Alberta announces new oil and gas liability management framework

The Alberta government has announced a long-awaited new liability management framework (LMF) for the oil and gas industry to better address the growing inventory of inactive and orphaned sites requiring permanent closure and to provide a more comprehensive and accurate assessment of oil and gas operators’ financial capabilities to meet the new site closure requirements. The new LMF details are to be announced and implemented by the Alberta Energy Regulator (AER) “over the next few months” following consultation with industry and other stakeholders.

The problem

• Currently 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), but there are no legislative timelines to do such work.
• Without a legislated timeline for closure, 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 (i.e., an inactive well or facility without anyone responsible or financially able to permanently close it) in the Orphan Well Association’s (OWA) care and custody has risen from 387 in 2013 to 2,992 wells requiring downhole abandonment, 3,157 requiring reclamation, 305 facilities requiring decommissioning and 3,762 pipelines requiring abandonment as of July 1, 2020, with thousands more to come as the inventories of insolvent or bankrupt companies not sold to buyers through court proceedings get transferred to the OWA.
• Landowners, municipal governments, First Nations, Alberta taxpayers, industry, the OWA and others are deeply concerned with the safety, environmental and financial impacts of permanently closing the large and growing inventories of inactive and orphaned oil and gas sites.

Six components

Details on the new LMF are not yet known but there will be six components.

First, licensees will for the first time have obligations in the form of a five-year rolling spending target to reduce their inventory of sites requiring closure. There is some indication they will be required to spend 4% of their estimated inactive well closure costs on reducing their inventory each year. How the target will be calculated and how progress is tracked aren’t yet known, nor are compliance mechanism details and how the obligation will work in a dynamic industry where acquisitions and divestitures of properties and companies are common. The new LMF will impact transactions, perhaps materially. It will also tie into the AER’s voluntary area-based closure program (discussed here).

The mandatory spending target will replace the current requirements for some operators to post a security deposit with the AER under the licensee liability rating (LLR) program. The security deposit requirement has been criticized as the money posted as security sits idle in an AER account instead of being put to work as operating capital. The security requirement has hurt many companies, especially smaller ones, and stifled numerous transactions and opportunities.

Second, a new “corporate health assessment” of a licensee’s ability to meet its site closure requirements will be created. The AER considers holding a license a privilege, and only companies the AER feels are responsible and capable will be able to hold new licenses or be transferred existing licenses. The details and scope of the new assessment are not yet known but will replace the existing LLR formula, which essentially considers only a licensee’s number of producing properties and inactive sites using generic AER formulae. It is likely that companies will have to regularly provide the AER with financial statements as well as other information as part of the new corporate health assessment.

Third, operators identified by the AER as struggling to meet their closure requirements may receive special proactive “support” or “action” from the AER to help them manage their closure liabilities. The details of such support or action for struggling companies is not yet known.

Fourth, landowners will for the first time have a regulatory power to nominate inactive sites for immediate closure and, unless the licensee can justify to the AER’s satisfaction that the site can remain inactive, the site must be permanently closed by the licensee. Citizens can also nominate inactive sites on public land for permanent closure.

Fifth, a new panel will consider options for addressing the approximately 37,000 legacy sites that were closed decades ago under much less rigorous standards than Albertans demand today. This may include holding the original operator liable to meet today’s standards even though it may have met its legal obligations at the time. The panel’s make-up, terms of reference and timeline are not yet known.

Sixth, the OWA’s powers were recently expanded to better manage orphaned wells, pipelines and facilities in its custody and new regulations require working interest participants to provide “reasonable care and measures to prevent impact or damage” to upstream assets in which they have an interest (details are here).

No surprise

The new LMF has been expected for a number of years. Some may say it’s long overdue. Given the large inventory of inactive and orphaned oil and gas sites in Alberta it is not surprising for Alberta to announce a more robust liability management framework.

If developed as intended, the LMF should inhibit the growth in the number of inactive sites, help reduce the existing inventory of inactive sites, keep some inactive sites from becoming orphans, enforce the polluter pay principal and at the same time not be fatal to the oil and gas operators wounded by persistently low commodity prices, lack of export pipelines and significant regulation and stakeholder opposition.