COURT FILE NUMBER COURT JUDICIAL CENTRE BY COUNTERCLAIM BY COUNTERCLAIM DOCUMENT ADDRESS FOR SERVICE AND CONTACT INFORMATION OF PARTY FILING THIS DOCUIVIENT Statement of Facts Relied On: Clerk?s Stamp 'MAqugM I, COURT OF BENCH OF ALBERTA . 1701-03460 CALGARY ALBERTA ENERGY REGULATOR LEXIN RESOURCES LTD. i . 2 STATEMENT OF W11 22 22131.? E: GROIA COMPANY 1 Professional Corporation Lawyef? 2 . 365 Bay Street, Suite 1100 Toronto, Ontario MSH Fax: 416?203 9231 it j? . Joseph Groia, LSUC 20612;} Tel: 416-203?4472 3" 5'31?! - i 5.5.- .v .- Bonnie Roberts Jones, LSUC 4 Tel: 416?203?4476 1. The Defendant, Lexin Resources Ltd. (?"Lexin? or the ?Defendant?) admits the allegations contained in paragraphs 1-2, 6-8, 11, 15-17, 30, 36 and 37 of the Amended Statement of Claim. 2. The Defendant has no knowledge or insuf?cient knowledge with respect to the allegations contained in paragraphs 14, 20-21 and 31-32 of the Amended Statement of Claim. Unless speci?cally admitted, the Defendant denies all other allegations contained in the Amended Statement of Claim. As is set out in more detail below, the commencement of this action is just the latest in a series of steps taken by the AER that are malicious, ultra vires its authority, in bad faith and designed to destroy Lexin. Any Matters that Defeat the Claim of the Plaintiff: History of the AER and the Regulation of the Oil and Gas Industry in Alberta 5. The province of Alberta has been regulating the oil and gas industry for at least 75 years. The ?rst regulatory body, called the Petroleum and Natural Gas Conservation Board, was created in 1938 and it has existed under several names since, including the Alberta Oil and Gas Conservation Board, the Alberta Energy and Utilities Board, and most recently, the Alberta Energy Resources Conservation Board. In December 2012, the Responsible Energy Development Act (the was passed by the Alberta Legislature. The REDA established that the Alberta Energy Regulator (the and on June 17, 2013, all regulatory ?anctions previously carried out by the Energy Resources Conservation Board were taken over by the AER, an entirely new organization with new regulatory functions and authority over energy-related applications and developments. The AER is responsible for all energy projects in the province, ?om application to reclamation, with the authority to administer, among other enactments, the Oil and Gas Conservation Act (the the Pipeline Act, the Public Lands Act, the Environmental Protection and Enhancement Act, the Mines and Minerals Act and the Water Act. The AER is now the single regulator for energy development in Alberta; it enforces environmental laws and issues environmental, oil and gas, pipelines .and other permits for energy developments. The mandate of the AER is to provide for the safe, ef?cient, orderly, and environmentally responsible development of energy resources in the province of Alberta. The Alberta IO. 11. 12. 13. government created the AER in response to concerns from stakeholders in particular, oil and gas companies who were experiencing inconsistent compliance response and uncertainty under the old regime. The AER was to effect change in terms of providing a more ef?cient, consistent and certain regulatory regime so as to ensure that stakeholders are given the best possible change of success within this regime. The AER, which operates independently from the government of Alberta, regulates approximately 181,000 active wells, more than 50,000 oil and gas facilities, and 415,000 km (258,000 mi) of pipelines. No one in Alberta can construct or operate a facility or drill a well without a license from the AER. A license can only be granted by the AER to a person or a company (a ?Licensee?) who complies with certain requirements under the OGCA and its regulations. The AER is funded by the Alberta energy industry and it is authorized to collect funds through an administrative fee levied on oil and gas wells, oil sands mines, and coal mines. The existence, therefore, depends upon the collection of these fees, as well as the ?nes it imposes upon Licensees for non?compliance. In addition, an Orphan Fund Levy is assessed and collected by the AER from oil and gas industry participants in Alberta, who fund the majority of the costs incurred by the Orphan Well Association (the The OWA manages the abandonment of Alberta upstream oil and gas orphan wells, pipelines, facilities and the reclamation of their associated orphan sites. An ?orphan? is a well, pipeline, facility or associated site which has no legally responsible or ?nancially able party to deal with its abandonment and reclamation. A Licensee?s annual Orphan Fund Levy is based upon its proportionate share of sector liability as determined by the Licensee Liability Rating (the which re?ects a ratio of the Licensee?s deemed assets and liabilities. 