Effective June 30, 2022, the Alberta Energy Regulator (AER) amended the Mine Financial Security Program (MFSP) rules to permit using reclamation bonds (a type of performance surety bond) as a financial security deposit for oil sands and mining projects.
The purpose of the MFSP is to allow the approval holder[1], and Alberta’s government, to manage risk relating to oil sands and coal mine closure costs within clear parameters.[2] When circumstances arise causing the approval holder’s operations to fall outside those parameters, a requirement for an appropriate amount of financial security is triggered.[3]
The MFSP requires a financial security deposit from an approval holder, which Alberta’s government can use to carry out suspension, abandonment, remediation, and surface reclamation responsibilities of an approval holder that does not carry them out.[4]
The AER stipulates that an approval holder could use a reclamation bond as a financial security deposit subject to the following conditions:
- The only acceptable form of surety bond is the AER-approved demand forfeiture bond (DFB) bond found on the AER website.
- Only surety providers actively operating in Canada will be accepted.
- Only surety providers with a minimum of A- rating (or equivalent) from at least two public credit agencies of the AER’s choosing will be accepted.[5]
Compared to the commonly utilized letters of credit, reclamation bonds often have unique differences and implications for various stakeholders. These differences include:
- Security
- If irrevocable, a letter of credit is typically a secure guarantee. The issuer (largely banks) would generally pay out funds to the beneficiary upon an operator’s default under the contract when the beneficiary submits the agreed-upon documentation.[6] There is little investigation and discussion about the contract or the operator’s default.
- The AER has sole discretion in determining whether an approval holder did not comply with its surface reclamation and remediation obligations under the Environmental Protection and Enhancement Act (EPEA) and EPEA Approval No.[7]
- Price and access to funds
- Irrevocable letters of credit are typically an unconditional obligation to pay a beneficiary upon an operator’s default, meaning a more significant premium than reclamation bonds. Letter of credit issuers also usually require sufficient collateral worth at least the same amount as the letter of credit, reducing an operator’s borrowing and operating capacity.[8]
- Reclamation bonds are typically secured using indemnity agreements or a combination of an indemnity agreement and some satisfactory collateral, resulting in a lower cost for obtaining bonds than letters of credit.
- Monitoring
- Letter of credit issuers are primarily concerned with an operator’s ability to repay owing amounts. They are not actively monitoring an operator’s work.
- As sureties continuously monitor an operator’s operations, sureties are usually aware of issues that could trigger performance difficulties. Despite the issues having no relation to the underlying bond contract, sureties use their awareness to work with the operator to prevent performance difficulties. Unsurprisingly, this continuous monitoring can help protect obligees from defaulting operators.
Parties would naturally view a regulator’s acceptance of the use of reclamation bonds as security deposits as positive. As sureties and letters of credit issuers (i.e. banks) have different methods of assessing risk and calculating premiums, operators can expect an alternate, potentially cheaper source of funding for satisfying their financial security deposit obligations.
Written by Jeremy Ellergodt and articling student Ali Sarhill.
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[1] An approval holder is the corporate entity holding an Environmental Protection and Enhancement Act approval for a mine or plant.
[2] Section 1, Manual 024: Guide to the Mine Financial Security Program, online: Alberta Energy Regulator
[3] Ibid.
[4] Ibid at section 4.7.
[5] Ibid at section 4.6.
[6] M Ogilvie, Bank and Customer Law in Canada, 2ed (Toronto: Irwin Law Inc, 2013) at 428.
[7] Section 1, Demand Forfeiture Bond, online: Alberta Energy Regulator
[8] Poyner Spruill LLP, “A brief look at common loan credit enhancements” (2 October 2015), Lexology USA