The Alberta Energy Regulator (AER) has issued a new draft directive on Licensee Life-Cycle Management for stakeholder comment. Life-cycle management is the regulation of oil and gas wells, pipelines and facilities from initial licensing, construction, operation through to eventual permanent closure.
The draft directive provides some further proposed details on 5 parts of the Alberta government’s Liability Management Framework being implemented by the AER to increase site closures and prevent oil and gas companies from defaulting on their closure obligations:
- a holistic licensee assessment by the AER on a licensee’s financial and operational capabilities and performance through a Licensee Capability Assessment (LCA);
- a Licensee Management Program by which the AER will manage the licensees that the AER identifies through its holistic licensee assessment as having a greater risk of potential failure in meeting their regulatory and liability obligations;
- an Inventory Reduction Program, which will set minimum annual site closure spending requirements for each company;
- changes to how the AER will consider applications to approve the transfer of oil and gas licences and approvals;
- a new financial security system.
Although the government and AER previously signalled these changes, the proposed changes are significant and will materially change how oil and gas assets are bought and sold, financed and managed in Alberta.
Holistic licensee assessment
The AER will consider more information and data about a company’s financial health and operational performance than previously. Recent changes already in force include the requirements for companies to provide the AER with detailed financial and other information under Directive 067: Eligibility Requirements for Acquiring and Holding Energy Licences and Approvals. The AER will use this Directive 067 financial information along with a Licensee Capability Assessment (LCA) it will undertake in considering a company’s capabilities to meet its obligations. The LCA includes estimating a company’s closure liabilities, its historical closure rates, compliance and other factors.
The holistic licensee assessment may also include any other information the AER has about a company. It will replace the existing Licensee Liability Rating (LLR) system. The changes will be brought about in phases.
Licensee Management Program
The holistic licensee assessment is intended to identify companies that the AER feels are at a greater risk of failure. The Licensee Management Program involves engagement or regulatory action by the AER with those at-risk companies. It may include education, encouragement to use best practices and, where appropriate, specific regulatory actions such as restrictions on new licensing, the issuance of orders and requirements to post security.
Mandatory inventory reduction
The AER’s regulations allow it to require companies to undertake minimum amounts of work abandoning, decommissioning and closing AER-regulated assets or to set minimum closure spending requirements, or both. Under AER Bulletin 2021-23, the AER has announced industry-wide annual total closure spending targets through to 2026, and will update them every July 31st. The total minimum closure spending requirement for the industry for 2022 has been set at $433 million. Each company will find out what its share is of this amount in July 2021.
The closure spend assigned to each company will be measured annually, starting January 1, 2022. It will not be adjusted throughout the year. Failure to spend the minimum amounts may require a company to post security and the AER may take other regulatory actions.
The work that will qualify towards a company’s mandatory target includes downhole abandonment, surface abandonment of wells, facility abandonment, surface casing vent flow and gas migration repairs, environmental site assessments, equipment removal and remediation of inactive sites. Well suspensions, pipeline discontinuances and certain work on operating sites will not qualify. Money spent under government grants for site closure, such as the Site Rehabilitation Program, is also excluded from meeting the closure target.
The AER has always had to approve any licence transfers and it considers holding a licence as a privilege. What is new is that a licence transfer application will trigger holistic licensee assessments of both the transferor and transferee.
If the assessments lead the AER to conclude that the transferee or transferor is at risk of failure, the AER can deny the licence transfers, or approve them with conditions, including the posting of security.
Applications to transfer dispositions of Crown surface land will be rejected if either the transferor or transferee is in arrears to the Crown for surface rentals under the Public Lands Act or if any municipal property taxes are outstanding. Further, the transferee will have to formally declare to the AER that it has valid surface access and mineral rights and holds a working interest, among other things. For pipelines, the transferor must declare it has all records as required by the regulations and the transferee must declare it has received all such records.
Currently, parties to an oil and gas asset transaction can usually estimate with reasonable accuracy the amount of any security deposit that may be required for AER approval to transfer licences. Under the new proposed system the AER will set the security amount through its holistic licensee assessment and any other information it considers appropriate. It will not provide any preliminary determination, meaning the parties to a transaction will not know if any security must be posted or its amount until the licence transfer application is considered by the AER. This will undoubtedly result in changes to how transactions are currently negotiated and structured. Escrow closings will likely become more common.
The maximum security that may be required will be the licensee’s total liability for permanent closure of all its AER-regulated assets, including amounts for providing care and custody of the assets while waiting for their permanent closure.
More to come
The proposed Licensee Life-Cycle Management Directive, if implemented, will significantly change how oil and gas assets are regulated in Alberta, and will affect every company with oil and gas assets in Alberta. Not all of the details on this new liability management system, or exactly when or how it will be phased in, are known. There is more to come.
The AER has invited stakeholder feedback on the draft directive until July 25, 2021.