In recent years the Alberta Energy Regulator (AER) has been making changes to its liability management system. In early August, the AER hinted more changes are on the way. In a news release, Jim Ellis, the regulator’s CEO, explains that a gap has been clearly identified in the current liability management system, and that the AER is working to fill it.
But what is this “hole” in the system? Imagine Company A and Company B decide to do a deal. Company A buys a couple of profitable wells along with a lot of unprofitable, unwanted wells from Company B. The deal transfers all liability for the bad wells to Company A, and Company B is off the hook for any of those wells’ end of life obligations. The AER approves the license transfer under the current liability management system, and the deal is complete. So far so good; everyone is happy. Then, out of nowhere, Company A files for bankruptcy. Once in bankruptcy, the AER has no real control over what happens with those bad wells. Usually, the bad wells make their way to the Orphan Well Association for decommissioning at the expense of the rest of the industry and government. This is the gap the AER is looking to fill.
The AER has limited legislative authority to oversee corporate transactions. As discussed in a previous post, the AER has been tightening eligibility requirements for license applications. It appears the belt will continue to tighten.
The AER has a new strategic plan that prioritizes liability management, and they have already begun work on a number of initiatives to this end. In addition to the now familiar liability management rating (where a rating higher than 1.0 is needed to hold a license without posting security for any end of life obligations, and a rating higher than 2.0 is required to transfer a license without risk of being required to post security for end of life obligations) the AER is going to begin looking at additional financial, behavioural and inventory risk factors to help them identify companies that may not be able to meet their assets end of life obligations.
What this will mean for the Alberta oil and gas investor going forward is still unclear. What is clear is that transactions are changing: the process is taking longer, contracts are evolving to compensate for regulatory uncertainty, and companies are becoming more diligent about who they do business with.
Although the AER is mindful that a balance must be struck between protecting the public interest and allowing companies operational freedom, investors can expect additional layers of due diligence will be needed going forward. The goal of the additional due diligence will be keeping costs low and deals on schedule. Getting legal counsel involved early will minimize the risk that the AER will stop a deal after significant money and time have been spent, or, worse yet but not unheard of, require a closed deal be reversed.
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