Canada: Update: Alberta Licensee Liability Rating Program Imposes Financial Challenges For Junior Oil & Gas Companies

This is an update to our September 2013 Blakes Bulletin: Increases to Alberta Licensee Liability Rating Program.

Effective February 28, 2014, the Alberta Energy Regulator (AER) has implemented the Licensee Liability Rating (LLR) Program Management Plan (PMP). The PMP complements the changes made to the LLR program in the first part of 2013, which require oil and gas operators in Alberta to pay higher security deposits to maintain their required LLR. The higher deposits under the new LLR requirements pose significant financial challenges for junior oil and gas companies. They also significantly impact oil and gas companies that are the subject of voluntary or involuntary insolvency proceedings due to the financial liabilities of the LLR program or otherwise, and wish to transfer their licences.

LICENSEE LIABILITY RATING PROGRAM MANAGEMENT PLAN

The PMP allows licensees who meet its eligibility requirements to defer the financial burden imposed by the new LLR standards. Instead of making a lump sum payment, which is subject to escalating enforcement procedures by the AER on default, licensees can make quarterly payments beginning within six months of their PMP approval date and continuing until December 30, 2017 (Plan End Date). The amount of each quarterly payment is determined by dividing the total LLR security deposit owing to the AER by the number of quarterly payments remaining until the Plan End Date. Licensees retain the right to make lump sum payments, which supplement but do not replace quarterly payments.

The AER has placed a number of restrictions on eligibility for the PMP. Licensees with closure and abandonment orders issued prior to January 1, 2014 will not be eligible. Licensees that become noncompliant with the LLR after January 1, 2014, but prior to a closure order being issued, may be eligible for the program. An application to the PMP must include an operating forecast, including a cash flow forecast (which will not reflect the LLR security payments required by the program), internally evaluated reserves information, and a management and director signoff. The AER also retains its right to modify the requirements of PMP at its sole discretion. 

In order to be eligible for the PMP, most licensees will be required by the AER to conduct at least one abandonment and one site reclamation over the life of the program. In limited cases where all wells are active, this requirement may be waived. Conversely, where a licensee has a high ratio of inactive properties, multiple well abandonments may be required. The abandonment and reclamation plan must be completed by the end of 2017 and is subject to revision at the request of the AER.

Applying to the PMP imposes significant restrictions and obligations on a qualifying licensee. The licensee must be willing to submit itself to greater AER scrutiny of its ability to meet LLR security requirements and must demonstrate an improvement in its LLR ratio over time. The licensee must provide monthly reports to the AER delineating progression towards goals and actions taken, and will have its company name posted on the AER website along with its asset-to-liability ratio.

Once the PMP is entered into, a licensee must pay all required quarterly security deposits, conduct all applicable reclamation and remediation activities, and attain an LLR ratio of 1.2 in order to exit the program. This ratio cannot be obtained by providing a security deposit that exceeds the PMP requirements. It requires an increase in deemed assets or reduction in deemed liabilities beyond what would otherwise be required had the PMP not been entered into. For example, a licensee could raise its LLR ratio to 1.2 by increasing production or undertaking additional abandonment or reclamation of its inactive properties.

The PMP program does not alter the AER approval process for licence transfer requests. Accordingly, the full security required by the LLR program must be paid as part of the transfer approval process. Both the transferor and transferee must have an LLR rating of at least 1.0 before a transfer can be approved. If a licensee seeks to transfer out more deemed assets than liabilities, it must pay the required security deposit at the time of transfer and is not eligible for quarterly payments under the PMP. In effect, this means that a licensee seeking to transfer out all of its licences would first have to pay the full outstanding security deposit required under the LLR program and would no longer be eligible for quarterly payments under the PMP. This poses a significant challenge for junior oil and gas producers that are subject to insolvency proceedings and seeking to transfer their licences, as outlined in our previous bulletin.

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.