Update to AER Directive 067
Further Regulatory Hurdles in Response to Redwater
CAIREEN E. HANERT
MCMILLAN AND ASSOCIATES
AS READERS WILL BE AWARE, THE COURT OF QUEEN’S BENCH OF ALBERTA IN RE REDWATER ENERGY CORPORATION (i) IN MAY 2016determined that trustees in bankruptcy and receivers are permitted to disclaim non-producing assets, are not required to carry out abandonment, reclamation and remediation obligations that would have been required of the insolvent licensee, and are not required to perform abandonment orders issued by the Alberta Energy Regulator (AER). The Court of Appeal upheld the decision. (ii) The AER and Orphan Well Association have further appealed the decision to the Supreme Court of Canada, which appeal is scheduled to be heard in February 2018.The AER’s initial response to the Redwater decision was Bulletin 2016-16, which set out interim measures in relation to licensee eligibility (both on initial application and prior to approval of licence transfers) and required an increased Liability Management Ratio of 2.0 for licence transferees as a condition of transferring existing licences, approvals and permits.
As of December 6, 2017, the AER issued Bulletin 2017-21, which announced the release of a new edition of Directive 067: Eligibility Requirements for Acquiring and Holding Energy Licences and Approvals. In setting out the revisions, the AER has emphasized that acquiring and holding a licence or approval in Alberta is a privilege, and that increased scrutiny will be applied to applicants and licensees to ensure that only responsible parties are granted and permitted to maintain licences. The significant changes include:
- a more comprehensive licence application process, which permits the AER increased discretion to reject applicants where the AER deems that the applicant poses a risk; and
- a requirement that applicants and licensees provide additional information to the AER upon undergoing a “material change” or upon request by the AER.
Changes to Licence Application Process Additional Information
Applicants are now required to provide the following information:
- details regarding corporate structure;
- names of related entities (including parent and subsidiary corporations) and any entity with common directors, officers, partners, or control persons of the applicant;
- the existence of and details regarding current regulatory proceedings or outstanding noncompliances (including financial) associated with the applicant or related entities, whether in Alberta or another jurisdiction;
- a copy of the most recent audited financial statements for the applicant;
- names of all shareholders (including corporate shareholders) who directly or indirectly own more than 20% of the outstanding voting securities of the applicant, all directors and officers of the applicant;
- list of all energy companies for whom the applicant’s directors and officers have been in an officer or director capacity within the previous five years;
- list of the applicant’s directors and officers who have been a director or officer of an energy company which has been subject to insolvency proceedings either while they were a director or officer or during the 12-month period preceding the insolvency proceedings; and
- copies of government-issued photographic identification for the applicant’s directors and officers with accompanying affidavit or attestation of instrument and declaration (as provided on the application form).
The AER has implemented a new risk assessment process to ensure that it is granting licences only to those parties it deems do not pose an unreasonable risk. The factors which the AER may consider in making this determination include:
- Compliance history of:
- the applicant, its directors, officers and shareholders;
- current or former AER licensees that are directly or indirectly associated or affiliated with the applicant or its principals;
- entities currently or previously associated with the applicant or its directors, officers or shareholders;
- experience of the applicant, its directors, officers and shareholders;
- corporate structure of the applicant;
- financial health of the applicant;
- outstanding debts owed by:
- the applicant;
- current or former AER licensees that are directly or indirectly associated or affiliated with the applicant or its directors, officers or shareholders;
- outstanding noncompliances of current or former AER licensees that are directly or indirectly associated or affiliated with the applicant or its directors, officers or shareholders;
- involvement of the applicant’s directors, officers and shareholders in:
- entities that have initiated or are subject to bankruptcy or receivership proceedings;
- current or former AER licensees that have outstanding noncompliances;
- naming of directors, officers or shareholders of current or former AER licensees under section 106 of the Oil and Gas Conservation Act.
The AER has expressly reserved the right to consider “other relevant information” as part of its risk assessment process. How this will be implemented in practice remains to be seen. Further, the compliance history of licensees and approval holders is not limited to Alberta but may extend to other jurisdictions in which they currently or have formerly operated.It should also be noted that information provided as part of the application process may be audited by the AER for accuracy and completeness at any time before or after a licence has been granted.
The AER has stated that it may refuse to grant licence eligibility, or may grant eligibility with or without restrictions, terms or conditions, which may include:
- the types or numbers of licences or approvals which may be held;
- a requirement that security be provided at the time of application for a licence or approval;
- requirements regarding the minimum or maximum working interest percentage an applicant must hold; or
- a requirement to address outstanding noncompliances of current or former AER licensees that are directly or indirectly associated with the applicant, its directors, officers or shareholders.
Additional scrutiny may also be undertaken when application is made for transfer of a licence or approval.
“Material Changes” and Their Effect
The AER is also implementing a requirement that licensees ensure that they meet licence eligibility requirements on an ongoing basis. To ensure that this is done, the AER requires that all licensees provide an updated Schedule 1 within 30 days of any material change.
Material changes include:
- changes to a licensee’s legal status or corporate structure;
- addition or removal of a related corporate entity;
- amalgamation, merger, or acquisition;
- changes to directors, officers, or control persons;
- appointment of a monitor, receiver, or trustee over the licensee’s property;
- implementation of a plan of arrangement or other transaction which will result in a material change to the licensee’s operations;
- sale of all or substantially all of the licensee’s assets; or
- cancellation of the licensee’s insurance coverage.
Reporting material changes is an additional regulatory hurdle for licensees. The above list should not be viewed as an exhaustive list of what the AER may consider to be a material change. What would otherwise be considered normal course corporate activities, such as taking steps to effect tax savings, may be captured by these new reporting requirements and may have an impact on the AER’s risk assessment of a licensee’s eligibility.
Before effecting a material change, a licensee may request an advance ruling on whether the AER would consider the change to result in an unreasonable risk that may impact licence eligibility. Until such time as there is more guidance from the AER as to when a material change does or does not result in what it deems to be an unreasonable risk, we encourage licensees to contact legal counsel before disclosing any confidential, competitive or material non-public information within the context of Directive 067.
The AER may revoke a licensee’s eligibility or impose terms and conditions on the licence where it believes the material change has resulted in an unreasonable risk. Also, if a licensee fails to disclose a material change within 30 days, the AER may revoke or restrict licence eligibility.
All licensees with current licence eligibility are required to provide the same information that is required of new applicants by January 31, 2018. Failure to meet this deadline may result in the AER revoking or placing restrictions on a licensee’s eligibility. If there are concerns as to how this information may be processed and the impact it may have on a licensee’s eligibility, we recommend discussing same with legal counsel.
In addition, all licensees should implement a material change compliance program to ensure that the new disclosure requirements are met. It will be instructive to discuss with legal counsel during the development of such a program to ensure that all potential material changes are identified in advance of their implementation and are reported in compliance with Directive 067.
My colleagues and I at McMillan LLP would be pleased to provide further guidance with respect to Directive 067 and its impact in your particular circumstances. Please contact us if we may be of assistance.
i 2016 ABQB 278 (Redwater).
ii 2017 ABCA 124.
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Published in The Negotiator February 2018