14. With the recent 50% drop in oil prices, Licensees are facing a challenging economic environment. To ensure sustainability, many companies have been forced to cut the level of capital spending and the size of their workforce. Corporate Structure of the Defendant and other Related Parties. 15. 16. 17. 18. 0989 Resource Partnership (?0989?) is a partnership formed and registered under the laws of British Columbia. Lexin is a partner of 0989 Resource. It is a company incorporated under the British Columbia Business Corporations Act. Lexin is extra-provincially registered in the Province of Alberta and is a licencee under the OGCA in relation to certain wells and pipelines and related infrastructure. 0989 Resource and Lexin own and operate natural gas and oil wells and related facilities in western Canada. 0989 Resource is a limited partner of LR Processing Partnership Processing?), which is a limited partnership registered in Alberta. The general partner of LR Processing is LR Processing Ltd. Ltd?), a company incorporated in Alberta. On November 25, 2016, LR Processing Partnership and its general partner, LR Processing Ltd. were adjudged bankrupt. They have appealed the bankruptcy. BACKGROUND AND SUMMARY OF CURRENT FINANCIAL DIFFICULTIES The Mazeppa Gas Processing Plant - Ownership and Operating Structure 19. 20. LR Processing wholly owns and operates the Mazeppa Gas Processing Plant (the ?Plant?), a natural gas processing plant located in High River, Alberta. LRP Ltd. owns the lands on which the Plant is located. From June 2003 until January 2014, LRP Ltd., was the licensee of the Plant. In January 2014, LRP Ltd?s license was improperly transferred to Lexin by the R, as is particularized below. History of the Mazeppa Gas Processing Plant 21. 22. 23. 24. There are over 6,000 sour gas wells and 18,000 kilometres of operating sour gas pipelines in Alberta. Sour gas is a natural, colourless and ?ammable gas containing more than 1% hydrogen sulphide. It-is processed at approximately 250 plants in Alberta, including more than 50 larger facilities that produce elemental sulphur. The Plant is one of these facilities. The Plant was opened in 1986 and is located in the High River area. It processes both sweet and sour gas. It has a plant capacity of 90 MMcf/d of sour natural gas and 45 MMc?d of sweet natural gas. In the High River area, there is approximately 270 km of pipeline infrastructure in place and gas compression capacity of 42.5 lV?Vlcf/d. In June 2016, the pipelines at the Plant became temporarily shut in due to a mechanical issue at the Plant. Following an inspection of the Plant by the AER on June 14, 2016, the AER made an order prohibiting the lines from reopening. As a result, the majority of the Plant?s 24 employees had to be furloughed at the end of June 2016. The Plant remains shut in. Improper Transfer of the License for the Plant to Lexin 25. 26. 27. For a number of years, Lexin has been a license holder under the OGCA in relation to certain wells and pipelines. However, until it was made the licensee of the Plant in January 2014, Lexin was not involved in and did not hold any license in relation to the Plant. At some point in or before December 2013, certain representatives of the AER approached LRP Ltd. and Lexin and advised them that they were required to submit a license transfer application by which LRP Ltd. would transfer its license for the operation of the Plant to Lexin. The AER threatened to revoke the Plant's license completely if Lexin did not consent to the transfer of the license to Lexin. This is despite the fact that since Lexin was not a 28. 29. 30. 31. 32. 33. 34. working interest participant in the Plant, it was not legally entitled to hold a licence in relation to the Plant, as set out below. . Lexin reluctantly, under protest and under pressure from the AER, submitted an application for a license transfer. The license transfer process was undertaken by AER arbitrarily and without proper consultation with Lexin. To the knowledge of the AER and its of?cials, s. 17(1) of the OGCA requires a licensee for a facility in Alberta to be a ?working interest participant? in relation to that facility. A ?working interest participant? is de?ned as ?a person who owns a bene?cial or legal undivided interest in a well or facility under agreements that pertain to the ownership of the well or facility?. At the time that the license transfer was forced upon Lexin by the AER, LRP Ltd. owned the lands on which the Plant is located and the Limited Partnership operated the Plant. Lexin had no involvement in the operations of the Plant, nor