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One Small Step - Alberta Energy Regulator Makes Change to Interim Measures

HIGHLIGHTS

  • The Alberta Energy Regulator (AER) has considered feedback on the interim measures put in place in Bulletin 2016­-16 and issued revisions and clarifications in Bulletin 2016-­21
  • The only change Bulletin 2016-­21 made to the interim measures is that if a transferee can provide evidence that they will be able to meet their obligations throughout the life cycle of energy development, they may not need to demonstrate that they will have a Liability Management Rating (LMR) of 2.0 or greater following the transfer 
  • Bulletin 2016-­21 also clarified that Licensees with transactions in progress should contact the AER to arrange a review of their specific circumstances
  • While transferees will still face heightened scrutiny from the AER with respect to their LMR and their ability to meet their future obligations, the change made in Bulletin 2016­-21 somewhat relaxes the restrictions on transactions created by Bulletin 2016­16 and may, hopefully, be a sign that the anticipated consultation between the AER and various stakeholders will result in more balanced regulatory measures that both protect the public interest and allow a greater number of licensees to make acquisitions

Bulletin 2016­-21 and the Change to the Interim Measures

Less than three weeks after issuing Bulletin 2016-­16, which set out interim measures to address the effects of the Court of Queen’s Bench decision in Redwater Energy Corporation (Re) (Redwater), 2016 ABQB 278. the AER issued Bulletin 2016­-21 announcing revisions and clarifications to the interim measures. A more detailed discussion of the Redwater decision and its implications can be found in the Field Law Energy Group’s June 2nd Energy Alert and a more detailed discussion of the interim measures set out Bulletin 2016­-16 and their impact can be found in the Field Law Energy Group’s June 23rd Energy Alert.

Prior to the AER issuing Bulletin 2016-­16, as a condition of licence transfers the AER required transferees and transferors to maintain a minimum
LMR of 1.0 post­ transfer. In Bulletin 2016­-16, the AER changed the minimum LMR required for transferees to 2.0 post­-transfer. While this condition remains, Bulletin 2016-­21 adds that a transferee can also:

Provide other evidence that the transferee will be able to meet their obligations throughout the lifecycle of energy development with an LMR of
less than 2.0. 

While the AER does not state what “other evidence” will be acceptable to it, this change opens the door, if only slightly, for the approximately 78% of licensees with an LMR under 2.0 to once again be acquirers of AER licensed assets.

In addition to this change, Bulletin 2016­-21 also contains a clarification with respect to the impact of the interim measures on transactions that were in
progress at the time Bulletin 2016-­16 was issued, stating that:

Licensees with transactions in progress are encouraged to contact the AER to arrange a review of their specific circumstances.

This clarification may provide some comfort to those who had entered into transactions prior to Bulletin 2016­-16 (and relying on the “old” rules) that their
transactions may be either grandfathered under the old rules or, at least, may face more lenient requirements then those set out in the interim measures.

THE IMPACT

As noted in the Field Law Energy Group’s previous Energy Alert on Bulletin 2016­-16, the AER’s condition for approval of licence transfers that transferees have a post-­transaction LMR of 2.0 or higher had the effect of greatly reducing the number of potential purchasers of AER licensed assets. This restricted the ability of companies to sell oil and gas assets to manage their LMR ratio or their balance sheet, which raised significant concerns that this would have a detrimental impact on licensees, including a rise in bankruptcies and an increase in the number of AER licensed assets being disclaimed by Receivers.

The change provided in Bulletin 2016­-21 starts to address some of the concerns raised by industry, as it allows licensees with an LMR under 2.0 (which includes many major and well known industry participants) to acquire AER licensed assets provided that the AER is satisfied that the licensee will be able to meet its obligations throughout the life cycle of energy development. While this change potentially relaxes the severity of the LMR requirements set out in Bulletin 2016-­16, since there is no guidance as to what “other evidence” will be required by the AER to approve a transfer to a transferee with an LMR under 2.0, it is still unclear how difficult it may actually be for such licensees to now acquire AER licensed assets. The AER stated that an LMR of 1.0 is not sufficient to ensure licensees will be able to address their obligations, so a prospective transferee with an LMR under 2.0 should expect heightened scrutiny by the AER of both their LMR and their overall financial standing before a transfer of AER licensed assets would be approved. Such prospective purchasers should proactively engage the AER with respect to potential transactions in order to determine whether the AER would be satisfied with the purchaser’s ability to meet and continue to meet its obligations and, if not, what can be done to satisfy the AER. While such proactive consultation may increase the time and cost of a transaction, it appears necessary in order to obtain AER approval.

Bulletin 2016­-21 does not make any other changes to the interim measures introduced in Bulletin 2016­-16 and, in fact, the AER reiterated that the interim measures are necessary to protect Albertans from unfunded liabilities. As such, there remains serious concern that the interim measures (as amended) will continue to have a chilling effect on oil and gas transactions in Alberta, as well as new capital development. Part of the reason for these concerns is the regulatory uncertainty surrounding the AER’s non-routine processing of all applications for licence eligibility, as well as the uncertainty as to what “other evidence” the AER will require from a transferee to demonstrate its ability to meet all of its obligations over the life cycle of energy development. Investors may not want to expend capital negotiating a transaction and doing due diligence only to find out they cannot close. Unfortunately, at this time there is no pre­clearance program for AER licence transfers.

While there remain concerns with respect to the interim measures, the change made by Bulletin 2016­-21 is a welcome start. The AER indicated that this change was based on the feedback it received to Bulletin 2016­-16, which provides cautious optimism that the AER’s expected consultation with industry, stakeholders and the Government of Alberta can produce more permanent and balanced regulatory measures which protect the public interest and allow industry to recover and, ultimately, prosper.

Companies wishing to discuss the impacts of Bulletin 2016-­21, the interim measures and how companies can address these measures in future transactions are welcome to contact any member of Field Law’s Energy Group. Field Law will continue to monitor the AER and Orphan Well Association’s appeal of the Redwater decision, as well as the formal engagement with stakeholders on more permanent regulatory measures.