Written by Ken Lenz Q.C., Brad Gilmour and Keely Cameron
Since the release of the Supreme Court of Canada's decision in Orphan Well Association et al v. Grant Thornton Limited et al (Redwater), the energy industry has been awaiting legislative direction on the approach to be taken by the Alberta Energy Regulator (AER) in regulating liabilities. The first set of changes were announced through Bill 12 - Liabilities Management Statues Amendment Act, 2020, which received royal assent on April 2, 2020, and will come into force on proclamation.
The changes consist of a series of amendments to the Oil and Gas Conservation Act (OGCA) and Pipeline Act and so do not apply to coal or oil sands projects. While some of the amendments are likely of little consequence to industry, such as the expansion of the definition of licensee to include "liquidator" and "receiver" and clarifying the Orphan Well Association's (OWA) jurisdiction regarding remediation, a number of the amendments, depending on how they are implemented, will result in additional costs and accountability for industry and additional exposure to liability for directors and officers. The key amendments are summarized below.
Introduction of Reasonable Care and Measures to Prevent Impairment or Damage
The amendments introduce the obligation to provide reasonable care and measures to prevent impairment or damage that result in or could reasonably be expected to result in harm to the integrity of a well, facility, pipeline, the environment, human health, safety or property. The AER now has the ability to address issues prospectively and to order a licensee both to provide reasonable care and to take measures to prevent impairment or damage. If the licensee fails to comply, the AER can extend such directions to working interest participants. Where an order is issued, a working interest participant is liable for its proportionate share of the costs of providing the care and measures required. The orphan fund has the ability to reimburse such costs in some circumstances.
Failure to comply with an order may result in the naming of one or more directors, officers, agents or other persons pursuant to section 106 of the OGCA. Being named pursuant to section 106 will affect the ability of a director or officer to act effectively in that capacity. Having named directors or officers may impact that ability of a licensee controlled by that person to hold licences, to have applications considered, to obtain or maintain licence eligibility and the amount of security required.
Ability to Continue Operations and Take Over Management and Control
The amendments provide that the AER or a delegated authority may continue operations where it takes over the management and control of a well or facility under section 105 of the OGCA. Currently, the only delegated authority of the AER is the OWA. Where management and control of a well or facility is assumed, the legislation does not permit production without the consent of the owner and lessee of the mineral rights.
Section 105 sets out how proceeds associated with such production are to be used. First, they are to address any costs and expenses. Second, funds are applied to any outstanding debt owing to the AER. Finally, any remaining funds are to be provided to the Minister of Energy; persons may file a claim for all or part of the funds within six months of the sale of the production.
Application of AER Statutory Lien
One of the more significant amendments is inclusion of security deposits as a "debt" owing to the AER. Pursuant to this legislation, under Alberta law an outstanding security deposit ranks in priority to any other liens, charges, rights of set-off, mortgages and other security interests. Further, failure to post security as required is now another ground for naming directors, officers or other control persons of that licensee pursuant to section 106.
This expansion of the definition of debt is expected to create concerns for lenders as it will further impede their recovery. This may further diminish the willingness of lenders to appoint receivers over insolvent companies, as there may be no financial benefit in their doing so. In turn, the legislation could make financing more difficult for industry. However, the super-priority afforded under Alberta legislation to the AER's creditor claim for outstanding security deposits could also be the subject of a legal challenge especially if it is applied routinely for large amounts. Readers may recall that one of the main reasons the Supreme Court of Canada found in favour of the AER in Redwater was the fact that it was seeking to enforce regulatory obligations in priority to other creditors, rather than collect debts.
Authority to Appoint a Receiver
The legislation provides clear regulatory authority for the AER or its delegate to appoint a receiver, receiver-manager, trustee or liquidator over the property of a licensee, subject to the regulations. It is noted that both the AER and OWA have previously appointed a receiver using existing authority under the Judicature Act which provides broad authority for a person to seek an appointment where it appears to the court to be just or convenient.
As a result of these changes, it will be important for companies to ensure that joint venture agreements account for both additional obligations and the possible requirement of working interest participants being directed to fund reasonable care measures on sites where they are not the licensee or operator. The impact on secured creditors and the banking sector is unclear and will depend on how often the regulator requires additional deposits for struggling companies, and whether the super-priority those deposits now enjoy survives judicial scrutiny.