Recent information from the Alberta Energy Regulator (AER) in their Licensee Capability Assessment: What We Heard Document and the draft Licensee Life-Cycle Management Directive (Draft LLCM Directive) provide licensees with guidance on the changes proposed by the AER to their liability management program, including others Details on how the AER will replace the licensees liability rating program with a holistic approach used to assess a company’s ability to meet its regulatory and liability obligations.

What we heard

What We Heard was published on May 31, 2021, following the publication of AER’s revised Directive 067 on April 7: Eligibility Requirements for Acquiring and Holding Energy Licenses and Permits. What We Heard provides insights into the AER’s Licensee Capability Assessment, which takes into account more than 30 parameters to comprehensively assess companies and their ability to meet their regulatory and liability obligations throughout the life cycle of a development, including a company’s liability management rating (which includes the assumed assets and liabilities of a company) and its financial and liability risk.

As part of the licensee’s capability assessment, the AER also suggests grouping similar companies into peer groups to facilitate the AER’s ability to compare companies and assess the sustainability, quality of assets or performance of a company to determine if regulatory action is required Mitigation of the risk required are associated with the company. While the reviews are not intended to be publicly available, some industry-wide information is expected to be made public.

Draft LLCM Policy

Further details on the AER’s proposed liability management programs, including their holistic approach to assessing a licensee’s skills and performance, were provided in the AER’s draft LLCM policy dated June 8, 2021. This policy applies only to companies licensed or permitted under the Oil and Gas Conservation Act and Pipeline Act. The deadline for submitting comments to the AER on the draft LLCM Directive is 25 July 2021.

In the draft LLCM guideline, the AER indicates that when assessing the ability of licensees to meet their regulatory and liability obligations, the AER will use a multi-factor approach which is based on the licensee’s ability assessment identified in Section 4.5 of Guideline 067 includes unreasonable risks and additional information provided by licensees.

The draft LLCM policy identifies the factors and parameters that the VRE will use to identify risks incurred by a licensee according to the licensee’s capability assessment. The AER licensee’s capability assessment results are used by the AER’s liability management program to identify licensees who are at greater risk of failing to meet their regulatory and liability obligations. If it is determined that the AER’s actions are justified, the AER may change the licensee’s authorization, impose restrictions on new applications, request security or give orders.

Spending targets and changes in transfer requirements

The draft LLCM policy also includes the industry-wide mandatory spending targets for closure for 2022 and proposed changes to the license transfer application requirements and the timing for decisions on the deposit of securities.

What’s new? Effects on Industry

Annual spending targets / inventory reduction program

From July 2020, the AER will be authorized to set targets for decommissioning expenditure under the Oil and Gas Conservation Rules and Pipeline Rules.

From 1 January 2022, the AER intends to put its mandatory industry shutdown spending targets into effect. The AER has set binding industry-wide targets for 2022 (Bulletin 2021-23) and will set targets for 2022 for each licensee in July 2021.

Spending targets are not new to those who voluntarily participate in the AER area-based closure program, which requires participants to agree to the closure spending targets.

The spending target under the Territorial Closure Program for 2021 is 4.33 percent of a licensee’s liabilities considered inactive in accordance with Directive 011: Licensee Liability Rating (LLR) Program: Updated Industry Parameters and Liability Costs. The spending targets set in Directive 011 are currently being reviewed and updated in preparation for the introduction of mandatory spending requirements.

Each licensee must meet an annual spending target that can be achieved by completing closure work or depositing a security deposit with the AER. Each licensee must report their closure activities and expenses by March 31 of each year, unless otherwise authorized. If a licensee decides to deposit collateral, the funds must be deposited by January 30 of this year. The AER has extensive powers to return any collateral and refunds require a holistic assessment of the licensee.

The introduction of mandatory spending requirements is a major departure from the existing AER guidelines, which for the most part do not set deadlines or fixed requirements for when decommissioning activities must occur in the absence of certain triggers set out in the Oil and Gas Conservation Rules. if, for example, a mineral lease, surface lease or right of entry is terminated; the licensee does not have the necessary permits; the supervisory authority suspended or canceled the license; the licensee is not or is no longer interested in working in the borehole or the facility; or when the AER believes that a well or installation may pose an environmental or safety risk.

License Transfers

According to the draft LLCM policy, all license transfers will trigger a holistic assessment of both the transferor and the acquirer. The AER has a wide discretion to consider any factors it deems appropriate in relation to this assessment, including concerns from stakeholders. For transfers that involve disposal of public land, the draft LLCM Directive states that the AER will reject the transfer request if the transferor or transferee is in arrears on debts to the crown or taxes to a municipality.

If an application covers a geographical area, the AER may reject an application that excludes licenses that have received a certificate of reclamation or that have been abandoned and classified as exempt from reclamation.

The new approach to transfers requires the following additional information:

  • Statements by both the seller and the purchaser, which relate, among other things, to the company’s binding authority, the validity of the holdings and rights to produce, contribute or dispose of, the fulfillment of signs and other responsibilities and obligations.
  • In addition to the full legal name and work interest percentages, contact information including email addresses for each work prospect.
  • A site-specific liability assessment carried out in the last three years for all problem sites within the meaning of guideline 006 and an assessment of the cost changes since the final date of the last assessment.
  • If an application is made to transfer inactive licenses, the transferor must first update their reported decommissioning activities and expenses before submitting the application. This notification cannot be updated after the transfer application has been submitted.

Security deposits

When examining a transfer application, the AER can request the provision of securities.

The maximum amount of security that the AER can ask is equal to the total liabilities of the licensee, including the costs of providing care and custody.

Applications for reimbursement of security deposits trigger the licensee’s holistic ability assessment.

The AER does not set the security requirements until it has examined a transfer request.

This suggests that the AER may deviate from the identification of security requirements as part of its discretionary waiver under Bulletin 2016-21, where the AER has traditionally set the conditions under which a transfer would be allowed if the transferee had a liability management rate below 2.0 Has . The discretionary waiver process has been a critical due diligence consideration for prospective buyers for many years when deciding whether to conduct a transaction (especially distressed assets or bankruptcy sales proceedings where the buyer is a new addition with limited or no existing assets).

While the details of the AER’s proposed liability management programs are subject to change and the AER expressly advises that the Licensee’s Skill Assessment Program will evolve over time, it is clear that the reporting requirements and additional controls in the In connection with the assessment by the AER, the ability of the licensee to meet his obligations will be increased.

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