Publication
Published April 9, 2021
Just over eight months after the Government of Alberta proposed several overhauls of the regulatory framework surrounding abandonment and reclamation obligations (AROs) for Alberta's oil and natural gas industry, and after soliciting feedback from the public, the Alberta Energy Regulator (AER) has implemented a new edition of Directive 067 as part of its new Liability Management Framework (LMF). Changes include additional requirements to provide updated financial information at the time of application and throughout the energy development life cycle. These changes are in response to the efforts of various industry stakeholders to replace the former Licensee Liability Rating (LLR) program with a more holistic Licensee Capability Assessment (LCA) system.
Empowered by amendments to the Oil and Gas Conservation Rules, the AER has begun to amend its Directives to initiate the overhaul of the province's liability management regime. For a closer look at legislative changes that the Government of Alberta announced last year, see our article here. For a deeper dive into the Government of Alberta's introduction of the new LMF, including the Licensee Capability Assessment, see our article here.
Directive 067 is the Directive that sets the rules around applying for, maintaining, and amending licence eligibility. In mid January 2021, the AER published and sought feedback from the public on a draft of an amended Directive 067 (the Draft Directive).
The changes introduced by the Draft Directive included building on the existing corporate and financial disclosure requirements for parties who wish to acquire, hold, maintain or transfer licences in Alberta, and broadening the AER's discretion to withhold or revoke licensees' privileges if they are assessed as posing an "unreasonable risk" of leaving assets to be assumed by the Orphan Well Association (OWA).
Notable changes introduced in the Draft Directive included:
Overall, the Draft Directive increased the AER's ability to scrutinize licensees by creating disclosure requirements for participants and prospective participants in Alberta's oil and natural gas industry that go far beyond a company's ability to conduct oil and natural gas operations. The AER's call for feedback on the Draft Directive was open from its introduction until February 14, 2021. For a closer look at public feedback that the AER received, and responded to, see here.
On April 7, 2021, the AER announced its implementation of the New Directive 067 (the New Directive). The three primary changes implemented in the New Directive are aligned with what was originally proposed in the Draft Directive with some revisions arising from the public consultation process.
1. Increased financial disclosure
Among several changes with respect to financial disclosure obligations in Section 4.4, licensees and approval holders will now be required to submit financial statements and financial summaries in a new Schedule 3 on an ongoing basis. Financial information provided to the AER under this requirement will remain confidential for the period outlined in section 12.152(2) of the OGC Rules.
A licence applicant must submit a complete Schedule 3, which requires full audited financial statements to be submitted to the extent available (management prepared financials may be acceptable to the extent audited financials are not available). Newly formed companies that do not have a financial history are required to provide details of financing; and companies with consolidated financial statements are required to provide a Schedule 3 financial summary for their parent corporation as well.
See here for a template of the new Schedule 3: Financial Summary Form and here for instructions to fill out a Schedule 3: Financial Summary Form.
The stated purpose of this additional information is to enable the AER to:
In the AER's response to stakeholder feedback, they also noted that this financial information will be integrated into the Licensee Capability Assessment program.
Finally, to maintain eligibility, the AER also requires that all licensees and approval holders submit financial statements and a Schedule 3 financial summary on an annual basis, which information is to be filed on the earlier of (i) it being finalized, and (ii) within 180 days of fiscal year end, (or as otherwise directed by the AER).
The AER also has the ability to request additional financial information in their discretion.
2. Identifying and assessing "reasonable risk"
The New Directive enumerates several new factors that the AER will now consider in its determination of whether a new licensee or transferee poses an "unreasonable risk" of orphaning assets (see Section 4.5 of the New Directive). The list is long, and little is off limits when it comes to factors that the AER can examine in its evaluations. Of note is the AER's ability to consider unpaid municipal taxes and surface lease payments, which comes as a direct result of input received from stakeholders during public consultation.
Under the New Directive, the AER may consider any of the following factors:
3. Maintaining eligibility
Under Section 5, the New Directive maintains the previous Directive 067's requirement to advise the AER of material corporate changes, and adds to the list of changes that require AER notification "changes to directors, officers, or shareholders directly or indirectly holding 20 per cent of the outstanding voting securities of the licensee or approval holder". A significant change to working interest participant (WIP) arrangements also triggers the 30-day notice requirement. In response to public feedback on the WIP arrangements, the AER noted that the requirement was intentionally broad "to allow the AER to interpret WIP changes on a case-by-case basis."
The New Directive introduces a requirement for licensees or approval holders to register an official "frequently monitored" regulatory email address for AER correspondence. There is a new mandate for licensees or approval holders to notify the AER immediately if:
A deadline for the "immediate" notification to the AER above was explained as "without any delay" in the AER's responses to stakeholder feedback. Licensees who are "considering initiating insolvency proceedings" are also encouraged to contact the AER and work with their WIPs in the process. There is also a new 30-day notification requirement for licensees and approval holders who default on or violate debt covenants.
The AER may request additional information to assess whether a material change would result in an unreasonable risk. As was the case under the previous Directive 67, licensees can request a determination on whether a proposed material change would result in an unreasonable risk in advance of such change being effected.
As mentioned above, a new fillable form, Schedule 3, has been added to the New Directive for use in submitting the required financial information. Licensees and approval holders are required to submit a Schedule 3 and financial statements to the AER annually. The first annual submissions (based on 2020 data) must be submitted within 180 days of a company's fiscal year end. Note that this timeline increased from the initially proposed 120 days in the Draft Directive to align with tax filing deadlines.
The AER has encouraged all licensees and approval holders to also provide financial statements and Schedule 3 forms based on the fiscal years 2018 and 2019, if not already provided. The AER also has the power to require this additional information through the New Directive to assess ongoing licensee eligibility.
The introduction of the New Directive 067 is the first in the series of forthcoming changes to Alberta's liability management regime. The rollout of all of the changes announced in July 2020 may require further legislative amendments, and will require additional changes to the AER's Directives. The AER has stated that the LCA requirements are still under development and will be open for public consultation later this year.
We continue to monitor the following elements of the LMF program announced in July 2020, which have not yet been implemented:
BD&P is monitoring announcements from the Government of Alberta and the AER related to the new framework. We will provide further commentary when additional details are available. For further guidance and advice, please reach out to our Energy Group.