did it take an active role in the business of the Limited Partnership. At all relevant times and, in particular, at the time of the Lexin license transfer in January 2014, Lexin did not own any bene?cial or legal interest in the Plant. Lexin was not at any relevant time a ?working interest participant? in the Plant. As a result, the purported transfer of the license to Lexin was illegal and void and therefore is of no force or effect. In January of 2014, LRP Ltd?s total deemed assets were $0 and its total deemed liabilities were stated as $65,596.00 with a Liability Management Rating of 0, while Lexin?s total deemed assets were $236,173,010.30 and its total deemed liabilities at that time were $141,975,129, resulting in a LMR of 1.66. The improper motivating factor in forcing Lexin to become the licensee of the Plant was this disparity in assets between the two companies. Lexin has disputed its status as a licensee in relation to the Mazeppa Plant and the amount of its liability to the AER (the ?Dispute?). 35. 36. 37. 38. 39. 40. Particularly, Lexin has advised the AER that it was not a ?working interest participant? in the Mazeppa Plant, within the meaning of the OGCA, and therefore was not a proper ?licensee? of the Plant under applicable legislation. Lexin also informed the AER that the resulting incorrect liability management rating calculation was damaging the company?s business and ?severely crippling? its ability to operate its business and execute its business plans, including negatively impacting Lexin?s ability to complete transactions in order to enhance its liquidity and ability to continue to operate as a going concern. The Dispute has materially adversely affected Lexin?s operations, liquidity and access to capital. Among other things, the AER has issued invoices to Lexin and later garnishing orders to Lexin?s commercial counterparts, which further materially undermined Lexin?s liquidity. Lexin raised its concerns with respect to the Dispute with the AER on a number of occasions, particularly in written correspondence by letters of July 12, 2016, August 2, 10 and 15, September 21, 2016, December 2, 2016 and January 31, 2017. As a result of the garnishment orders and other actions, Lexin has had cash ?ow dif?culties and has been unable to pay its creditors and comply with the AER notices since approximately February of 2016. Further, and to the knowledge of the AER, its actions have made it impossible for Lexin to comply with directions and orders, and to ensure that its licenced sites are maintained in compliance with the requirements. Further, since early 2016 the AER has repeatedly threatened Lexin with various regulatory actions and enforcement mechanisms resulting from the error in the calculation of Lexin?s LMR. By way of example, as a result of this miscalculation, the AER demanded on June 10, 2016 that Lexin pay a security deposit for the difference between its deemed assets and deemed liabilities in the amount of $3,107,665.02. The AER improperly threatened Lexin with remedial and enforcement actions if these monies were not paid. attacks on Lexin continued as follows: 41June 13, 2016, the AER issued a Notice of Garnishment against Lexin in relation to amounts that the AER claimed were owing. Two days later, on June 15, 2016, the AER made an order preventing Lexin from restarting the Plant, even though Lexin was not the owner or operator of the Plant. On numerous occasions in July and August of 2016, Lexin raised with the AER the issue of its having been wrongfully forced to be the licensee for the Plant. It also requested that the deemed liabilities incorrectly attributed to Lexin and the calculation of its LMR be corrected. On July 21, 2016, the AER recognized its error in the calculations. It corrected Lexin?s LMR (to be 1.03) and retracted its demand for a security deposit (because Lexin?s LMR was above 1.0, no security deposit is required). In early August 2016, however, the AER reverted back to its original position in calculating Lexin?s LMR and, to date, has continually and incorrectly attributed an LMR of less than 1.0 to Lexin, insisting that Lexin pay a security deposit as a result. Furthermore, in a meeting with Lexin in August 2016, the AER staff took the extraordinary position that even if Lexin became fully compliant with all licencing requirements, it could not operate the Plant as it was not an owner or a ?working interest participant? in the Plant. This assertion was made by the AER while it simultaneously continued to assert that Lexin was the proper licensee. On August 9, 2016, AER purported to issue an Order against Lexin requiring it to suspend and discontinue the operations of the Plant, to develop and submit an Incident Response Plan, to develop and submit an Ongoing Monitoring Plan, and to report to the Director and to the public through a weekly written report. This Order was made against Lexin despite the fact that the AER knew that Lexin has no ownership or working interest in the Plant and was therefore not a working interest participant. 