Oil and gas producers and lenders face challenges as Alberta Energy Regulator toughens rules for license transfers

Energy Alert


Last month, the Alberta Court of Queen's Bench issued its decision in Re Redwater Energy Corporation (2016) ABQB 278. This decision affirmed that the priority rules in federal insolvency legislation are paramount to provincial environmental obligations imposed on licensees of oil and gas assets.  The result is that receivers and trustees may, in certain circumstances, disclaim undesirable assets and sell other assets over Alberta Energy Regulator ("AER") objections.

The AER has appealed the Redwater decision and has warned operators about the possibility of pursuing officers and directors for unfunded liabilities.  In addition, the AER has now implemented changes to its liability management regime. Bulletin 2016-16, effective June 20, 2016, addresses the Redwater decision on an interim basis in anticipation of pending regulatory changes.  It is important to note that while the Redwater decision took place in an insolvency context, the changes set out in Bulletin 2016-16 apply to all transactions under the authority of the AER and not only to transactions arising out of insolvency.

Bulletin 2016-16 contains three significant measures:

Firstly, and most significantly, all purchasers of AER-regulated assets must demonstrate that they will have a liability management ratio (LMR) of 2.0 or higher immediately following the transfer of the assets.

The previous threshold for the purchase of AER-licensed assets was, for both the vendor and purchaser of assets, 1.0.

The AER states in the bulletin that requiring purchasers to have an LMR of 2.0 or higher is a significant change, but also notes that there will be no requirement for existing licensees to improve their LMR (such as by posting additional security) unless they intend to undertake an acquisition of licensed assets.

The number of licensees impacted by this change is significant. According to the AER, as of June 4, 2016, there were 426 licensees with a LMR rating of over 1.0 (who would have been entitled under the old rules to acquire licensed assets). 207 of those licensees, however, have a LMR of between 1.0 and 2.0 and will now not be entitled to purchase assets without posting additional security or otherwise improving their LMR.  219 licensees remain with an LMR of 2.0 or greater.

Secondly, the AER has stated that it will now apply a greater level of scrutiny by treating all applications for license eligibility as non-routine, and also exercise its discretion to refuse applicants or to impose additional conditions on applicants. Previously, most new entrants to the industry were treated as routine. The scope of the proposed additional conditions is unknown at this time.  This may also result in delays for license approvals.

Thirdly, where there is a gap between the approval of an application and the completion of a transfer, the AER may require that the licensee provide proof that there have been no material changes since the application was approved.

Effects of changes on energy sector

The effect of the changes outlined in Bulletin 2016-16 will likely be significant as it regards the purchase and sale of assets.  The changes will significantly reduce the number of energy industry participants who are eligible to purchase assets, and it will increase the requirements on remaining participants to satisfy license eligibility (such as the posting of security). Financings in the energy sector will also be affected as sale of distressed assets will become much more difficult and the ability to structure transactions to avoid insolvency will be severely constrained.

For companies that are in financial distress, there may now be less incentive to try to maintain the business as a going concern and avoid insolvency as the number of potential purchasers has been greatly reduced and the difficulty of closing a transaction has been increased.  As well, once insolvency proceedings have been started, there will be an even greater incentive on the part of receivers or trustees to disclaim uneconomic assets, or for those trustees or receivers to decline to act or to seek discharge if they are of the view that the latest changes have made it impossible to successfully transfer the assets into the hands of a qualified purchaser.

The Alberta Energy Regulator states that it will enter into consultation with industry groups and other stakeholders with respect to the development of new, permanent rules.