database of costs in similar (analogue) projects.
For mature producing fields with well-established declines in production rates, the past production data alone may be sufficient to estimate future production. However, in other cases, or where there are plans to substantially redevelop a mature field, more work must be done to understand the geology of the field and to estimate the quantities of hydrocarbon initially in-place. This typically requires a technical audit of geophysical, geological and petrophysical interpretations. Where Reserves are being considered it is often the case that a geocellular, “static” or “geological” reservoir model will be provided by the listing company. For Prospective Resources, volumes are usually estimated using simpler methods, but this will still involve seismic interpretation and analogue data. This work generally results in audited or reworked estimates of quantities of hydrocarbons initially in-place. Subsequently the development plan and the associated production profiles would be audited from a reservoir engineering point of view. Again, a “dynamic” reservoir model may be provided, or production profiles may be estimated by comparison with analogue developments in similar fields.
If production facilities are in place, a site visit may be undertaken. Sometimes a site visit is not possible, in which case the completion of a questionnaire by the applicant, supported by photographs may be accepted.
Any reputable consultancy preparing CPRs will have internal review processes to ensure the quality and rigour of the technical work, consistency from one CPR to the next, and compliance with stock market rules and guidelines.
In summary, a CPR is a report by an independent technical/commercial expert in support of an IPO or other stock exchange transaction and is required by stock exchange rules for mineral mining and oil and gas companies. The CPR is required in order to provide a responsible, unbiased and independent opinion on the technical aspects of the company and to inform and protect investors. The CPR is prepared following technical due diligence procedures and the effective date of the CPR should typically be no more than 6 months earlier than the date the transaction takes place.
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