Canada: Alberta Energy Regulator Releases Interim Measures In Response To Redwater Decision

On May 19, 2016, the Alberta Court of Queen's Bench issued their decision, Redwater Energy Corporation Re, 2016 ABQB 278 ("Redwater Decision"), which we discussed in our recent alert, " Insolvency and energy insights: The Redwater decision". The Alberta Energy Regulator (AER) and the Orphan Well Association (OWA) have since appealed the decision.

On June 20, 2016, in response to the Redwater Decision that, among other things, affirmed the ability of receivers and trustees in insolvency proceedings to selectively disclaim uneconomic assets (and their associated abandonment and reclamation obligations) in accordance with the Bankruptcy and Insolvency Act (BIA), the AER released Bulletin 2016-16, "Licensee Eligibility – Alberta Energy Regulator Measures to Limit Environmental Impacts Pending Regulatory Changes to Address the Redwater Decision" (the Bulletin). The Bulletin outlines interim measures being implemented by the AER to minimize risks to Albertans pending the outcome of appeals by the AER and OWA of the Redwater Decision and/or the implementation of what the AER determines to be appropriate regulatory measures to account for the impacts of the Redwater Decision.

In the Bulletin, the AER identified what it sees as several risks to Albertans as a result of the Redwater Decision, one of which is the fact that the BIA permits "receivers and trustees to avoid the licensee's abandonment, reclamation and remediation obligations under AER-administered legislation." As a result, the OWA could assume a larger burden for the abandonment, reclamation and remediation obligations of insolvent licensees should a trustee or receiver disclaim those assets it determines to be uneconomic in an insolvency supervised sale process.1

Pursuant to the Bulletin, the AER has implemented the following measures that are 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 first two measures will result in a more intensive application process for new entrants seeking eligibility to become licensees in Alberta, and may act as a significant barrier to entry for start-up oil and gas companies going forward.

As was acknowledged by the AER, the third measure will likely have the most immediate and significant impact on the industry. Changing the LMR requirement from 1.0 to 2.0 for transferees wishing to acquire AER-licensed assets is expected to affect a number of current transactions that are in negotiation or that are waiting to close, and may put those transactions in jeopardy. This change could also potentially have a further chilling effect on acquisition and divestiture activity for the industry in general. The AER reasoned that it has "observed that some licensees that maintain an LMR at the minimum level required (i.e., 1.0) purchase AER-licensed assets only to find themselves in financial difficulty within weeks or months following the acquisition." The AER noted that there are several ways that a party can achieve an LMR of 2.0 or higher, including posting security, addressing existing abandonment obligations, or transferring additional assets. It is debatable whether any of these proposed solutions would be reasonably available to the type of purchasers most likely impacted by these changes.

In light of the measures implemented by the AER, many purchasers will need to be more selective on the types of asset packages they will consider. This might include negotiating with vendors to exclude or limit the inclusion of interests in wells that have a negative impact on the LMR ratios. For vendors with asset packages in the Province, the range of potential purchasers for these packages has been significantly reduced. As a result, well capitalized purchasers with healthy LMR ratios will likely be in stronger bargaining positions, with vendors eager to dispose of assets. In addition, further consideration will be required to address the impact of these changes in purchase and sale agreements. The measures also present an interesting structuring alternative whereby parties may consider a share purchase over an asset purchase (where such an alternative is available2), since a share purchase would not trigger any license transfers and therefore not require the purchaser or the acquired entity to meet the new requirements for an LMR of 2.0 or higher.

The AER will commence a consultation process with industry, other stakeholders and the Government of Alberta, to develop broader and more permanent regulatory measures to address risks posed by the Redwater Decision. Further information on the AER's consultation on new regulatory measures is expected, however the changes announced in the Bulletin reflect the "new normal" in Alberta until such time as the appeals of the Redwater Decision have been heard, or more permanent regulatory measures are announced.

Dentons regularly provides advice to clients on energy, energy regulation, environmental and bankruptcy/insolvency matters. We will continue to monitor any develops as a result of the Redwater Decision and the AER's interim measures.

Footnotes

1 The AER's Licensee Liability Program provides recourse to the AER to pursue current and former working interest holders in respect of abandonment and reclamation obligations that an operator fails to perform. Therefore it is not a certainty that in all cases such disclaimed properties will become the responsibility of the OWA provided there are current or former working interest holders with the financial wherewithal to satisfy these obligations, although the current working interest holders who incur the costs to abandon and reclaim such disclaimed properties may apply to the OWA to recover the defaulting working interest partner's share of such costs.

2 It is acknowledged that this alternative would only be available in very limited circumstances where a vendor was considering the sale of all or substantially all of its assets.

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