Alberta Energy Regulator Revises Eligibility Requirements for Aquiring and Holding Energy Licences and Approvals

In early December 2017, the Alberta Energy Regulator (AER) released a new edition of Directive 067: Eligibility Requirements for Acquiring and Holding Energy Licences and Approvals (New Directive).1 The New Directive makes several significant changes to the previous version of Directive 067 (Original Directive), primarily in the form of increased responsibility for approval holders and increased scrutiny by the AER.

The New Directive was issued in apparent response to AER concerns about companies that are unable to fulfil abandonment and reclamation obligations. These concerns also arose as a result of the decisions2 in Redwater Energy Corporation (Redwater) matter that is proceeding to a hearing at the Supreme Court of Canada in February of 2018. Redwater involved an insolvent energy company where the receiver sought to renounce the estates interest in certain wells, pipelines and facilities and the Court of Queen’s Bench and Court of Appeal confirmed that receivers and trustees have this authority.

While this has only been an issue in a handful of cases to date, the New Directive will require all oil and gas operators to meet more stringent hurdles to participate in the oil and gas industry. The changes that current or prospective licence and approval holders should expect to see include, for example:

  • The requirement for ongoing assessment of materiality in the context of changes to an approval holder’s business and reporting to the AER regarding same. A failure to comply with reporting requirements could result in a change to the type of licence eligibility which could have significant impacts on a licensee’s business or operations.
  • A higher disclosure standard for directors and officers relative to other jurisdictions and related to past insolvency proceedings. A failure to provide this information or persuade the AER that there is no “unreasonable risk” might negatively impact a licensee’s licence eligibility.
  • Broad discretion on the part of the AER to assess and determine on a seemingly subjective basis what constitutes an “unreasonable risk”.   Little guidance has been provided that would assist current or prospective approval holders in determining how this standard might be applied, resulting in the potential for increased uncertainty relatively to the Original Directive about how the AER might make decisions regarding the issuance of licences or licencee eligibility of existing approval holders.

The New Directive

The New Directive increases the scrutiny the AER will apply to ensure that licences and approvals are only granted to, and retained by, “responsible parties”. The increased scrutiny under the New Directive comes in the form of several significant changes to the Original Directive, which had been in force since July 11, 2005. These include the following:

1. License eligibility types

Under the New Directive, there are now three types of license eligibility, as compared to the eight types under the prior regime. The types of licence eligibility under the New Directive are:

  1. No eligibility – Not eligible to acquire or hold licences to drill/construct wells, facilities, or pipelines.
  2. General eligibility – Eligible to hold licences for all types of wells, facilities, and pipelines.
  3. Limited eligibility – Eligibility to hold only certain types of licences and approvals or on certain terms and conditions.

The changes in the New Directive primarily relate to the limited eligibility category. That category replaces a number of eligibility types under the Original Directive which covered distinct types of operations and particularized assessments.

2. New requirements to become a licensee

In order to become a licens4ee under the Original Directive, parties had to meet relatively straightforward eligibility, residency, agency, insurance and declaration obligations, in addition to an applicant or existing license-holder paying the required fees. Additionally, the New Directive now gives the AER discretion to consider whether, in its opinion, a license applicant poses an “unreasonable risk”.

This change in the New Directive was implemented, at least in part, by the AER in order to allow it to scrutinize former directors and officers of companies who have entered insolvency proceedings. If those insolvent companies were unable to fulfill abandonment and reclamation obligations and then those directors and officers went on to work for other licensees or form new companies, the New Directive allows the AER to potentially consider that company an “unreasonable risk”.

The question of unreasonable risk appears to be a subjective determination to be made by the AER in respect of any given licensee or approval holder based on the following factors:

  • Compliance history of the applicant. This includes its directors, officers and shareholders, in Alberta and elsewhere, including in relation to any current or former AER licensees that are directly or indirectly associated or affiliated with the applicant or its principals
  • Compliance history of entities currently or previously associated or affiliated with the applicant or its directors, officers and shareholders
  • Experience of the applicant, including its directors, officers and shareholders
  • Corporate structure
  • The applicant’s financial health
  • Outstanding debts owed by the applicant or current or former AER licensees that are directly or indirectly associated or affiliated with the applicant or its directors, officers or shareholders
  • Outstanding non-compliances of current or former AER licensees that are directly or indirectly associated or affiliated with the applicant or its directors, officers or shareholders
  • Involvement of the applicant’s directors, officers or shareholders in entities that have initiated or are subject to bankruptcy or receivership proceedings or in current or former AER licensees that have outstanding non-compliances
  • Naming of directors, officers or shareholders of current or former AER licensees under section 106 of the Oil and Gas Conservation Act.3

Depending on its assessment, the AER may refuse to grant licence eligibility or may grant licence eligibility with or without restrictions, terms or conditions.

A key change is the requirement to report the involvement of directors, officers or shareholders in entities that are have initiated or are subject to bankruptcy or receivership proceedings or in current or former AER licencees that have outstanding non-compliances. Depending on the circumstances this could be an onerous requirement that is difficult to meet by being proactive.

3. On-going compliances obligations

All existing licence or approval holders will have on-going compliances obligations and must meet licence eligibility requirements on an ongoing basis and ensure that the information the AER has on file is kept accurate. A licensee must, for example, provide an updated Schedule 1 within 30 days of any “material change”, the scope of which is described in the New Directive as including:

  • changes to legal status and corporate structure;
  • addition or removal of a related corporate entity;
  • amalgamation, merger, or acquisition;
  • changes to directors, officers, or control persons
  • appointment of a monitor, receiver, or trustee over the licensee’s property;
  • plan of arrangement or any other transaction that results in a material change to the operations of the licensee;
  • the sale of all or substantially all of the licensee’s assets; or
  • cancellation of insurance coverage.