49. 50. 51August 10, 2016, the AER again asserted Lexin?s liability for the Plant under the illegal license, despite acknowledging that Lexin was not a working interest participant and therefore not a proper licensee under the OGCA. On September 22, 2016, while maintaining its position that it was not the proper licensee, Lexin submitted to the AER a reasonable proposal for a payment plan in relation to the Orphan Well Levy and administrative fees that the AER claimed were owing. Despite the agreement regarding a payment plan, shortly thereafter, the AER improperly commenced a garnishing process against Lexin. Not only was the discretion to do so exercised arbitrarily and unfairly, but it was based upon an inaccurate liability rating as described above, and was also based upon an overstatement of the fees that were allegedly owing by Lexin. On October 25, 2016, the AER once again improperly issued an order against Lexin for a hydrocarbon spill at the Plant, despite the fact that AER was not the proper licensee for the Plant and was not in control of the Plant. This continuing series of arbitrary and unfair steps taken by the AER against Lexin has made it dif?cult, if not impossible, for Lexin to operate as a going concern. In October 2016, the AER issued orders and notices against Lexin, including a direction not to remove ui ment from Lexin?s Sites the ui ment Direction? . Cl 13 On December 2, 2016 and again on January 31, 2017, Lexin advised the AER that it was not able to provide ?proper health and safety overview and measures for sour wells? beyond February 15, 2016. At the same time, Lexin made a proposal to the AER that would be in the best interests of the AER, the general public and Lexin. The December 2, 2016 proposal contained 3 main components: a) The AER issue abandonment orders with respect to Lexin?s sour gas wells; 57The AER release the garnishment orders issued with distribution of funds received from counterparties being split 70% to the AER on account of Lexin?s liabilities and 30% to Lexin; and c) Lexin be permitted to restart production on shut-in wells and distribute funds ?orn such restarted production on the basis of 70% to the AER on account of Lexin?s liabilities and 30% to Lexin. On January 31, 2017, Lexin delivered a letter to the AER following up on the proposal set out in its December 2, 2016 letter. Lexin advised in this letter that because of the Dispute and the actions, it was ?not sure that [it] will be able to continue to provide proper health and safety overview and-measures for the sour wells, particularly beyond February 15, 2017.? Lexin expressed its concern that the situation created serious health and safety risks for all concerned. On February 6, 2017, the AER responded to Lexin and rejected the proposals set out in the December 2, 2016 and January 31, 2017 letters. On February 14, 2017, the AER issued an order suspending all of Lexin?s operations and licenses (the ?Closure Order?). On the same day, February 14, 2016, the AER also issued a Direction requiring Lexin to cooperate with any inspection of its sites and records (the ?Inspection Direction?). Also, on the same day, the AER commenced an application against Lexin seeking an order to enforce the Equipment Direction and directing Lexin, its directors, agents and employees to comply with the Inspection Direction. The AER brought this application on an urgent basis, purportedly on the basis of health, safety and environmental concerns. Interim Orders were granted on February 14 and 17, 2017, and another Order was granted on March 3, 2017 with respect to the Equipment Direction, and the application with respect to the Inspection Direction was adjourned sine die. On February 15, 20l7, the AER issued Environmental Orders against Lexin. 