Industry and the public may face significantly higher costs as a result of the much anticipated decision of the Alberta Court of Queen's Bench in Redwater Energy Corporation (Re), 2016 ABQB 278, issued on May 19, 2016. The Court held that trustees and receivers of insolvent companies can disclaim uneconomic oil and gas assets under the federal Bankruptcy and Insolvency Act, then sell the valuable oil and gas assets for the benefit of secured creditors.

Currently under appeal by the Alberta Energy Regulator (AER) and Orphan Well Association (OWA), the Redwater Decision leaves in its wake serious questions regarding responsibility and liability for the immediate care and custody, and the ultimate abandonment, reclamation and remediation of such disclaimed assets.

AER Bulletin 2016-16

On June 20, 2016, as part of its response to the Redwater Decision the AER has released a bulletin, Bulletin 2016-16: Licensee Eligibility “ Alberta Energy Regulator Measures to Limit Environmental Impacts Pending Regulatory Changes to Address the Redwater Decision that implements three important changes to the Licensee Liability Rating (LLR) program and the related regulatory regime, which are effective immediately and are likely to stay in effect until resolution of the Redwater litigation or implementation of further regulatory measures.

Bulletin 2016-16 follows on the AER's previously released Bulletin 2016-10 Obligations of Licensees When in Insolvency or When Otherwise Ceasing Operations which did not introduce new regulatory requirements, but served nonetheless to remind licensees and their directors and officers of their statutory responsibilities (as well as the expansive rights and powers of the AER) in cases where a company ceases operations because of insolvency or for any other reason.

The changes implemented by Bulletin 2016-16 are as follows:

1. The AER will consider and process all applications for licence eligibility under Directive 067: Applying for Approval to Hold EUB Licences as non-routine and may exercise its discretion to refuse an application or impose terms and conditions on a licence eligibility approval if appropriate in the circumstances.
2. For holders of existing but previously unused licence eligibility approvals, prior to approval of any application (including licence transfer applications), the AER may require evidence that there have been no material changes since approving the licence eligibility. This may include evidence that the holder continues to maintain adequate insurance and that the directors, officers, and/or shareholders are substantially the same as when licence eligibility was originally granted.
3. As a condition of transferring existing AER licences, approvals, and permits, the AER will require all transferees to demonstrate that they have a liability management ratio (LMR) of 2.0 or higher immediately following the transfer.

The first and second changes relate to the potential for increased scrutiny on initial and "gone stale" eligibility, respectively, to hold AER well, pipeline and facility licences.

The third change relates to an increase in LMR requirements at time of licence transfer. This change in particular is anticipated to have an immediate impact on the timing, structure and fiscal metrics of all transactions involving the transfer of oil and gas assets in Alberta. According to this month's liability records released from the AER, there are over 200 licensees with a non-security adjusted LMR between 1.0 and 1.99, and total deemed liabilities of $10 billion. If any such licensee has contracted to or is planning to acquire AER licensed assets, it will be required to increase its LMR to at least 2.0 pro forma closing the acquisition, either by posting additional security, discharging existing abandonment obligations or disposing of other assets.

Next Steps

Bennett Jones invites clients to contact the firm with any questions and is available to assist clients who wish to understand what impacts Bulletin 2016-16 and the Redwater Decision may have on their business. We will continue to monitor these regulatory changes and provide updates on any further developments.

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