The AER's Holistic Approach to Liability Management

Bennett Jones LLPRecent information provided by the Alberta Energy Regulator (AER) in its Licensee Capability Assessment: What We Heard document and draft Licensee Life-Cycle Management Directive (Draft LLCM Directive) provides guidance for licensees regarding the AER's proposed changes to its liability management program, including further details regarding the AER's replacement of its licensee liability rating program with a holistic approach that will be used to assess a company's ability to meet its regulatory requirements and liability obligations.

What We Heard

Released on May 31, 2021, What We Heard, follows the April 7 release of the AER's revised Directive 067: Eligibility Requirements for Acquiring and Holding Energy Licences and Approvals. What We Heard provides insight into the AER's Licensee Capability Assessment, which will consider more than 30 parameters to comprehensively assess companies and their ability to meet their regulatory requirements and liability obligations throughout the full spectrum lifecycle of a development, including a company's liability management rating (which considers a company's deemed assets and liabilities) and its financial and liability risk.

As part of the licensee capability assessment, the AER is also proposing to group similar companies into peer groups to facilitate the AER's ability to compare companies and assess a company's sustainability, quality of assets or performance to determine if regulatory action is required to mitigate the risk associated with the company. Although the assessments are not intended to be publicly available, it is anticipated that some industry wide level information will be made public.

Draft LLCM Directive

Further details regarding the AER's proposed liability management programs, including its holistic approach to assessing a licensee's capabilities and performance, was provided in the AER's June 8, 2021 Draft LLCM Directive. This Directive only applies to companies that have licences or approvals under the Oil and Gas Conservation Act and Pipeline Act. The deadline to provide comments on the Draft LLCM Directive to the AER is July 25, 2021.

The AER advises in the Draft LLCM Directive that in assessing the capabilities of licensees to meet their regulatory and liability obligations, the AER will use a multifactor approach that includes the licensee capability assessment, the unreasonable risks identified in section 4.5 of Directive 067 and additional information provided by licensees.

The Draft LLCM Directive identifies the factors and parameters that the AER will use to identify risks posed by a licensee pursuant to the licensee capability assessment. The results of the AER's licensee capability assessment will be used by the AER's liability management program to identify licensees that have a higher risk of not meeting their regulatory and liability obligations. If it is determined that AER action is warranted, the AER may change the licensee's eligibility, place restrictions on new applications, require security deposits or issue orders.

Spend Targets and Changes to Transfer Requirements

The Draft LLCM Directive also details the industry wide mandatory closure spend targets for 2022 and proposed amendments to licence transfer application requirements and timing for decisions regarding the posting of security.

  What Is New? Implications for Industry

Annual Spend Targets/Inventory Reduction Program

As of July 2020, the AER has the authority to set closure spend targets under the Oil and Gas Conservation Rules and Pipeline Rules.

Commencing January 1, 2022, the AER intends to bring into effect its mandatory closure spend targets for industry. The AER has set mandatory industry wide targets for 2022 (Bulletin 2021-23) and will set 2022 targets for each licensee in July 2021.

Spend targets are not new to those voluntarily participating in the AER's area based closure program, which requires that participants agree to closure spend targets.

The spend target under the area-based closure program for 2021 is 4.33 percent of a licensee's deemed inactive liabilities as outlined in Directive 011: Licensee Liability Rating (LLR) Program: Updated Industry Parameters and Liability Costs. The spend targets set out in Directive 011 are under review and will be updated in preparation for the introduction of the mandatory spend requirements.

Each licensee will have an annual spend target to meet, which can be addressed by carrying out closure work or posting a security deposit with the AER. Each licensee must report their closure activities and spends by March 31 of each year unless otherwise authorized. If a licensee elects to post security, the funds must be posted by January 30 of that year. The AER has broad authority regarding the return of any security posted and refunds will require a holistic assessment of the licensee.

The introduction of mandatory spend requirements is a large shift from existing AER policies, which for the most part do not set any timelines or firm requirements for when abandonment activities must occur in the absence of certain triggers set out in the Oil and Gas Conservation Rules, such as where a mineral lease, surface lease or right of entry is terminated; the licensee does not have the necessary approvals; the Regulator has suspended or cancelled the licence; the licensee is not or ceases to be a working interest participant in the well or facility; or where the AER is of the opinion that a well or facility may constitute an environmental or safety hazard.

Licence Transfers

Under the Draft LLCM Directive, all licence transfers will trigger a holistic assessment of both the transferor and transferee. The AER has broad discretion to consider any factors it determines appropriate in connection with that assessment, including statements of concerns from stakeholders. For transfers involving public lands dispositions, the Draft LLCM Directive states that the AER will reject the transfer application if the transferor or transferee is in arrears in respect of any debt to the Crown or any taxes to a municipality.

Where an application covers a geographic area, the AER may reject an application that excludes licences that have received reclamation certification or that are abandoned and classified as reclamation exempt.

Under the new approach to transfers, the following additional information will be required:

  • Declarations from both the transferor and transferee related to, among other things, the authority to bind the company, the validity of the interests held and rights to produce, inject or dispose, satisfaction of signage and other responsibilities and obligations.
  • In addition to the full legal name and percentages of working interests, contact information including email addresses for each working interest participant.
  • A site-specific liability assessment completed in the last three years for any problem sites as defined in Directive 006 and an evaluation of cost changes since the completion date of the last assessment.
  • Where an application is made to transfer inactive licences, the transferor must first update its reported closure activities and spending before submitting the application. This reporting cannot be updated after submission of the transfer application.

Security Deposits

The AER may require the posting of security as part of its review of a transfer application.

The maximum amount of security that the AER may require is equal to the licensee’s total liabilities, including the cost of providing care and custody.

Requests for refunds of security will trigger the holistic licensee capability assessment.

The AER will only determine security requirements after it has reviewed a transfer application.

This suggests that the AER may be moving away from identifying security requirements as part of its discretionary waiver under Bulletin 2016-21 where the AER has traditionally set out the conditions upon which a transfer would be permitted where the transferee has a liability management ratio below 2.0. The discretionary waiver process has for many years been a critical upfront due diligence consideration for prospective buyers in determining whether to proceed with a transaction (particularly in distressed asset or insolvency sale processes where the buyer is a new entrant with limited or no existing assets).

While the details of the AER's proposed liability management programs remain subject to change, and the AER explicitly notes that the licensee capability assessment program will evolve over time, it is clear that there will be increased reporting requirements and additional scrutiny associated with the AER's assessment of a licensee's ability to meet its obligations.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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