64late February 2017, Lexin sought a mandamus order directing the AER to take reasonable steps to remedy all health, safety and environmental issues and to issue abandonment orders for Lexin?s sites which have been designated as orphans by the AER (?Lexin?s Application?). The Court of Queen?s Bench of Alberta will be asked to determine whether it has jurisdiction to hear these issues on March 22, 2017. The AER acted ultra vires its authority under the Alberta Legislation and in bad faith. The AER has undertaken a course of conduct that is ultra vires its constituting and governing legislation. Its improper conduct started in 2013 and continues to date, and includes: making Lexin the licensee of the Plant when it is not a ?working interest participant?, contrary to the refusing to remove Lexin as a licensee of the Plant despite its illegality and despite repeated requests that they do so, contrary to the failing to calculate Lexin?s LMR correctly, and therefore calculating Lexin?s security deposit, which is based on its LMR, incorrectly, contrary to Directive 006; after acknowledging the error in the calculation of the LMR, applying the incorrect LMR again in calculating the security deposit; issuing Declarations against three individuals related to Lexin, despite the fact that, to the knowledge, Lexin is not the proper licensee under the garnishing Lexin?s assets when the AER knew or reasonably ought to have known that Lexin was not the proper licensee and that such a garnishing process would make it dif?cult, if not impossible, for Lexin to carry on business; demonstrating a complete unwillingness to issue ?dual licenses? to Lexin and LRP Ltd. and forcing Lexin, therefore, to hold the sole license for the Plant in circumstances where other similarly situated companies were treated differently; and 12 h) in general, exercising their authority in an unfair and arbitrary manner, and acting in bad faith when dealing with Lexin. Section 106(1) of the OGCA is Unconstitutional 67. Where: a) a licensee, permit holder or working interest participant is in contravention of or fails to comply with an order of the or b) a licensee, permit holder or working interest participant has an outstanding debt to the AER, or to the AER in account of the Orphan Well Fund section 106 of the OGCA allows the AER make a declaration setting out the nature of the contravention, failure to comply or debt, and naming one or more directors, of?cers, agents or other persons who, in the opinion, were directly or indirectly in control of the licensee, approval holder or working interest participant at the time of the contravention, failure to comply or failure to pay. 68. Before making a declaration under s. 106 of the OGCA, the AER must: a) Believe that it is in the public interest to do so; and b) Give at least 10 days? written notice of the intention to issue a declaration to anyone affected. 69. In making a declaration under s. 106 of the OGCA, the AER can, subject to any terms and conditions it considers appropriate, including inter alia: a) Suspend any operations of a licensee or approval holder; b) Refuse to consider an application to transfer a license or approval under the 70Require from the person subject to the declaration the submission of abandonment and reclamation deposits in an amount determined by the AER prior to granting any license, approval or transfer under the d) Require from the person subject to the declaration the submission of abandonment and reclamation deposits in an amount determined by the AER for any wells or facilities of any licensee or approval holder. Between May of 2005 and September 2015, the AER and its predecessor named only 10 individuals under s. 106 as a person ?in control? of a licensee that has contravened or failed to comply with an order of the AER or has an outstanding debt owed to the AER (a ?Declaration?). Although there were 300 outstanding non-compliance issues listed on the website in 2016, the AER issued no Declarations that year. Declarations are rare for a reason: a Declaration is an extraordinary remedy that can and often does have a signi?cant impact not only on the licensee who is allegedly non- compliant, but upon the named individual. The effect of a Declaration, if issued, is that the person named in the Declaration cannot be involved in the operations of the licensee or of any licensee until the licensee at issue becomes compliant. It is a serious, potentially career ending issuance and can have a severe, negative impact on the named individual and the ability of the licensee to carry on business. On January 19, 2017, the AER issued Declarations pursuant to s. 106 of the OGCA naming Michael Smith, Jasmina Cezek and Robert Jennings as persons in control of Lexin as a ?licensee? that has failed to comply? with certain AER Orders (the ?Declarations?). The AER provided no reasons for its decision. The Declarations were issued despite counsel?s prior requests for information in relation to the intention to issue the Declarations, including a breakdown of the fees and penalties allegedly owing by Lexin 75the AER. The AER provided no evidence upon which it relied in making the Declaration and did not hold a hearing despite counsel?s request. On February 14, 2017, Mr. Jennings and Mr. Smith made requests for a regulatory appeal of the AER