When, in the AER’s opinion, a material change results in an unreasonable risk, the AER may revoke or restrict eligibility by imposing terms and conditions.

In advance of making a material change, a licensee may request an advance ruling from the AER on the question of “unreasonable risk”. At the date of writing, no process or guidelines had been established under the New Directive in this regard.

4. Restriction of licence eligibility.

Under the New Directive, there are three main circumstances in which the AER may revoke or restrict licence eligibility:

  1. The licensee fails to provide complete and accurate information and ensure that information remains complete and accurate by advising the AER of material changes within 30 days;
  2. The AER finds that, as a result of a material change or compliance history, the licensee possesses an unreasonable risk; or
  3. The licensee fails to acquire or hold licences or approvals within one year after having been granted eligibility.

The repercussions for a party that is offside any of these requirements will depend on the circumstances. For a party that holds licences or approvals, licence eligibility will be restricted. For example, general eligibility (if applicable) will be changed to limited eligibility with potential terms and conditions and the licensee will not be permitted to acquire additional licences or approvals unless general licence eligibility is reacquired or terms and conditions are lifted.

5. Information requirements relating to directors and officers

Schedule 1 of the New Directive now requires applicants to disclose whether any director or officer has been a director of officer of an energy company in any jurisdiction in the past five years, including of an energy company that has been subject to insolvency proceedings either while that person was a director or officer or during the 12 months prior to such insolvency proceeding.

Directors and officers must also now provide a current piece of government-issued identification that contains a photograph and affidavit of attestation of instrument and declaration. The AER specifically acknowledges in Schedule 1 that this information is being obtained to, among other things, conduct compliance and enforcement proceedings.

Current licensees and approval holders were required to provide an updated Schedule 1 by January 31, 2018.

Potential Implications for Prospective or Current Approval Holders

New Directive has been in effect since December 6, 2017. While it remains to be seen how exactly the requirements of the New Directive might affect prospective or current approval holders, it is apparent that there could be some challenges.

First, the powers of the AER under the New Directive are largely discretionary. This discretion is likely intentional to ensure that the AER has access to every tool that might be necessary to ensure responsible development in the province. This discretion, however, introduces some uncertainty for operators and their shareholders as to what the AER might consider in determining whether an approval should be issued or licence eligibility changed.

Also, while the New Directive allows the AER to make an advance determination of unreasonable risk, no direction has been provided about the information the AER might consider in this regard. Again, this gives the AER maximum flexibility to make decisions that it considers appropriate in the circumstances, but raises questions about consistency of decision making that were not as prominent under the Original Directive.

It is apparent that the New Directive paints all approval holders with the same brush. While the New Directive is likely aimed at ensuring responsible operation by new or smaller operators, it will have implications for larger and well-established licencees. As compared to smaller organizations, the task of identifying directors, officers, and shareholders that might have been involved in bankruptcy or receivership proceedings or in current or former AER licencees that have outstanding non-compliances is likely to be more onerous for larger operators.

Finally, it is not clear if the New Directive will be effective in addressing situations such as those that arose in the Redwater matter. There are a number of reasons companies enter insolvency proceedings and many of these are not within the control of directors and officers (i.e. price of oil and gas). Consequently, the insolvency of these entities cannot necessarily be linked to any specific improper conduct or poor management by the former directors and officers that the AER is seeking to prevent from recurring. However, there does appear to be a direct correlation between prior association with an insolvent licensee and potentially being deemed an “unreasonable risk” by the AER under the New Directive. It has been noted by the AER that this problem is not endemic and involves only a small number of former directors4. As noted, the AER does have discretion under the New Directive, but it is not yet clear how that discretion might be exercised in these circumstances.

*Katie Slipp is a partner in the Regulatory and Environmental Group in the Calgary office of Blake, Cassels & Graydon LLP. Katie advises and represents oil and gas developers, pipeline companies, electric generation and transmission companies and alternative energy companies on a broad range regulatory and environmental matters. She has experience with various regulatory regimes, representing clients in proceedings before the National Energy Board, Alberta Energy Regulator, Alberta Utilities Commission, Alberta Surface Rights Board and the British Columbia Oil and Gas Appeal Tribunal.

**Ryan Zahara is a partner in the restructuring and insolvency group in the Calgary office of Blake, Cassels & Graydon LLP. His primary focus is on restructuring and insolvency law where he acts for secured creditors, debtors and court-appointed officers, including receivers, monitors and trustees. He is counsel for ATB Financial in the Redwater Energy matter and has dealt extensively with claims advanced by government entities and regulators in insolvency proceedings.

  1. Alberta Energy Regulator, Directive 067: Eligibility Requirements for Acquiring and Holding Energy Licences and Approvals (Calgary: AER, 2017).
  2. Redwater Energy Corporation, 2016 ABCA 278; Orphan Well Association v Grant Thornton Limited, 2017 ABCA 124.
  3. Oil and Gas Conservation Act, RSA 2000, c O-6, s 106.
  4. Jeremy Sims, “Alta. gets tougher on abandoned oil wells”, The Western Producer (21 December 2017), online : <>.

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