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Alberta Energy Regulator to accept surety bonds for collateral

The AER oversees the remediation of decommissioned oil wells and coal mines in Alberta. To encourage responsible development of Alberta’s energy resources, the AER requires coal and oil sands operators to commit to restoring the land to its pre-development state once the mining project is finished.
restored mining site

09/30/2022 · 2-minute read

On May 2, 2022, Alberta Energy Regulator (AER) announced its intention to accept surety bonds as security under the Mine Financial Security Program (MFSP), starting with the MFSP annual report submissions due on June 30, 2022.

The AER oversees the remediation of decommissioned oil wells and coal mines in Alberta. To encourage responsible development of Alberta’s energy resources, the AER requires coal and oil sands operators to commit to restoring the land to its pre-development state once the mining project is finished. Through the MFSP, AER secures funding from the operators, which helps ensure the financial burden to remediate stays with the operators and not the public.

Previously, the AER only accepted financial security in the form of cash and/or letters of credit (LOCs) from accredited banking facilities. Procuring LOCs can present a challenge for coal and oil sands operators as they tend to be costly and impact ability to access capital due to the banks’ requirement for the buyer to collateralize the LOCs.

Surety bonds are less costly and do not tie up capital in the same way since they do not require collateral. Additionally, surety bonds do not affect borrowing capacity with the bank. Not having to provide collateral at this stage may free up liquidity pressures, increase financial flexibility, and relieve opportunity costs.

In a rising interest rate environment, surety bonds have more cost certainty to them than LOCs. The bond rate is a negotiated rate between the broker and the surety market and does not fluctuate. For LOCs, the bank typically charges prime rate and a percentage on top. Prime rate will fluctuate.

As the Bank of Canada increases its interest rate, the major banks will increase theirs in response. Meaning, with LOCs, there is no cost certainty, as it will fluctuate as the interest rates rise.

The only form of surety bond accepted by the AER is the demand forfeiture bond available on its website.

Alberta joins the list of provinces and territories that currently accept reclamation surety bonds. British Columbia, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Quebec, Saskatchewan, Northwest Territories, and Yukon all accept surety bonds as financial assurance for mine remediation to varying degrees, subject to each jurisdiction’s regulations and review processes. At this time, Manitoba is working toward the acceptance of bonds and is still in the due diligence phase.

If you have questions about the use of surety bonds, please reach out to your Marsh advisor.

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