One deal, two jurisdictions – interpreting competing jurisdiction clauses
The Court of Appeal has provided comfort to the derivatives market by giving a wide, commercial interpretation to an exclusive English jurisdiction clause.
The Alberta Energy Regulator (AER) has recently promoted a new area-based closure (ABC) program to incent oil and gas companies to permanently close inactive or marginally productive oil and gas wells and thereby reduce the potential for such wells ending up with the Orphan Well Association upon the insolvency of operators. The ABC program is a voluntary program that exempts participating companies from inspection and reporting requirements for low-risk suspended wells by agreeing to spend a set amount of money permanently abandoning and reclaiming wells in a defined geographical area.
Pilot programs under the ABC program have shown the potential for significant cost savings for industry, and industry has shown keen interest in the program.
Wells and related infrastructure are commonly shut in and made inactive when oil and gas prices are low or their productivity declines.
The AER's Directive 013: Suspension Requirements for Wells sets out the regulatory and technical requirements for inactive wells that have not produced for 12 or more months. Among other things, it requires operators to maintain, inspect and report on all inactive wells.
The purpose of Directive 013 is to reduce the potential for impacts to the public and the environment posed by inactive wells. As of September 2018 there were over 89,000 inactive wells in Alberta.
Undertaking an ABC program can be more cost effective than complying with Directive 013’s annual inspection and reporting requirements for low-risk wells, as such inspections and reports are a cost that does not ultimately deal with the actual closure of those inactive wells; the costs are simply spent inspecting and reporting on wells that will in the future have to be abandoned and reclaimed. The ABC program allows operators to avoid such costs for low-risk wells and instead spend money on actual abandonments and closures.
The ABC program incents operators to abandon wells, remediate contamination and undertake reclamation in one concentrated and coordinated effort. By focusing work in one area, economies of scale can be realized. Seasonal access roads may only have to be re-opened once and unit prices for services, equipment and personnel may be lower for numerous wells in a concentrated area rather than over the same number of wells spread over the province.
Operators must shut in pipelines that have not been used for at least a year. To do this they typically access the pipeline and conduct shut-in operations but then leave the associated wells for many years in an inactive state before re-accessing the area, re-opening the roads and abandoning the wells. Remediation of any contamination and surface reclamation then follows, sometimes years later. The ABC program can provide far greater efficiencies because the steps to permanent closure can be planned and implemented in one continuous series of operations, all concentrated within one field.
The ABC program also encourages collaboration and cost sharing with other operators. For instance, two or more companies with ABC programs in the same area may share common service providers, such as for trucking, waste disposal, camps or other services and they may share required but commonly underutilized personnel, such as medics who are usually on site in standby mode.
Some operators are claiming savings of 50 per cent or more conducting work under the ABC program compared to the traditional Directive 013 approach of monitoring, reporting and then eventually abandoning, remediating and reclaiming inactive wells.
Operators apply to the AER with an ABC program closure activity plan that sets out the work they will perform, where it will occur and when. They must commit to an inactive well liability reduction target of at least 4 per cent of their total inactive well inventory. ABC program applications are posted on the AER’s “OneStop” web page to encourage collaboration with other operators in the area.
If the AER approves an ABC program, the operator is then assigned an inactive liability reduction target, which is an amount it must spend within a calendar year on closing inactive sites in order to reduce liability. Once an operator’s proposed ABC program has been approved by the AER, it can apply for a relaxation of its Directive 013 inspection and reporting requirements for low-risk wells. Operators in the ABC program must report their closure activities and expenditures to the AER. An operator’s ABC program will have one of three outcomes: exceeding the liability reduction target number, meeting the target, or not meeting its target. Operators who fail to meet their target will not be allowed to participate in the ABC program in future years.
The AER has committed to monitoring the program and providing annual reports to the public.
The voluntary ABC program is strongly supported by industry associations as it is expected to lower the province’s inactive well count and is efficient, risk based, scalable in that it can in any year deal with 4 per cent or more of an operator’s inactive well inventory, applies to both big and small operators, encourages collaboration and is transparent. It also makes good business sense as it ultimately helps the bottom line, is good for the environment and should improve industry’s reputation with the public.