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Providing coverage of Alaska and northern Canada's oil and gas industry
January 2007

Vol. 12, No. 1 Week of January 07, 2007

Execs ‘misled’ market in reserves scandal

Alberta Securities Commission finds two executives of junior oil and gas company guilty; analysts say industry paying price

Gary Park

For Petroleum News

It was a scandal that went to the core of investor trust in Canada’s oil and gas reserves disclosure, prompting clean-up action by regulators and the industry itself.

It also set in motion a four-year hearing by the Alberta Securities Commission that included 137 days of testimony and resulted in late December in a finding that two executives of a junior oil and gas company had misled investors and their own outside auditor.

“This hearing was all about integrity, transparency and reliability of public disclosure by a public company,” a three-member panel said in a 313-page decision.

“It was also about the conduct expected of individuals who serve as directors or senior officers of public companies.”

Industry also paid price

As well, it was indirectly about the price paid by the industry, with many companies blaming the fallout on their inability to raise money until the commission and the industry were able to rebuild and sustain the confidence of capital markets.

The end results from 1,600 exhibits and 20,000 pages of transcript was that two former executives of Blue Range Resource — Chief Executive Officer Gordon Ironside and Chief Financial Officer Robert Ruff — were found by the securities commission to have misled the market by overstating reserves and production volumes.

The commission said the two men failed to follow generally accepted accounting principles when they withheld material information from their outside auditor.

They were found to have overstated Blue Range gas reserves by 8.9 percent by using raw gas numbers rather than sales gas volumes; to have used a “management adjustment” of 13.6 percent to inflate disclosed gas sales production volumes; issued a press release claiming 30 percent increases in new gas production without revealing that production overall was expected to decline by 20 percent; and engaged in a business activity of significantly over-contracting gas sales without disclosing this added risk to the market.

Company reported volumes in ‘unique and materially different’ manner

“What is clear is that, from its inception (in 1986), Blue Range reported natural gas volumes in a manner that was unique and materially different from that of all other companies in the oil and gas industry, without making the difference clear to recipients of the disclosure,” the regulatory decision said.

The panel said Ironside and Ruff “showed indifference to and disdain for the functioning of the capital market ... (and) compromised their duty to act honestly and in good faith in favor of their own self-interests.”

The penalties will be decided on early in 2007 when the two face a possible combination of fines and bans from trading or acting as directors of public companies. Neither has commented publicly on the verdict.

The scandal became public after Big Bear Exploration completed a hostile takeover of Blue Range in late 1998.

Once it had access to Blue Range’s books, Big Bear announced a C$152 million writedown of Blue Range assets, shrinking reserves by 25 percent or 20 million barrels of oil equivalent.

Crippled by that move, Big Bear was forced to file for creditor protection and to sell assets to Canadian Natural Resources for C$235 million, which was not enough to pay off all of its creditor claims.

The commission decided it was unable to examine the reasons for Blue Range’s demise, but the panel said that if companies present a “contrived picture” of their financial position “public confidence in the integrity of our capital market is undermined, with potentially devastating results.”

While the hearing proceeded, the industry and the commission developed new disclosure standards that were imposed in 2004 and required, among other things, an independent evaluation of reserves to provide investors with “reliable, consistent and useful information.”






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