With the release of Bulletin 2015-34, the Alberta Energy Regulator (AER) amended the process for transferring pipeline licences to require written confirmation that compulsory records under CSA Z662: Oil and Gas Pipeline Systems and Part 4 of the Pipeline Rules have been maintained by the vendor and transferred to the purchaser prior to the approval of a license transfer.
Although the requirement to maintain and transfer pipeline records as part of a transaction is not new, the requirement to submit a written confirmation in respect of same in conjunction with the AER license transfer application has forced both vendors and purchasers to take a more measured and thoughtful approach to the hand off of records.
Since the release of Bulletin 2015-34, parties to purchase agreements have adopted a few different approaches to address the transfer of records, including the use of a vendor representation and warranty and/or a covenant in respect of the maintenance, rectification and delivery of pipeline records.
With regard to the requirement to rectify deficient records, parties should carefully consider the proper allocation of the costs that may be incurred in the course of any such rectification. In particular, it is within the power of the AER to require that where relevant records are damaged or incomplete, an engineering assessment must be undertaken to prove that a pipeline is fit for service. Given the foregoing, bringing records up to AER standards can be costly and time consuming. Both vendors and purchasers should be aware of these potential hazards, and should agree in advance where the responsibility for such costs lies.
The transfer and rectification of pipeline records is addressed in the draft 2017 CAPL Property Transfer Procedure (PTP). In particular, Section 3.07 of the PTP consists of two parts: the first dealing with the submission of the license transfers, and the second dealing with the allocation of risk for losses and liabilities pertaining to pipeline records.
Section 3.07(a) provides that if the purchaser is required to be in possession of pipeline records prior to the submission of a license transfer, the responsible party can defer the submission of the relevant application for up to 20 business days after closing.
Section 3.07(b) consists of an election. Alternate 1 contemplates that the purchaser will be liable to and must indemnify the vendor for any losses and liabilities stemming from deficient pipeline records. Alternate 2, on the other hand, contemplates that the vendor will be liable to and must indemnify the purchaser for such losses and liabilities, provided the purchaser notifies the vendor of the existence of any deficiencies within 6 months after closing.
According to the annotations in the PTP, Section 3.07 was structured in this way on the assumption that compliance monitoring by the AER would typically occur after the relevant transfers have been processed, and therefore, only after closing would a requirement to rectify deficient records be imposed by the AER.
Rather than transferring the risk of an issue arising to the post-closing period, a purchaser may wish to take a more proactive approach and consider including within the sale agreement a provision whereby there is a pre-closing timeline for the review of pipeline records, together with a requirement that any identified deficiencies be rectified (at either the purchaser’s or the vendor’s cost) prior to or after closing in conjunction with a set process and timeline.
As mentioned above, some parties have opted to include a vendor side representation and warranty to address the transfer of pipeline records, and the PTP contains an optional representation and warranty to that effect. If selected, under Section 6.02(r) of the PTP, the vendor represents and warrants that it has collected, maintained and retained all pipeline records and it has or will provide those records to the purchaser by the date the applicable license transfer is to be effective.
A purchaser may wish to consider pushing for additional comfort from the vendor by adding language to the above representation and warranty that any records required by CSA Z662: Oil and Gas Pipeline Systems and Part 4 of the Pipeline Rules are complete and accurate and have been maintained in accordance with regulatory requirements and applicable law.
A vendor, on the other hand, should consider its ability to provide any such covenants or representations and its willingness to assume trailing liability for deficient records, and may only be willing to give a representation and warranty that it can execute and deliver the transferor statement required pursuant to Bulletin 2015-34.
If a vendor is not willing to assume responsibility for deficient records, a purchaser should ensure that its due diligence processes are comprehensive enough to identify any such deficiencies prior to the execution of the sale agreement, or that the sale agreement contains sufficient protective measures, such as a right to walk away if the cost to rectify deficient records is determined to be material. If a vendor is willing to assume a degree of liability, the vendor may want to consider including limitations on that liability, for example a liability cap or certain thresholds and/or deductibles, and a reduced timeframe in which the purchaser can look to the vendor for such cost recovery.