Alberta Energy Regulator Introduces New Requirements for Acquiring and Holding Energy Licences and Approvals

In July 2020, the Alberta government introduced a new Liability Management Framework (the Framework) to address the growing inventory of inactive and orphaned well sites in the province.
 
As part of its implementation of the Framework, the Alberta Energy Regulator (AER) updated Directive 067 (the New Directive) on April 7, 2021, amending previous rules and requirements on energy licence and approval eligibility. For an overview of previous changes made to Directive 067, please see our December 2017 bulletin.
 
Similar to the last set of amendments, the New Directive increases the scrutiny the AER will apply to ensure that licences and approvals are only granted to, and retained by, “responsible parties throughout the energy development life cycle.” Noteworthy changes to the New Directive that impact the eligibility of potential and existing licensees and approval holders include:

1. New requirements to disclose financial information.

2. Additional requirements to maintain eligibility.

3. Expansion of “unreasonable risk” factors.

INCREASED FINANCIAL DISCLOSURE

As part of the AER’s licensee eligibility assessment to determine whether applicants will meet their regulatory and liability obligations, new applicants for a licence or approval must now submit a complete financial summary to the AER in the form of Schedule 3.
 
This includes providing annual financial statements (audited or management-prepared) and the financial summary of the company. If the details are consolidated into a parent company’s records, a Schedule 3 must also be submitted for the parent providing this information. New companies with no financial history must provide financing details.
 
To maintain eligibility, current licensees and approval holders are also now required to provide an updated Schedule 3 annually. This is due once finalized, or within 180 days of fiscal year end, whichever comes first.
 
The financial information disclosed to the AER will be kept confidential for a period of five years per Section 12.152(2) of the Oil and Gas Conservation Rules.

ADDITIONAL AER REPORTING REQUIREMENTS

In addition to the increased financial disclosure, the New Directive specifies that existing licence or approval holders must now do the following to maintain eligibility:

• Maintain an official regulatory email address to monitor communications with the AER.

• Notify the AER within 30 days of defaulting on debt or violating any debt covenants.

• Immediately notify the AER if (a) general or emergency contact information changes, (b) insurance coverage is cancelled or “significantly reduced,” and (c) if insolvency proceedings are initiated.

The New Directive also states that licensees contemplating initiating insolvency proceedings are encouraged to contact the AER and engage their working interest participants in any such plans.
 
If a licensee fails to provide complete, accurate and up-to-date information as required by the New Directive, the AER may revoke or restrict licensee eligibility, or impose additional terms or conditions.

NEW “UNREASONABLE RISK” FACTORS

The New Directive significantly broadens the factors that the AER will consider when assessing whether an applicant, licensee or approval holder poses an “unreasonable risk.” In addition to the factors already enumerated in Directive 067, the New Directive now empowers the AER to consider (among other things):

• 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;

• corporate and ownership structure;

• 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 other measures to prevent impairment or damage in respect of a pipeline, well, facility, well site or facility site;

• 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 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, as well as involvement in entities that have initiated or are subject to insolvency proceedings; and

• any other factor the AER considers appropriate in the circumstances.

POTENTIAL IMPLICATIONS

The New Directive builds on the increased AER oversight introduced in the 2017 changes to Directive 067. In particular, the New Directive:

• signals the AER’s intention to increase scrutiny and apply a holistic assessment of prospective and existing licensees and approval holders;

• further raises an already high standard for directors and officers in terms of disclosure obligations as compared to other jurisdictions by requiring the disclosure of financial information, which increases the AER’s ability to take proactive measures against those operators it views as a risk of orphaning oil and gas assets; and

• creates a level of uncertainty for current and prospective operators, as the addition of “unreasonable risk” factors increases the AER’s discretion to refuse a licence or approval application or change the eligibility of current licensees and approval holders. In this regard, the New Directive provides little guidance on how the AER will apply the newly enumerated factors when assessing whether an oil and gas operator poses an “unreasonable risk” in any given case.

For further information, please contact any member of our Restructuring & Insolvency, Energy Regulatory, Environmental Law or Financial Services groups.