A Wave of Change – Alberta continues to Implement a New Liability Management Framework

The Government of Alberta (“Alberta”) continues to take steps to implement a new liability management framework (“LMF”) for oil and gas wells, pipelines and facilities.  The new LMF was first announced on June 30, 2020 and is intended to improve and expedite reclamation efforts, enable industry to better manage the clean-up 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.

The LMF builds on the Site Rehabilitation Program announced in March of 2020 and the enactment of the Liabilities Management Statutes Amendment Act (“LMSA”), which received Royal Assent on April 2, 2020.  Additional background on the Site Rehabilitation Program can be found here

To help make sense of Alberta’s piecemeal and targeted approach, this article provides a summary of the changes to date (including recent amendments to the Alberta Energy Regulator’s (“AER”) Directive 067: Eligibility Requirements for Acquiring and Holding Energy Licenses and Approvals (“Directive 067”) and a road map for what is to come in 2021.

Background

In 2019, the Supreme Court of Canada (“SCC”) ruled in Orphan Well Association v Grant Thornton Ltd. (“Redwater”).  Redwater is now a sentinel decision for the energy industry in Alberta, confirming the importance of environmental, reclamation and remediation obligations and liabilities. In Redwater, the SCC determined that a trustee in bankruptcy is not permitted to renounce uneconomical oil and gas assets and leave these assets to be remediated by the Orphan Well Association (“OWA”) to avoid the environmental liabilities of the estate it is administering.

Following the Redwater decision and since early 2020, Alberta committed to actively reducing the inventories of orphan and inactive well sites in the province. According to the OWA, as of January 1, 2021, orphan inventory counts in Alberta are as follows:

  • 2,852 orphan sites for decommissioning (sites will start reclamation process after decommissioning has been fully completed).
  • Assets included on the 2,852 sites are:
    • 2,110 orphan wellbores for decommissioning;
    • 289 orphan facilities for decommissioning.
  • 2,571 orphan pipelines for decommissioning.
  • 4,014 orphan sites for reclamation (decommissioning has been fully completed).

The LMF is intended, in part, to help tackle the OWA’s orphan inventory, create a framework to better manage the reclamation of sites throughout their lifecycle and to keep new sites from joining the inactive and orphan inventories in the future.

Alberta’s Liability Management Framework

Similarly to the current framework under the licensee liability management rating (“LMR”) program, Alberta sets the policy direction and the AER will implement, monitor and enforce the new LMF. The LMF is expected to be implemented mid 2021 following industry meetings and feedback from stakeholders. Since the announcement of the LMF, Alberta and the AER are gradually laying the framework for its implementation, with a focus on taking a holistic approach in assessing risk throughout the entire lifecycle of development.

Replacing the current LMR program, the LMF is set to include five key components supporting the lifecycle approach:

  1. Licensee Special Action: the AER will provide practical guidance and proactive support for individual or distressed operators to ensure regulatory and liability obligations are addressed throughout the entire lifecycle of development.
  2. Licensee Capability Assessment System: the new system will replace the LMR program and will enable the AER to proactively provide support by looking at a company’s financial capability along with their closure, administrative, operational and compliance history.
  3. Inventory Reduction Program: this initiative will establish annual industry site closure spending targets over a 5-year rolling period in order to reduce inactive well inventories while providing flexibility. This initiative, together with the area-based closure program, will enable companies to work together to share the cost of cleaning up multiple sites in one area.
  4. Addressing Legacy and Post-closure Sites: a process will be introduced to address legacy and post-closure sites or sites that were abandoned, remediated or reclaimed prior to the current standards. A panel will be created to determine how to bring these sites in line with current environmental requirements.
  5. Expanding the Mandate of the Orphan Well Association: as noted below, the OWA will take on a more involved role to better manage and accelerate the clean-up of oil and gas facilities and infrastructure that does not have a responsible owner.

Under the LMF, the OWA is set to have a more involved role. Originally, the OWA’s role was restricted to overseeing the closure of oil and gas properties, however, upon receiving Royal Assent in April of 2020, the LMSA expanded the role of the OWA. These changes include:

  • adding the OWA to the definition of “delegated authority” which allows the OWA to assume management and control of wells, with any production being subject to the consent of the owner or holder of mineral rights;
  • expanding the scope of activities that the Orphan Well Fund can be used for, including costs associated with monitoring the behavior of orphan wells and facilities and the costs of a receiver; and
  • expanding the OWA’s jurisdiction to include undertaking remediation activities associated with orphan sites in addition to suspension, abandonment and reclamation activities and so that the costs of these activities can now be recovered from the Orphan Well Fund.

Proposed Changes to AER Directive 067

On January 13, 2021, a revised draft of Directive 067 was published by the AER. Directive 067 was last updated in December of 2017 to increase the scrutiny applied by the AER in granting licenses, and to license holders generally. Our summary of these changes can be found here.

The proposed changes to Directive 067 are intended to assist the AER in obtaining information throughout the entire lifecycle of development to assess licensee eligibility and a licensee’s capabilities of meeting regulatory and liability obligations. The proposed changes focus on requiring additional financial information (both at the time of application and throughout the lifecycle) and the concept of “unreasonable risk” to determine licensee eligibility.

Financial Information

Section 4.4 of the proposed Directive 067 will require a financial summary in the form attached as Schedule 3 to Directive 067 and full audited financial statements from licensees and approval holders. These proposed requirements will extend to both new applicants and existing licensees and approval holders.  Existing licensees and approval holders will be required  to submit financial statements (audited or management prepared) and the financial summary (Schedule 3 to Directive 067) within 120 days of their fiscal year end or as directed by the AER in order to maintain eligibility.

Guidance on “Unreasonable Risk”

Specifically, to determine if an applicant, licensee or approval holder poses an “unreasonable risk”, the AER has broad discretion to consider a number of factors listed in section 4.5 of the draft Directive 067.  The factors proposed by the AER are broad and 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 and section 51 of the Pipeline Act; and
  • any other factor the AER considers appropriate.

The AER is currently seeking feedback on the revised draft of Directive 067 until February 14, 2021.

Next Steps

On December 17, 2020, prior to the recently announced changes to Directive 067, the AER announced the steps it has taken to introduce and implement the new LMF, noting that additional changes to AER directives, requirements, processes and systems will be required in order to implement the LMF. The steps taken in December include the following rule changes to the Oil and Gas Conservation Rules and Pipeline Rules which support the 5 key components of the LMF (as discussed above):

  • the AER can now set closure spend targets for industry to support timely inventory reduction;
  • closure plans will be required from a licensee at the request by the AER and the AER may direct timing and the priority of the work, as well as subject the closure plans to specific terms and conditions;
  • as part of the inventory reduction program, through an “opt-in” program, an “eligible requestor”, which includes private landowners, the Ministry of Energy and public lands disposition holders, may nominate inactive or abandoned wells and facilities for closure; and
  • the AER may request financial and reserves information, to be kept confidential, and to be used for assessing licensee eligibility and administering liability management programs.

As the AER begins to work towards implementation of the LMF, the AER is expected to hold meetings with industry to go over implementation and how the changes will impact stakeholders. We encourage stakeholders and industry participants to monitor the AER website for information and updates over the coming months.  Information for stakeholders seeking to provide comments on the draft Directive 067 can be found here.

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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