Canada: Alberta Government Passes Bill 12, Liabilities Management Statutes Amendment Act, 2020 – What You Need To Know

Many of us who work in the oil and gas industry have been watching the progress of Bill 12, the Liabilities Management Statutes Amendment Act, 2020, with interest.

We have been told by the Alberta Government that Bill 12 is one part of a new suite of policies that are supposed to be announced in the near future, which will touch upon every single stage in the life cycle of a well, from exploration to post-closure, while ensuring that the oil and gas industry is able to meet their liability obligations in a flexible and cost-effective way. This complete overhaul of the existing liability management framework has been in the works for some time now becoming a top priority for the Alberta Government around the same time the Redwater case (Orphan Well Association v Grant Thornton Ltd., 2019 SCC 5 (CanLII), [2019] 1 SCR 150) was heard.

On March 31^st the Alberta Government proposed Bill 12 stating the purpose of this legislation is job creation while ensuring a responsible, sustainable oil and gas industry in the Province of Alberta for generations to come. Bill 12 is about strengthening the ability of both the Alberta Energy Regulator (the "AER") and the Orphan Well Association (the "OWA") to more effectively manage orphan wells and the associated infrastructure, including pipelines, abandoned by companies that go insolvent, while at the same time protecting landowners and safeguarding the environment and the public.

The Bill took just three days to pass with all proposed amendments voted down. It received Royal Assent on April 2^nd and will come into force on proclamation as SA 2020, c 4, which is expected any day now.

This Bill is intended to be a complement to the Alberta Government's earlier announced plan on March 2^nd to extend its interest-free loan to the OWA by an additional $100 million, bringing the total amount loaned to the OWA to a sizeable $335 million. With this Bill and the additional loan, the Alberta Government is hoping to give the OWA the tools it needs to "fast track" the cleanup of Alberta's orphan wells and the associated infrastructure creating much needed jobs in Alberta's oil services sector.

As of April 15^th, the OWA lists its orphan inventory at:

Alberta's orphan problem is well-publicized and is not a small one. Unfortunately, we can expect that current low oil prices and even lower oil demand will trigger further insolvencies and thus a further increase in Alberta's orphan inventory.

So with this background in mind, what does Bill 12 do exactly?

Bill 12 amends two pieces of provincial legislation, the Oil and Gas Conservation Act (the "OGCA") and the Pipeline Act. The amendments, for the most part, expand the role of the OWA and provide it with more flexibility to manage Alberta's orphan wells and the associated infrastructure.

Examples of some of the bigger changes are set out and discussed in more detail below.

Provision for Remediation and Remediation Costs

The Bill adds definitions for "remediation" and "remediation costs" to the OGCA (s. 1(1)(vv.11) and (vv.12)) and the Pipeline Act (s. 1(1)(x.2) and (x.3)) and then uses them in numerous other provisions throughout the acts.

Prior to this change, the acts only made reference to "suspension, abandonment and reclamation" activities in regards to orphan sites. The problem with that is reclamation is not the same thing as remediation. Reclamation refers to returning land to its original or an equivalent land use. Remediation goes further and requires the removal of any contaminants that existed under the surface.

These new definitions ensure that the OWA can now undertake remediation activities in regards to orphan sites and that those remediation costs can be recovered from the orphan fund.

New Duty to Provide Reasonable Care and Measures to Prevent Impairment or Damage

This Bill adds a new duty to the OGCA (s. 26.2) that licensees, approval holders, working interest participants or delegated authorities, like the OWA, have to "provide reasonable care and measures to prevent impairment or damage in respect of a well, facility, well site or facility site".

As part of this new duty, a new definition for "impairment or damage" has also been added. This term is defined very broadly to mean "impairment or damage that results in or could reasonably be expected to result in harm to the integrity of a well or facility or harm to the environment, human health or safety or property (emphasis added)" thereby covering a broad spectrum of people and property.

Similar changes have also been made to the Pipeline Act (s. 22.1).

This new duty closes a loophole that prevented timely action by the OWA when a licensee walked away from its obligations. The amendments around this new duty allow the AER to order the OWA, as a delegated authority under Part 11 of the OGCA, to assume care and custody obligations over a particular well, facility, well site, facility site or pipeline, where required, to ensure reasonable care and measures to prevent impairment or damage are being taken by someone.

