Canada: The Alberta Energy Regulator Reacts To The Redwater Decision – Who Suffers?

Last Updated: June 22 2016
Article by Chidinma Thompson, Sandi Shannon, Mark Franko and Miles F. Pittman

Most Read Contributor in Canada, September 2016

On June 20, 2016, in reaction to the Alberta Court of Queen's Bench Redwater Energy Corporation (Re), 2016 ABQB 278 decision ("Redwater") the AER issued Bulletin 2016-16 Licensee Eligibility - Alberta Energy Regulator Measures to Limit Environmental Impacts Pending Regulatory Changes to Address Redwater. The AER and Orphan Well Association have appealed the decision. While the AER is working on appropriate regulatory measures to address Redwater's significant impacts to stakeholders, including industry and landowners, it has taken drastic measures, effective immediately, to ensure that statutory environmental liabilities associated with energy development in Alberta are adequately and appropriately addressed. The impacts of the AER's reaction to Redwater will be felt by all stakeholders.


On May 19, 2016, the Alberta Court of Queen's Bench released its greatly anticipated decision on Redwater. The Honourable Chief Justice Wittmann found that an operational conflict existed between the federal Bankruptcy and Insolvency Act ("BIA") and Alberta's Oil and Gas Conservation Act ("OGCA") and the Pipeline Act ("PA") with respect to certain rights of trustees and receivers of licensees of the Alberta Energy Regulator ("AER") in the bankruptcy context. As a result, receivers and trustees under the BIA can selectively disclaim unprofitable assets. By disclaiming such assets receivers and trustees also disclaim the associated abandonment and reclamation obligations.

On April 8, 2016, prior to Redwater, the AER pre-emptively released AER Bulletin 2016-10 [discussed previously by BLG in AER Reminds Licensees of Certain Obligations when Ceasing Operations], where it warned that it could increase the use of its powers under section 106 of the OGCA declarations to name individuals who are principals in connection with AER-licensed assets.

BULLETIN 2016-16

On June 20, 2016, the AER issued Bulletin 2016-16 Licensee Eligibility - Alberta Energy Regulator Measures to Limit Environmental Impacts Pending Regulatory Changes to Address Redwater. In furtherance of its mandate under section 2 of the Responsible Energy Development Act the AER has implemented the following interim rules, effective immediately:

  1. The AER will consider and process all applications for licence eligibility, under Directive 067: Applying for Approval to Hold EUB Licences, as non-routine and may exercise its discretion to refuse an application or impose terms and conditions on a licence eligibility approval if appropriate in the circumstances.
  2. For holders of existing but previously unused licence eligibility approvals, prior to approval of any application (including licence transfer applications), the AER may require evidence that there have been no material changes since approving the licence eligibility. This may include evidence that the holder continues to maintain adequate insurance and that the directors, officers, and/or shareholders are substantially the same as when licence eligibility was originally granted.
  3. As a condition of transferring existing AER licences, approvals, and permits, the AER will require all transferees to demonstrate that they have a liability management ratio (LMR) of 2.0 or higher immediately following the transfer.

The Bulletin indicates that the interim rules above will remain in effect pending the outcome of the Redwater litigation (currently under appeal by the AER and the Orphan Well Association) or the implementation of appropriate regulatory measures.

The recent changes to the LLR program had increased the minimum LMR to 1.0 [discussed previously by BLG in Alberta Energy Regulator Implements the Final Phase of the LLR Program Changes]. While the AER notes, in Bulletin 2016-16, that the increase to 2.0 is a significant change, it states that from its observations the 1.0 LMR is inadequate in that some purchasers of AER licensed assets find themselves in financial difficulty within weeks to months of the purchase. The AER notes that licensees can achieve an LMR of 2.0 or higher in a number of ways, including by posting security, addressing existing abandonment obligations or transferring additional assets.


The AER's reaction to Redwater, and specifically the increase to the LMR requirement for parties acquiring assets, will likely have significant implications on pending and future transactions. Although these are only interim measures their impacts will also be immediately felt among all stakeholders in a number of ways.

1. Barriers to Entry for New Licensees

New licensees will be examined closely, and the issuance of a licence will not be a foregone conclusion. Each licensee may have specific conditions attached to its license. Further, this close examination may significantly delay the issuance of new licences, as AER staff will be required to review new licences in much greater detail. A potential delay could have an effect on a new entrant's ability to bid on or close a transaction on a certain timeline. The effect makes current licensees, therefore, more able to act quickly and nimbly.

2. Licensees Approved where Assets not yet Acquired

For licensees whose licences have been approved but have not yet acquired assets, the licensee will need to update its information provided to the AER, and will effectively need to show that its current situation is materially the same as when the license was issued. Therefore, if a licensee has undergone a corporate restructuring or transaction and has not acquired any assets, and its shareholders have changed more than minimally, the licensee may have to requalify.

3. Reduction of the Pool of Potential Purchasers

The LMR requirements of a purchaser are effectively doubled. This would logically reduce the pool of available purchasers for assets, as any purchaser whose LMR is less than 2.0 but greater than 1.0 after a transaction will now be required to post additional credit. This necessarily gives the advantage to purchasers whose LMR is high; but also potentially reduces the number of purchasers, so could reduce purchase prices.

Further, it may lead to a larger pool of renounced assets in the case of an insolvency. Any receiver would, one would expect, be selling a suite of assets whose effective LMR is greater than 2.0, rather than 1.0, to ensure that the pool of purchasers is as great as possible. Therefore more marginal or suspended assets would logically be renounced.

4. Effect on Small or Marginal Producers

The effect on small or marginal producers whose LMR is close to 1.0 may be to freeze their asset suite and prevent them from acquiring further assets. As an example, a purchaser whose LMR is close to 1.0 and who proposes to buy assets which would raise their LMR above 1.0 (a net gain for all parties concerned, including the AER), would now have to post additional credit to raise its LMR to 2.0. Lenders will need to consider the LMR requirement in reviewing the creditworthiness of a current or potential licence holder with the result that this additional credit might well not be available, and an otherwise viable transaction may not proceed.

5. Albertans and the Economy

The potential implications for Albertans are also significant. If the 2.0 LMR requirement is unattainable for many, which in the current market may well be the case, it is foreseeable that the interim measures could result in a significant influx in wells being abandoned to the Orphan Well Fund.

Under Bulletin 2016-16, it appears that none of the stakeholders is spared and the impacts will be felt by many. Everyone will likely suffer. As we stated previously in Where do we go from here? Alberta Court approves renouncement of AER-licensed assets by Trustees and Receivers to avoid monetary environmental obligations a complete overhaul of the LLR program may be the only way out.

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