Just over eight months after the Government of Alberta proposed several overhauls of the regulatory framework surrounding abandonment and reclamation obligations (AROs) for Alberta's oil and natural gas industry, and after soliciting feedback from the public, the Alberta Energy Regulator (AER) has implemented a new edition of Directive 067 as part of its new Liability Management Framework (LMF). Changes include additional requirements to provide updated financial information at the time of application and throughout the energy development life cycle. These changes are in response to the efforts of various industry stakeholders to replace the former Licensee Liability Rating (LLR) program with a more holistic Licensee Capability Assessment (LCA) system.
Empowered by amendments to the Oil and Gas Conservation Rules, the AER has begun to amend its Directives to initiate the overhaul of the province's liability management regime. For a closer look at legislative changes that the Government of Alberta announced last year, see our article here. For a deeper dive into the Government of Alberta's introduction of the new LMF, including the Licensee Capability Assessment, see our article here.
January 2021: AER introduces a draft Directive 067 and outlines reporting requirements under LMF
Directive 067 is the Directive that sets the rules around applying for, maintaining, and amending licence eligibility. In mid January 2021, the AER published and sought feedback from the public on a draft of an amended Directive 067 (the Draft Directive).
The changes introduced by the Draft Directive included building on the existing corporate and financial disclosure requirements for parties who wish to acquire, hold, maintain or transfer licences in Alberta, and broadening the AER's discretion to withhold or revoke licensees' privileges if they are assessed as posing an "unreasonable risk" of leaving assets to be assumed by the Orphan Well Association (OWA).
Notable changes introduced in the Draft Directive included:
- increased financial disclosure;
- assessment criteria for what constitutes "reasonable risk"; and
- general requirements for maintaining licence eligibility.
Overall, the Draft Directive increased the AER's ability to scrutinize licensees by creating disclosure requirements for participants and prospective participants in Alberta's oil and natural gas industry that go far beyond a company's ability to conduct oil and natural gas operations. The AER's call for feedback on the Draft Directive was open from its introduction until February 14, 2021. For a closer look at public feedback that the AER received, and responded to, see here.
April 7, 2021: AER implements a new Directive 067
On April 7, 2021, the AER announced its implementation of the New Directive 067 (the New Directive). The three primary changes implemented in the New Directive are aligned with what was originally proposed in the Draft Directive with some revisions arising from the public consultation process.
1. Increased financial disclosure
Among several changes with respect to financial disclosure obligations in Section 4.4, licensees and approval holders will now be required to submit financial statements and financial summaries in a new Schedule 3 on an ongoing basis. Financial information provided to the AER under this requirement will remain confidential for the period outlined in section 12.152(2) of the OGC Rules.
A licence applicant must submit a complete Schedule 3, which requires full audited financial statements to be submitted to the extent available (management prepared financials may be acceptable to the extent audited financials are not available). Newly formed companies that do not have a financial history are required to provide details of financing; and companies with consolidated financial statements are required to provide a Schedule 3 financial summary for their parent corporation as well.
The stated purpose of this additional information is to enable the AER to:
- "assess licensee eligibility;
- assess the capabilities of licensees and approval holders to meet their regulatory and liability obligations throughout the energy development life cycle;
- provide further direction on which material changes can indicate a risk of licensees or approval holders being unable to meet their regulatory and liability obligations;
- administer our liability management programs; and
- ensure the safe, orderly, and environmentally responsible development of energy resources in Alberta throughout their life cycle".
In the AER's response to stakeholder feedback, they also noted that this financial information will be integrated into the Licensee Capability Assessment program.
Finally, to maintain eligibility, the AER also requires that all licensees and approval holders submit financial statements and a Schedule 3 financial summary on an annual basis, which information is to be filed on the earlier of (i) it being finalized, and (ii) within 180 days of fiscal year end, (or as otherwise directed by the AER).
The AER also has the ability to request additional financial information in their discretion.
2. Identifying and assessing "reasonable risk"
The New Directive enumerates several new factors that the AER will now consider in its determination of whether a new licensee or transferee poses an "unreasonable risk" of orphaning assets (see Section 4.5 of the New Directive). The list is long, and little is off limits when it comes to factors that the AER can examine in its evaluations. Of note is the AER's ability to consider unpaid municipal taxes and surface lease payments, which comes as a direct result of input received from stakeholders during public consultation.