Much Broader Operational Powers and Permitted Uses for the Orphan Fund

Perhaps one of the most talked about changes to come from Bill 12 is the fact it makes changes to the OGCA (s. 11(2)(a.1), s. 11(2.1), s. 12(2)(a.1) and s. 12(2.1)) and the Pipeline Act (s. 16(3)) to enable the OWA, on the direction or with the consent of the AER and with the consent of the owner or holder of the mineral rights, to continue to produce and operate wells, facilities and pipelines in its orphan inventory that still have value.

This change will help to provide additional revenue to the OWA, which can be used to fund further clean‑up activities. It will also protect freehold mineral rights owners, the Crown and mineral rights holders by avoiding premature shutting-in of production that still has value. Another potential positive impact of this change is that the OWA could bring in other companies, such as service companies or even nearby producers, to run these assets, opening up job opportunities in the areas with viable assets under OWA management.

Another related amendment makes changes to the OGCA (s. 70(1)) to expressly enable the OWA to use the orphan fund to pay for the costs associated with its much broader operational powers discussed above and some new categories of cost, that include:

• monitoring the behaviour and condition of orphan wells, facilities, wells sites and facility sites;
• paying the costs of administering the orphan fund, including for:
  • hiring and retaining staff, experts and professionals that, in the opinion of the AER, are necessary for the purposes of conducting, analysing and responding to monitoring under the act, or
  • hiring and retaining staff and experts that, in the opinion of the AER, are necessary for the prudent management of accounting, investment and risk management activities in respect of the orphan fund;
• paying the costs of a receiver, receiver-manager, trustee or liquidator appointed under section 106.1. This new category of costs is connected to another new section in the OGCA which allows the AER, subject to regulations (not yet drafted), to apply to court for the appointment of a receiver, receiver-manager, trustee or liquidator of the property of a licensee; and
• any other purpose prescribed by the regulations.

Additional Regulation-Making Authority

Another frequently talked about change to come from Bill 12 is the new and extremely broadly worded additional regulation‑making authority the Alberta Government has given itself in the OGCA (s. 77(1.1)), on top of the already existing regulation making powers the government has pursuant to section 77(1).

With this change "the Lieutenant Governor in Council may make regulations necessary to carry out the provisions of this Part according to their intent or to meet cases that arise and for which no provision is made by this Part, including regulations

(a)  respecting the administration of the orphan fund;

(b)  limiting, regulating and controlling the exercise of the AER's discretion with respect to the orphan fund;

(c)  respecting the purposes for which the orphan fund may be used;

...".

This change has the potential to significantly expand the Alberta Government's role in managing the orphan fund, if such regulations are, in fact, enacted.

Critics are saying that before this change, the OWA was a non-profit, arm's length, independent organization working with a mandate from the AER to administer the orphan fund, but now the Alberta Government is giving itself the power to administer the orphan fund through regulation without any oversight of the legislature. The OWA and the AER have the expertise. Why does the government need these powers?

In conclusion, Bill 12 for the most part does contain some helpful tools that will assist the OWA in managing Alberta's orphan wells and the associated infrastructure. The Bill also has its critics. Some people feel strongly that it was passed too fast and at an inappropriate time in the middle of a COVID-19 pandemic when the people of Alberta have their ability to engage in democratic process severely restricted. Others have criticized Bill 12 for what it is missing. It does not address the systemic drivers of the growing orphan liability problem in the Province of Alberta. It is focused on management of existing orphans, and not on the prevention of, or even on limiting the number of, new orphans. Either way, at this point, Bill 12 has passed. Now, perhaps the more important question for Albertans is what will the balance of the Alberta Government's "new suite of policies" that were mentioned at the beginning of this article look like and when will they be announced?

One final piece of good news for Albertans. The Federal Government announced on April 17^th that it will provide a further $1.72 billion to help clean-up orphan and inactive wells in Alberta, Saskatchewan and British Columbia. $1 billion of the $1.72 billion will go to the Alberta Government. The OWA will receive $200 million as a refundable loan. Saskatchewan will receive up to $400 million and British Columbia will receive up to $120 million. More details around this federal assistance and other announced measures for the oil and gas industry will follow in the upcoming days.

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2019