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Alberta's New Liability Management Framework

On December 1, 2021, the Government of Alberta ("Alberta" or the "Province") introduced its latest set of amendments to existing directives and new directives to implement the new liability management framework ("LMF") which was initially announced on June 30, 2020. Following the end of a public comment period, the Province introduced amendments to Directive 006: Licensee Liability Rating (LLR) Program ("Directive 006") and a new Directive 088: Licensee Life-Cycle Management ("Directive 088"). Our earlier blog summarizing the announcement of the LMF and the proposed changes can be found here.

The LMF is set to replace the liability licensee rating ("LLR") system which is currently in place, and is intended to improve and expedite reclamation efforts, enable industry to better manage the cleanup of oil and gas wells, pipelines and facilities at every stage of development, and provide a holistic and full lifecycle approach to reclamation and remediation obligations.

The announcement of the amendments to Directive 006 and new Directive 088 also build on the new Directive 067: Eligibility Requirements for Acquiring and Holding Energy Licences and Approvals ("Directive 067"), which was introduced on April 7, 2021 as well as the Site Rehabilitation Program announced in March of 2020 and the enactment of the Liabilities Management Statutes Amendment Act, which received Royal Assent on April 2, 2020.

The following is a summary of the key regulatory changes announced in furthering the implementation of the LMF and how such changes may implement or affect stakeholders and proponents within the industry.

What Proponents Can Expect Under the New LMF

  • Each licensee will be required to meet mandatory annual spend targets for well closures and abandonments.
  • Licensees will be required to report to the Alberta Energy Regulator ("AER") their closure activities and closure spends for the previous calendar year by March 31 of every year.
  • Any "material change" will need to be reported to the AER within 40 days of its occurrence.
  • Transferees to a transfer of licenses will be subject to an assessment of "unreasonable risk", including an assessment of various new criteria, and disclosure of certain financial information.

Changes to Directive 067

Directive 067 which was announced earlier this year, implements changes with respect to licence eligibility requirements, including:

  • financial disclosure requirements;
  • assessment criteria for determining "unreasonable risk"; and
  • implementing general requirements for maintaining licence eligibility.

Directive 067 is intended to assist the Province in furthering its efforts to create a holistic approach to assessing risk throughout the entire life cycle of development. Through the revised eligibility requirements, Directive 067 is aimed at ensuring that energy development in Alberta is only for those proponents who have been deemed to be "responsible parties" so as to avoid unreasonable risk.

Through the criteria in Directive 067, the AER will consider a list of factors when determining whether an applicant, licensee or approval holders poses an "unreasonable risk". In implementing this mandate, the AER has broad discretion to consider the list of factors contained in section 4.5 of Directive 067, which include:

  • the applicant, licensee, or approval holder’s compliance history, including the history of its directors, officers and shareholders in Alberta and other jurisdictions as well as the compliance history of any affiliates or associates of the entity;
  • the financial health of the applicant, licensee or approval holder and current associated or affiliated entities, including the directors, officers and shareholders thereof;
  • the corporate structure of the entity;
  • the experience of the applicant, licensee, or approval holder and its directors, officers, and shareholders;
  • working interest participant arrangements, including participant information and proportionate shares;
  • the assessed capability of the applicant, licensee, or approval holder to meet its regulatory and liability obligations throughout the energy development life cycle;
  • the assessed ability of the applicant, licensee, or approval holder to provide reasonable care and measures to prevent impairment or damage in respect of a pipeline, well, facility, well site, or facility site;
  • outstanding debts owed to the AER or the Orphan Well Fund by the applicant, licensee, or approval holder, or by current or former AER licensees or approval holders that are directly or indirectly  associated or affiliated with the applicant, licensee, or approval holder, or its directors, officers, or shareholders;
  • involvement of the applicant, licensee, or approval holder’s directors, officers, or shareholders in entities that have initiated or are subject to insolvency proceedings (which includes bankruptcy proceedings, receivership, notice of intention to make a proposal under the Bankruptcy and Insolvency Act, proceedings under Companies Creditors Arrangement Act);
  • cancellation of or significant reduction to insurance coverage;
  • naming of directors, officers, or shareholders of the applicant, licensee, or approval holder in a declaration made under section 106 of the Oil and Gas Conservation Act (Alberta) and section 51 of the Pipeline Act (Alberta); and
  • any other factor the AER considers appropriate.

Under Directive 067, licensees are required to maintain eligibility requirements on an ongoing basis and will be obligated to inform the AER within 40 days of any "material change". Along with other amendments, Directive 067 now includes a more expansive list of what constitutes a "material change" for the purposes of notifying the AER, including but not limited to, any changes to "control persons" and any "significant change to working interest participant arrangements, including participant information and proportionate shares."

In addition to the ability of the AER to request additional information following a material change, the licensee is also required to submit financial information on an annual basis and notify the AER within 30 days of defaulting on debt obligations or violating debt covenants.

