British Columbia strengthens oil and gas liability management regime

Global Publication April 2018

British Columbia has introduced amendments to the Oil and Gas Activities Act to address a growing number of orphan oil and gas sites due to increased operator insolvencies. The proposed changes will enable the Oil and Gas Commission (OGC) to adequately fund the Orphan Site Reclamation Fund (OSRF), develop new regulations that will require inactive wells to be abandoned and restored, and prevent oil and gas operators with a history of insolvency or non-compliance from operating in B.C.

Increasing number of orphan sites

The OSRF is a fund administered by the OGC to pay for the costs of abandoning and restoring orphaned oil and gas sites.

The number of designated orphan sites in B.C. recently leaped over one year from 45 to 307 due to operator insolvencies. The costs to abandon and restore these orphaned sites are estimated to be $40 to $60 million. However, as of March 31, 2017, the OSRF held only $5.3 million in funds.

The OGC has authority to designate a well, facility, pipeline or an associated area as an orphan site if the permit holder is insolvent or cannot be located. A designation allows the costs of abandonment and reclamation to be assumed by the OSRF. The OSRF is currently funded by all operators through a restoration tax on oil and gas production. The proposed amendments include replacing the restoration tax with a liability-based levy to be set by regulation based upon forecasted annual abandonment and restoration costs. Currently, changes to the restoration tax rate require a legislative change, so it cannot be quickly adjusted when there is a large increase in orphan designations.

Dormant sites

The proposed legislative amendments will authorize regulations for classifying certain long-term inactive oil and gas sites as dormant sites. Following a period of time to be set by regulation, the regulatory permit for a dormant site will automatically be cancelled, thereby triggering the abandonment and restoration requirements.

Currently, only a revocation of the permit triggers the abandonment and restoration requirements. While a permit is valid, the permit holder does not need to abandon or restore an inactive site. This has enabled companies to create a large inventory of inactive sites. It is thought that reducing the number of inactive sites will lessen the likelihood of an inactive site becoming an orphan site if companies later become insolvent.

The OGC will also have the ability to approve a liability reduction plan filed by an operator. Once approved, the permits for that company’s dormant sites will not automatically expire provided the company follows the liability reduction plan approved by the OGC.

Banishing bad operators

Presently, the OGC may refuse to issue or may suspend, cancel or amend a permit if the permit holder contravenes the legislation, is convicted of an offence or has engaged in a pattern of conduct that shows, in the OGC’s opinion, that it is unfit to hold a permit. The proposed amendments will allow the OGC to refuse to issue a permit or to suspend, cancel or amend a permit if the permit holder’s directors, officers, shareholders or agents have previously contravened the legislation, been convicted of an offence or are felt to be unfit to hold a permit. It is believed that banishing from B.C.’s oil and gas industry operators with personnel who have previously worked with companies that have gone insolvent and who have a poor compliance history will lessen the likelihood of future orphan site designations.

Enabling permit transfers

Presently, a permit may only be transferred upon approval of the OGC. In order to approve the transfer, the legislation requires that the OGC receive an application signed by both the permit holder and the person to whom the permit holder wants the permit to be transferred. The proposed legislative amendments will change these requirements so that the OGC will be able to approve a permit transfer upon receiving an application from only the person who wants to acquire the permit if the permit is cancelled, spent or if the permit holder no longer exists or cannot be located. This change will enable the OGC to transfer a permit to a willing working interest holder. Currently, the OGC is restricted on what it can do with a permit once a permit holder becomes insolvent or ceases to exist.

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