In Redwater the Court held that a trustee in bankruptcy
has the right to disclaim unproductive oil and gas assets,
including those subject to abandonment orders. This creates a risk
that if the Orphan Well Association is unable to fund the increase
in abandonment and reclamation liabilities from disclaimed assets,
the obligation to do so will borne by Alberta taxpayers.
The Redwater case is under appeal. The Bulletin has
been issued pending the earlier of the appeal decision in
Redwater or the implementation of appropriate regulatory
measures. The Bulletin provides that effective
The AER will consider and process all applications for licence
eligibility under Directive 067: Applying for Approval to Hold EUB
Licences as nonroutine and may exercise its discretion to refuse an
application or impose terms and conditions on a licence eligibility
approval if appropriate in the circumstances.
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.
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.
Previously, a post transfer LMR of 1.0 was required under the
Licensee Liability Rating Program. The AER acknowledges that the
requirement of an LMR of 2.0 or higher is a significant change and
that "these measures may inconvenience some
stakeholders." This is an understatement.
What are the ramifications of this policy?
It is likely that a reduction in eligible purchasers will
result in fewer acquisition and divestiture ("A&D")
transactions being able to proceed, given that only 28% of
licensees currently have an LMR of 2.0 or greater (219 of 788
licensees) (according to the AER Liability Management Programs
Results Report dated June 4, 2016). In contrast, 54% of
licensees currently have an LMR of 1.0 or greater (426 of 788
We may see more negotiations providing for the purchaser to
post security to offset any LMR shortfall reducing the purchase
price for the assets and creating a further barrier to A&D
The injection of new capital into the industry could be
deterred by this dramatic and immediate increase in the LMR
There is a retrospective effect to this change given that many
deals will have been in planning stages for months. Those
transactions in particular that were slated for a second quarter
closing may now be derailed with very little to no
notice. Further, the Bulletin does not address whether closed
deals with pending transfers are affected by this new policy;
Perhaps corporate acquisitions rather than asset deals will be
an alternative that is considered when dealing with asset
transactions that would otherwise result in an LMR rating below
The Bulletin does not explain why the AER has chosen an LMR of
2.0 as the new standard for transfers. At a time when the oil
and gas industry is already suffering from a prolonged period of
low commodity prices, a supply glut, increased taxes and a new
carbon emissions regime, this additional hurdle to completing
transactions may be unduly restrictive.
The Bulletin indicates that this change will only affect those
wishing to acquire AER licensed assets so current licensees with an
LMR rating under 2.0 not contemplating any transactions should not
be directly affected by this change. In addition, the Bulletin
indicates that these are temporary measures and that it will work
with industry, other stakeholders and the Government to develop
broader and more permanent regulatory measures to ensure that
environmental obligations are met by industry. However, this
does beg the question of whether increased LMR requirements for all
licensees are forthcoming.
Hopefully a full and meaningful consultation with industry does
occur and a balance is achieved that will allow the industry to
recover and grow while ensuring that abandonment and reclamation
obligations are met by industry and not passed on to the Alberta
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.
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