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Alberta’s energy watchdog is bracing for budget cuts and layoffs in an overhaul that underscores renewed concern about the energy industry's financial health.

The cutbacks follow multiple investigations into the Alberta Energy Regulator’s (AER) former chief executive and comes as it struggles with fallout from the industry-wide downturn, including a glut of defunct oil and gas wells.

AER interim CEO Gordon Lambert told staff in a June 24 e-mail that shifts in global oil markets mean some companies can no longer afford levies that support the regulator’s operating budget. Fees are based on a variety of factors including the AER's revenue requirement, the previous year's production volumes and the number of wells and operators in the province.

The AER oversees major oil-sands plants and pipelines in the province and had a budget of around $252.8-million in the last fiscal year. Although funded by industry, the budget is set and approved by the provincial government.

The magnitude of the cuts was not immediately known, but a source with direct knowledge of the organization’s finances said it is currently operating with an interim budget of about $150-million and that staff reductions are likely. The person was granted anonymity by The Globe and Mail because the individual was not authorized to speak publicly on the matter.

Top executives at the AER are working closely with Premier Jason Kenney’s government “to address the challenges posed by the current fiscal situation,” Mr. Lambert wrote in the internal e-mail, a copy of which was obtained by The Globe. The final outcome of the budgeting process will not be known until September or October, he added.

“The AER, along with all levels of government, need to find new ways of operating. Innovative leadership is required across the organization to manage in ‘new normal’ circumstances where oil and gas revenues are considerably reduced," he wrote.

“As a result, we are examining a range of business models aimed at building a sustainable future state for the AER and our employees.”

It is unclear at this time whether the province would top up the regulator’s budget.

Scores of energy firms have collapsed in recent years, leaving behind thousands of oil and gas wells with no legal owner. Trident Exploration Corp. in April became the latest energy producer to shut down operations. It walked away after handing custody of 4,700 wells to the regulator.

Earlier this month, the United Conservative government stepped in with $23-million in emergency tax relief to head off further bankruptcies of struggling natural gas producers.

The AER is also embroiled in investigations launched by Alberta Ethics Commissioner Marguerite Trussler, Public Interest Commissioner Marianne Ryan and Auditor General Doug Wylie into a consultancy run by its former CEO, Jim Ellis.

He led the AER for five years but resigned abruptly last fall amid allegations that he diverted public resources and money for a startup nonprofit.

Spokeswoman Cara Tobin said the AER would seek additional funding after the provincial budget is released but is reviewing options now in anticipation of cuts.

“While we are undertaking this work on the assumption that we will face a budget reduction, it is too early to speculate about details such as staffing levels at this time,” she said in a statement.

Mr. Kenney pledged during the spring election campaign to fire the AER board in response to industry criticisms over lengthy delays to major projects and new drilling permits. However, much of the board remains intact.

Energy Minister Sonya Savage’s office did not respond by deadline Tuesday.

In May, Mr. Kenney appointed a panel led by former Saskatchewan NDP finance minister Janice MacKinnon to assess the province’s finances ahead of a fall budget. A report is expected by mid-August.

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