Amendments to Directive 006

With the enactment of Directive 088, Directive 006 will be amended on a rolling basis to transition away from the LLR program and to implement those programs under Directive 088. As of December 1, 2021, requirements related to licence transfer applications were removed from Directive 006 and added to Directive 088.

Directive 088

Directive 088 introduces programs that will apply throughout a project's life cycle and was developed alongside the Manual 023: Licensee Life-Cycle Management (the "Manual"). Directive 088, together with the Manual, introduce, among other things:

  • a holistic assessment of a licensee's capabilities and performance across the energy development life cycle, which will be supported by the licensee capability assessment ("LCA");
  • introduces the Licensee Management Program ("LMP"), which will determine how licensees will be managed throughout the energy development life cycle;
  • implementing mandatory closure spend targets;
  • updates application requirements related to the licence transfer process; and
  • outlines security collecting.

Licensee Capability Assessment

Through the lens of providing a holistic approach to lifecycle management licensee reliability, the AER will undertake a multifactor approach to assess the capabilities of licensees to meet their regulatory and liability obligations throughout the entire life cycle of the development. These factors include the factors prescribed in section 4.5 of Directive 067 to assist the AER in determining whether a licensee poses an unreasonable risk, and the factors outlined in the LCA.

The AER will use the LCA as an assessment to identify risks posed by a licensee, including, but not limited to, an assessment of:

  • financial health of the licensee;
  • estimated total magnitude of liability (active & inactive), including abandonment, remediation and reclamation;
  • rate of closure activities and spending and pace of inactive liability growth; and
  • compliance with administrative regulatory requirements, including compliance with operational requirements.

Licensee Management Program

The LMP is designed to provide oversight and monitoring to support responsible management of energy development. It is anticipated the LMP will be a tool used by the AER to identify licensees that are, or are likely to be, a risk of failing to meet their regulatory and liability obligations throughout the development's life cycle.

Through the LMP, the AER will encourage licensees to use collaborative closure planning tools, such as area-based closure work more efficiently and to reduce liability on the landscape. Where deemed necessary, the AER may use regulatory tools or conduct other compliance assurance activities, such as placing restrictions on licenses/approvals, requiring deposits or issuing orders.

Mandatory Spend Targets

The AER will set mandatory closure spend targets and voluntary closure spend targets for each licensee annually which will not be adjusted during the calendar year. Industry-wide closure spending targets will be published annually and licensee-specific targets will be calculated and released in July of each year.

License Transfers

Any licence transfer application will trigger a holistic licensee assessment of both the transferor and transferee. The new transfer process replaces the LMR process and seeks to consider whether a transferee will be able to deal with the obligations associated with the transferred licence. In its review, the AER will consider the unreasonable risk factors outlined in section 4.5 of Directive 067, as outlined above and may also consider whether the licensee has any unpaid municipal taxes or surface lease payments. 

It is noted that the following factors may trigger additional scrutiny of the licensee's transfer application:

  • the "unreasonable risk" factors in section 4.5 of Directive 067;
  • key LCA factors including a determination of medium or high financial distress, or a medium or high estimated total magnitude of liability pre or post-transfer;
  • the licensee has no financial or operational history to support the holistic assessment of the licensee;
  • a licensee's compliance performance;
  • site-specific risk;
  • statements of concern submitted on a transfer application;
  • repeated transfers of licenses;
  • compliance under the Public Lands Administration Regulations;
  • transfers with the intent to repurpose wells or sites for alternative uses (i.e. helium, lithium or geothermal uses); and
  • the overall scope and scale of the transaction.

During its holistic review, the AER may request additional information to support the application, including, but not limited to:

  • corporate history information of both the transferor and transferee, including director and officer information, field and administrative compliance;
  • inventory management plans including current AER licenses and license included in the transfer transaction;
  • updated site-specific liability assessments;
  • financial statements under Directive 067; and
  • additional financing information including transaction purchase price and source of financing.

Upon reviewing an application, the AER may determine that a security deposit may be required from a transferor or transferee to offset any increase in risk that may arise from the transfer. 

 What to Expect for 2022

The following are key changes stakeholders and proponents can expect as we begin to prepare 2022:

  • Starting in January of 2022, proponents will be required to hit mandatory targets whereby all licensees with inactive liability will have an obligation to meet annual targets determined by the AER.
  • Throughout 2022, changes to Directive 006, will be implemented by the Province in phases as the AER transitions away from the LLR program as implemented by Directive 088.
  • Starting in 2022, those eligible to make requests, can nominate eligible inactive or abandoned oil and gas sites, including wells, pipelines and facilities for closure pursuant to and in accordance with the AER's new closure nomination program.
  • Licensee specific mandatory closure spend targets will be released in July of 2022.

For more information on the Provinces LMF, please visit the AER's website here for upcoming dates and an overview of the implementation process. McCarthy Tétrault will continue to monitor the implementation of the LMF and provide updates as they become available. To discuss how you or your organization might be impacted by these initiatives and regulatory changes, please contact your trusted McCarthy Tétrault advisor or one of the authors.



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