Under the New Directive, the AER may consider any of the following factors:
- "failure to maintain in Alberta persons who are authorized to make decisions and take actions on behalf of the licensee or approval holder to address any matters or issues that arise in respect of the wells, pipelines, facilities, well sites, and facility sites of the licensee or approval holder;
- the compliance history of the applicant, licensee, or approval holder, including its directors, officers, and shareholders in Alberta and elsewhere;
- the compliance history of entities currently or previously associated or affiliated with the applicant, licensee, or approval holder or its directors, officers, and shareholders;
- outstanding non-compliances of current or former AER licensees or approval holders that are directly or indirectly associated or affiliated with the applicant, licensee, or approval holder or its directors, officers, or shareholders;
- the experience of the applicant, licensee, or approval holder and its directors, officers, and shareholders;
- corporate and ownership structure;
- working interest participant arrangements, including participant information and proportionate shares;
- the financial health of the applicant, licensee, or approval holder and entities currently associated or affiliated with the applicant, licensee, or approval holder or its directors, officers, and shareholders;
- the assessed capability of the applicant, licensee, or approval holder to meet its regulatory and liability obligations throughout the energy development life cycle;
- the assessed ability of the applicant, licensee, or approval holder to provide reasonable care and measures to prevent impairment or damage in respect of a pipeline, well, facility, well site, or facility site;
- outstanding debts owed to AER or the Orphan Fund by the applicant, licensee, or approval holder, or by current or former AER licensees or approval holders that are directly or indirectly associated or affiliated with the applicant, licensee, or approval holder, or its directors, officers, or shareholders;
- outstanding debts owed for municipal taxes, surface lease payments, or public land disposition fees or rental payments by the applicant, licensee, or approval holder, or by current or former Alberta Energy Regulator Directive 067: Eligibility Requirements for Acquiring and Holding Energy Licences and Approvals (April 2021) 7 AER licensees or approval holders that are directly or indirectly associated or affiliated with the applicant, licensee, or approval holder, or its directors, officers, or shareholders;
- being or having been subject to or initiating insolvency proceedings (which includes bankruptcy proceedings, receivership, notice of intention to make a proposal under the Bankruptcy and Insolvency Act, proceedings under Companies Creditors Arrangement Act);
- involvement of the applicant, licensee, or approval holder's directors, officers, or shareholders in entities that have initiated or are or have been subject to insolvency proceedings;
- cancellation of or significant reduction to insurance coverage;
- naming of directors, officers, or shareholders of the applicant, licensee, or approval holder in a declaration made under section 106 of the Oil and Gas Conservation Act and section 51 of the Pipeline Act; and
- any other factor the AER considers appropriate in the circumstances."
3. Maintaining eligibility
Under Section 5, the New Directive maintains the previous Directive 067's requirement to advise the AER of material corporate changes, and adds to the list of changes that require AER notification "changes to directors, officers, or shareholders directly or indirectly holding 20 per cent of the outstanding voting securities of the licensee or approval holder". A significant change to working interest participant (WIP) arrangements also triggers the 30-day notice requirement. In response to public feedback on the WIP arrangements, the AER noted that the requirement was intentionally broad "to allow the AER to interpret WIP changes on a case-by-case basis."
The New Directive introduces a requirement for licensees or approval holders to register an official "frequently monitored" regulatory email address for AER correspondence. There is a new mandate for licensees or approval holders to notify the AER immediately if:
- their general or emergency contact information changes (must submit an updated Schedule 1, sections A and B);
- they initiate or are subject to insolvency proceedings; and/or
- their insurance coverage is cancelled or significantly reduced.
A deadline for the "immediate" notification to the AER above was explained as "without any delay" in the AER's responses to stakeholder feedback. Licensees who are "considering initiating insolvency proceedings" are also encouraged to contact the AER and work with their WIPs in the process. There is also a new 30-day notification requirement for licensees and approval holders who default on or violate debt covenants.
The AER may request additional information to assess whether a material change would result in an unreasonable risk. As was the case under the previous Directive 67, licensees can request a determination on whether a proposed material change would result in an unreasonable risk in advance of such change being effected.
Grace period for current licensees and approval holders
As mentioned above, a new fillable form, Schedule 3, has been added to the New Directive for use in submitting the required financial information. Licensees and approval holders are required to submit a Schedule 3 and financial statements to the AER annually. The first annual submissions (based on 2020 data) must be submitted within 180 days of a company's fiscal year end. Note that this timeline increased from the initially proposed 120 days in the Draft Directive to align with tax filing deadlines.
The AER has encouraged all licensees and approval holders to also provide financial statements and Schedule 3 forms based on the fiscal years 2018 and 2019, if not already provided. The AER also has the power to require this additional information through the New Directive to assess ongoing licensee eligibility.
Expect additional changes to Alberta's regulatory regime to implement the LMF
The introduction of the New Directive 067 is the first in the series of forthcoming changes to Alberta's liability management regime. The rollout of all of the changes announced in July 2020 may require further legislative amendments, and will require additional changes to the AER's Directives. The AER has stated that the LCA requirements are still under development and will be open for public consultation later this year.
We continue to monitor the following elements of the LMF program announced in July 2020, which have not yet been implemented:
- "Licensee Special Action", described as additional support from the AER for licensees assessed to be nearing distress;
- the payment structure for licensees' mandatory reclamation spending, which the government has indicated to be approximately 4% of a licensee's AROs, assessed and payable over five-year spending targets;
- the details of a "forum" for eligible requesters to nominate sites on their land to be prioritized for closure; and
- the details of a panel tasked with managing legacy and post-closure sites.
BD&P is monitoring announcements from the Government of Alberta and the AER related to the new framework. We will provide further commentary when additional details are available. For further guidance and advice, please reach out to our Energy Group. Citations can be found in the PDF linked at the top of this article.
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