New Court Ruling

New Court Ruling

The Alberta Energy Regulator (AER) and other officials – including the Orphan Well Association – were shocked this spring when the Alberta Court of Queen’s Bench ruled that receivers and trustees can selectively disclaim unprofitable assets under a section of the federal Bankruptcy and Insolvency Act.

Before the ruling, the AER had priority in a bankruptcy, but the ruling suggests receivers can avoid abandonment, reclamation and remediation obligations laid out in provincial regulation. In effect, the AER’s Licensee Liability Rating (LLR) program is weakened, as federal bankruptcy rules trump provincial environmental regulations.

The AER moved quickly to try to mitigate the impact of this decision why it appeals the decision in the courts. Crucially, a new condition for transferring existing AER licenses, approvals and permits is that companies must demonstrate a Liability Management Ratio (LMR) of 2.0 or higher – that is the value of their producing wells must be twice the cost of abandoning and reclaiming the wells at the end of their productive life. This hurdle is 100 percent higher than before the directive. Of course, applicants can meet the new criteria by posting security, addressing existing abandonment obligations, or transferring assets.

This can’t help but cool the pace of asset sales in Alberta, and is especially hard on smaller producers. It appears that two-thirds of companies licensed to operate in Alberta can no longer buy producing assets without paying a special deposit to the AER. The AER’s announcement in June sent a chill through the market, and the Regulator has said it will seek a middle road by reviewing each company’s individual circumstances when applying the new LMR standard.

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