[co-author: Chyna Brown - Summer Student]
The Alberta Energy Regulator (AER) is continuing to revise and supplement its holistic approach to regulating. The AER released revisions to Manual 023 effective May 3, 2022, which supplements Directive 088: Licensee Life-Cycle Management, expanding on the directive's requirements and new programs.
As noted in our previous insight, AER Implements Life Cycle Management Directive Effective December 1, 2021, the AER issued Manual 023 to provide further information on the criteria used to evaluate and group licensees on the basis of risk, mandatory and voluntary spend requirements and the AER's approach on transfer applications. The changes to the manual follow industry feedback after the initial release of the manual in December 2021.
While most of the amendments are intended to create clarity and address errors, there are also substantive changes related to the AER's guidance on when it may require security to be posted as part of a transfer application.
The AER has advised that it will be conducting an assessment of both parties to a transfer and may require either or both to post security as part of a transfer application. As part of the revisions to Manual 023, the AER added Table 9, which provides insight into the amount of security that transferors and transferees may be required to post; however, the AER retains its discretion to determine the appropriate amount taking into account the specific risks and circumstances of the transfer application.
The amount of security required will vary, with no security being required where a party's level of financial distress is viewed as low and its crossover timeline is medium or far (three years or more). The crossover timeline is defined in section 220.127.116.11 as the estimated timeframe when the magnitude of liability will exceed future income potential from remaining production. The crossover timeline is broken down into far (more than seven years), medium (three to six years) and near (less than one year, or one to two years).
The level of financial distress, ranging from low to high, is determined by analyzing the financial information required annually or as directed by the AER through Directive 067. These factors result in a range of security, determined as a percentage of the licensee's total estimated liability from licenses within the transfer application.
Given the discretion reserved by the AER, it is unclear how closely the AER will follow these guidelines and require security to be provided. However, it is recommended that when structuring a transaction the parties ensure that the AER has updated financial information and regard is had for the crossover timeline, which is a factor not previously considered by the AER. On the buy-side of a transaction, this review should be contemplated as part of your due diligence plan to gauge the potential security that may be required. For both parties, this should be factored in to the definitive agreement and closing procedures, as would typically be the case for any replacement security.