Bulletin – Licensee Liability – Abandonment – Bankruptcy
The AER made this announcement in response to the Alberta Court of Queen’s Bench decision in Redwater Energy Corporation (Re), 2016 ABQB 278. That decision involved a dispute between the receiver of Redwater Energy Corporation, the Alberta Treasury Branches, the Orphan Well Association, and the AER.
The Court found in Redwater that receivers and trustees of AER licencees may selectively disclaim unprofitable assets (and their associated abandonment and reclamation obligations) under section 14.06 of the federal Bankruptcy and Insolvency Act (BIA). The Court found that the provincially mandated AER requirements were inoperative to the extent that they conflicted with the BIA under the doctrine known as paramountcy, which gives effect to federal law where provincial and federal laws conflict.
The AER noted that it, along with the Orphan Well Association, are appealing the Court’s decision in Redwater.
Effective immediately however, the AER announced the following changes to minimize risk to Albertans:
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The AER will consider and process all applications for licence eligibility under Directive 067: Applying for Approval to Hold EUB Licences as nonroutine and may exercise its discretion to refuse and application or impose terms and conditions on an licence eligibility approval if appropriate in the circumstances.
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For holders of existing but previously unused licence eligibility approvals, prior to approval of any application, the AER may require evidence that the holder continues to maintain adequate insurance and that the directors, officers, and/or shareholders are substantially the same as when the licence eligibility was first granted.
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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 AER recognized that requiring an LMR of 2.0 or higher was a significant change. However, the AER noted that this change applies only to licensees that wish to acquire AER-licensed assets.
The AER noted that the reasoning behind the change was that some licensees that maintain the minimum LMR of 1.0 often find themselves in financial difficulty within weeks or months following an acquisition. The AER also stated that the measures were in furtherance of its mandate under section 2 of the Responsible Energy Development Act to provide for the efficient, safe, orderly and environmentally responsible development of energy resources in Alberta through the AER’s regulatory activities.
The AER noted that an LMR of 2.0 can be achieved either through posting additional security with the AER, addressing existing abandonment obligations, or transferring additional assets. While the AER noted that the interim measures would inconvenience a number of stakeholders, it stated that the interim measures were necessary to ensure the protection of Albertans and their confidence in the regulatory system and AER licensees.