decision to issue the Declarations and brought an originating application for judicial review of the AER decision to issue the Declaration, as did Lexin for review of the AER decision to issue the Declaration against Ms. Cezek. These appeals and applications for judicial review remain outstanding. These Declarations were made based on incorrect, erroneous and/or intentionally wrongful information, including: a) Lexin is not the proper licensee of the Plant; and b) the AER Order of August 9, 2016 attributes the responsibility for the Plant to Lexin, even though the AER admitted that Lexin is not an owner or a ?working interest participant? of the Plant; The issuance of such Declarations, in addition to their detrimental effects against each of the individuals, has had a severe and negative effect on Lexin?s reputation and ability to attract and maintain quality employees, and on its ability to carry on business in the normal course . The Declarations are not in the public interest. They will have no deterrence effect, nor will they protect the public or the environment. The Plant operations have been and remain suspended and discontinued by the August 9, 2016 Order These Declarations will also encourage other individuals involved with oil and gas companies in Alberta facing challenging economic times to jump ship and avoid responsibilities owing to the licensees, the public and the environment. Section 106(1) of the OGCA allows the AER to make a Declaration naming a director, of?cer, or agent of a licensee that has failed to comply with an order of the AER or has an outstanding debt to AER, to AER on account of the Orphan Fund, or any other person. 81The effect of such a declaration is that the AER may for an inde?nite and unde?ned period of time: suspend operations of; refuse to consider any applications from; or (0) require the payment of abandonment and reclamation deposits, which could amount to millions of dollars, from either the individual or any company controlled by him or her in the future, and subject to any terms it considers appropriate, so long as it considers it to be in the public interest to do so. This section is clearly penal in nature. Its purpose is to place a stigma upon and to punish an individual for the alleged acts of a licensee. The punishment pursuant to s. 106(1) of the OGCA is of disproportionate magnitude. Its magnitude is determined in accordance with principals of criminal sentencing, making it punitive and therefore triggering constitutional protections such as the right to be presumed innocent, a right that is not protected in this legislation. As such, s. 106(1) of the OGCA is unconstitutional. Section 106(1) of the OGCA also gravely interferes with the ability of an individual against whom a declaration is made to make a living. As such, it undermines the rights of life, liberty and security of the person protected by Section 7 of the Canadian Charter of Rights and Freedoms, Part I of the Constitution Act, 1982, being Schedule to the Canada Act 1982 (UK), 1982, 11 (the ?Charter?). The reduced security of the person, which this legislation engenders, is not accomplished in a fashion that comports with the principles of fundamental justice and in the circumstances, is a denial of the rule of law and contrary to the Charter. Section 106(1) of the OGCA is therefore unconstitutional and should be held to be of no force and effect. The Parties? immediate ?nancial dif?culties and insolvency are primarily due to their lack of liquidity which ?ows from and is as a result of the Dispute, resulting garnishment orders of the AER, general market conditions in the oil and gas industry and the Parties? consequent inability to satisfy its short~terrn debt obligations. Lexin?s ability to obtain ?nancing or complete any orderly sale of assets to improve its liquidity has been signi?cantly affected by the Dispute and the ongoing AER proceedings, 87. 16 the increasing demand from its creditors, the shutdown of its operations by the AER and its urgent need for cash have made it impossible for Lexin to preserve its business. Lexin has sought to cooperate with the AER, including making proposals to the AER designed to repay the AER amounts claimed by it, While giving the Lexin the ability to generate cash ?ow necessary to meet its current liabilities. However, the AER has rejected such proposals. The AER's garnishment and other measures currently make it Virtually impossible for the Parties to carry out any initiative to sell assets or otherwise in order to enhance their liquidity. Remedy Sought: 88. The Defendant respectfully requests that the Plaintiff?s claim be dismissed with costs of the action against the Plaintiff. Statement of Facts Relied On: