On March 20, 2023, the Alberta Minister of Energy, Peter Guthrie, released ministerial order 043/2023 (the Order). The Order, authorized pursuant to the Responsible Energy Development Act, requires the Alberta Energy Regulator (the AER) to determine if oil and gas companies have outstanding municipal taxes above a certain threshold yet to be announced prior to approving new licence or licence transfer applications. This Order has wide application as it applies to not only applicants and transferors but also transferees.

According to a report by the Rural Municipalities of Alberta, as of December 31, 2022, there are $268.5 million of unpaid municipal taxes by oil and gas companies. The report states that oil and gas companies with operating assets currently owe 41 percent of the unpaid taxes, indicating that this is not an issue solely rooted in bankrupt or non-existent companies.

The Order notes that there is "an unreasonable risk to members of the public, including municipalities and taxpayers, in the AER granting an application for, or a transfer of, a licence where the applicant or transferee has unpaid municipal taxes." In response to that risk, the Order places an obligation on the AER to obtain evidence and take reasonable steps to confirm that a well licence applicant, transferee or transferor does not have outstanding municipal taxes exceeding the threshold amount or if it does, that a payment plan is in place with the applicable municipalities. The Ministry of Municipal Affairs has been tasked with preparing a list which sets out the oil and gas companies that have outstanding municipal taxes. Any entity on that list wishing to acquire or transfer a licence will now need to provide evidence to the AER indicating that the municipal taxes in excess of the threshold have been paid, or an alternative repayment arrangement has been agreed to with the appropriate municipalities. Currently, approximately $45 million of all taxes in arrears are subject to a tax agreement between operating oil and gas companies and the appropriate municipality.

If a well licence transferor is in arrears of its municipal taxes in excess of the threshold, the AER must obtain sufficient evidence to prove that the payment of those municipal taxes in excess of the threshold is a condition to the purchase and sale agreement. It appears from the drafting of the Order that the assessment of outstanding municipal taxes is made at the entity level, not in respect to the licences being disposed of. In addition to the assessment of a company's outstanding municipal taxes, the AER is directed as part of its routine compliance audits to apply its regulatory enforcement tools in cases where the applicant, transferor or transferee provides false or misleading information about payments or payment arrangements.

At this time, there are some unknowns as to how the Order will operate in practice, and the effects these new requirements will have on asset transactions involving AER licences, especially in the event of insolvencies where tax arrears are often significant and, prior to the issuance of the Order, could be vested off title to the asset. The Order only specifically identifies well licences, however, it remains to be seen if the requirements of the Order will also be expanded to apply to facility and pipeline licences at a later date. Finally, there is no indication in the Order as to the terms of the alternative repayment arrangements necessary to acquire or transfer a well licence or what will constitute sufficient evidence of an agreement.

The threshold amount has not yet been determined, but will be established by the AER in consultation with the Assistant Deputy Minister responsible for energy resource policy at the Ministry of Energy and the Assistant Deputy Minister responsible for property tax policy at the Ministry of Municipal Affairs. At this time, it is unknown if the threshold will be a set dollar amount or a percentage of assets, or whether it will be calculated at the individual licensee level or a global standard applicable to all licensees. Regardless, the AER must have the necessary procedures in place to implement the Order by no later than the close of business on April 30, 2023.

Licensees should expect additional due diligence to be undertaken in respect of unpaid municipal taxes in connection with corporate transactions, asset sales and corporate lending.

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