The Alberta Energy Regulator (AER) has outlined some details on its previously announced new liability management framework (LMF). The LMF's goal is to provide a comprehensive and accurate assessment of the capabilities of oil and gas companies to meet their oil and gas well, facility and pipeline closure requirements. Details have recently been provided on a proposed new Licensee Capability Assessment (LCA) that considers a licensee's financial ability to meet its site closure requirements. How the LCA will be used by the AER in making licensing decisions is not yet clear.
The AER considers holding a licence a privilege, and only companies the AER feels are responsible and capable may be granted new licences or be transferred existing licences.
Licensees must abandon wells at the end of their productive lives (i.e., permanently plug them with cement and remove downhole and surface equipment), remediate any contamination and reclaim the site (i.e., replace the soil and re-establish surface drainage and vegetation). However, there are no legislative timelines to do such work. Without legislated timelines, the inventory of inactive oil and gas wells in Alberta (i.e., no production or activity within the last year) due to technical or economic reasons has grown over the decades to 96,969 wells as of July 2020.
The number of orphaned sites has also grown dramatically. An orphaned site is an inactive well or facility without anyone responsible or financially able to permanently close it. Sites are orphaned when the licensee becomes insolvent and the AER decrees them as orphans. The number of sites under the Orphan Well Association's (OWA) care and custody has risen from 387 in 2013 to 2,898 sites requiring closure as of December 1, 2020, with potentially many more to come as the inventories of insolvent or bankrupt companies not sold to buyers or otherwise dealt with through court proceedings get transferred to the OWA.
The new LMF will have several components, including a Licensee Capability Assessment, an inventory reduction program and expansion of the OWA's powers. The full LMF has not yet been disclosed by the AER. The recent outline from the AER provides some detail on the LCA component.
Licensee Capability Assessment
A new Licensee Capability Assessment will consider a licensee's financial ability to meet its site closure requirements by considering its financial statements, the magnitude of its specific liabilities under AER Directive 011: Licensee Liability Rating (LLR) Program: Updated Industry Parameters and Liability Costs, and various operating parameters of the licensee. The new LCA will supplement the existing LLR formula used by the AER, which essentially considers only the production from and liabilities associated with a licensee's licensed properties using generic AER formulae.
Financial information
Once implemented, the new LCA will require companies to regularly provide the AER with financial statements and other financial information. The specific details of these requirements have not been released but is understood to include information about a company's average net profit margin operating netback, debt-to-equity ratio, interest coverage ratio and cash from operations to service debt.
Magnitude of liabilities
Directive 011 assesses the magnitude of a licensee's liability. It provides the LLR formula used currently by the AER. Under the LCA, a licensee's magnitude of closure liability will be classified as low (below $25 million), medium ($25 million to $150 million) or high (greater than $150 million). How the AER will use these categories is not yet clear.
Performance indicators
The new LCA will also consider a licensee's operational, closure and administrative performance indicators.
Operational parameters to be considered by the AER will include an evaluation of a licensee's asset integrity systems and ability to operate safely. This will include compliance with AER Directive 013: Suspension Requirements for Wells, and the licensee's history of spills, releases and pipeline incidents.
Closure parameters to be considered under the LCA will include a licensee's commitment to liability management and site closure. The parameters include historical closure spend rates and site abandonment and reclamation rates.
Administrative parameters will consider a licensee's compliance with paying industry levies to the AER and for the OWA, as well as mineral lease expiries.
Application of the new LCA
How the AER will collectively assess a licensee's financial statements, the magnitude of its Directive 011 liabilities and its performance indicators in the new LCA is not yet known. Further, how the LCA will be used by the AER in making regulatory decisions for granting new licences, approving licence transfers or determining if security must be posted by a licensee has not yet been disclosed.
What is clear, however, is that the AER is moving towards a more holistic, life-cycle approach to liability management and the proposed LCA should provide the AER with better information about a licensee's financial ability to meet its site closure obligations.
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