Regulatory banishment – Section 106 declarations in Alberta’s oil industry

The Alberta Energy Regulator (AER) can effectively banish individuals from ever working again in a management position in Alberta’s oil patch. Section 106 of the Oil and Gas Conservation Act allows the AER to make a declaration naming directors, officers, agents and others who were in direct or indirect control of a company regulated by the AER that is in contravention of AER requirements. Once named in a Section 106 declaration, the named person will likely never again work as a director, officer, agent or person in control of an AER-regulated company.

The Section 106 declaration

Section 106 is relatively straightforward. It provides that where an AER-regulated company contravenes or fails to comply with an AER order or has an outstanding debt to the AER or the orphan well fund for upstream oil and gas suspension, abandonment or reclamation costs, then the AER can name the people it believes were directly or indirectly in control of that company when the order was contravened or debt incurred. If a named person then becomes or is a director, officer, agent or other person in direct or indirect control of another AER-regulated company, then the AER can require that other company to post security for its operations, abandon and reclaim its wells and other assets and refuse to consider any licensing applications from that other company.

It is likely companies will never hire anyone named in a Section 106 declaration because the AER could begin to shut them down. In short, if you are in management of a company that defaults, you could effectively be banished from ever working again in a senior position at another AER-regulated company.

The process

The process commences when a company defaults in meeting AER requirements, such as suspending, abandoning or reclaiming wells, an unfortunately common situation for companies with insufficient financial resources. The AER then issues suspension and abandonment orders to the company. Upon the orders being ignored or contravened, the AER’s liability management staff may then recommend Section 106 declarations be issued. An internal committee of AER staff, independent of liability management staff, then determines if there is enough evidence to go to a public hearing before AER hearing commissioners. If so, the hearing commissioners decide whether to issue to the persons who controlled the company a notice of the AER’s intention to issue the declaration.

Section 106 is a “reverse onus” provision. This means that once a notice of intention is issued to an individual it is then up to the individual to respond to the notice within 10 days and try to convince the hearing commissioners that they should not make the declaration.

Direct or indirect control

An issue the AER has to commonly determine is if the individuals were in direct or indirect control of the company at the time it defaulted to the AER.

In many of the 16 declarations issued so far by the AER, the AER has found that corporate directors and officers were in control of defaulting companies. In several, the directors and officers had resigned but the AER nevertheless issued the declaration as the individuals had still carried on corporate activities such as signing correspondence and agreements, applying for licences and transfers of licences, and meeting with the AER.

It is important to note that even if a company is insolvent a person can still be in control of the company. In one declaration, an individual argued that the company’s bank was in effective control as it controlled all of the company’s funds, had taken all of the funds from the company’s bank account and only allowed the company to spend money on rent, telephone and office supplies and none on well abandonment and reclamation or meeting other AER requirements.

The AER held that private arrangements between a company and its bank were not a defence to being named in a declaration, as the legislation administered by the AER overrides any contract. The company’s statutory obligations to abandon and reclaim wells were not contingent on the company’s financial success.

In other instances the AER has considered if a shareholder has control of a defaulting company, and the AER has decided that the ownership of shares is a factor to consider. The AER believes section 106 contemplates a wide range of positions that a person in control may occupy and the intent of the legislation is to focus on the person’s actual control of the company’s actions rather than on the person’s title. The test to establish control is real, effective and practical control over a defaulting company’s business affairs and such control can exist in a wide variety of settings and arrangements. Control is ultimately the power to direct the business of the company and make decisions that will be acted on by the company.

Public interest

In considering the use of Section 106, the AER has to also determine if it is in the public interest to name an individual. In doing so, it has typically determined that the purpose of naming someone is to prevent another licensee or person in control of a licensee from breaching AER requirements or orders and incurring abandonment and reclamation debts, thereby safeguarding the public interest.

Continued confidence in the AER’s regulatory scheme is best assured when licensees comply with legislative requirements and AER orders. Without compliance, the protection of the public and the environment may be jeopardized. The AER has also said there is a public interest in deterring like-minded individuals from engaging in similar conduct and warning other companies who may deal with such individuals.

The AER also believes the law does not give licensees the choice whether they should abandon and reclaim wells or to delay compliance with an order due to its financial condition. In short, companies cannot “walk away” from their properties and leave them for others to clean up.