Redwater will affect the way E&Ps estimate and manage Asset Retirement Obligations

May 15, 2018

The issue of Licensee liability in Alberta’s oil and gas sector has been an evolving one for many years. The Alberta Energy Regulator (AER) introduced changes to the Licensee Liability Rating (LLR) from 2013 through 2015, and then again in 2016. Further changes are expected in 2018, as is the ruling on the Redwater Energy Corp. (Redwater) case which will determine the degree of liability that must be assumed by receivers of defunct companies.

No matter which way Canada’s Supreme Court rules, in the post-Redwater world it will be essential for E&P companies, lenders, and other investors to have an early and realistic estimate of the asset retirement obligation (ARO) associated with an oil and gas asset. If the Court rules in favour of the AER and the Orphan Well Association (OWA), then lending institutions will very likely impose ARO-related constraints and conditions on capital. If the Supreme Court rules in favour of Redwater’s receivers, then the government, through the AER and OWA, is likely to tighten regulations around LLR and ARO to ensure companies are setting aside enough funds to effectively cover the abandonment, reclamation, and remediation costs to retire wells and facilities.

Either way, astute E&P companies are recognizing the importance of having a clear upfront picture of Asset Retirement Obligations on both the assets they currently hold and any prospects they may consider adding to their portfolio. Having a simple, standardized process that can be used industry-wide will help companies to remain compliant and allow all stakeholders to make realistic, apples to apples comparisons when evaluating acquisitions and managing long-term liabilities. It will also help determine more realistic budgets and a more realistic return on investment (ROI) projections.

During the research and development phase of XI’s LLR and ARO Cost Model software, industry feedback revealed that, at the time, nearly 90 percent of companies were relying on the LLR deemed liabilities as the basis to estimate long-term asset retirement obligations. This seems logical until you realize that the AER’s LLR formulas were never designed for this purpose and, as a result, LLR overlooks five key components necessary to get a realistic estimate of the true end of life costs.

Using real-world data from an unnamed Canadian E&P company, XI Technologies has published a short summary report to demonstrate the potential bottom-line differences between estimating ARO based on LLR deemed liability numbers versus a more comprehensive ARO cost model.

The full summary report is available as a free, downloadable ePaper titled, LLR vs ARO – The Cost of Uncertainty