Word to the Wise: Why using LLR can cause inaccurate abandonment cost estimates

July 23, 2019

The Alberta Energy Regulator’s Licensee Liability Rating (LLR) Directive 011 deemed liability values are the most commonly accepted measure of asset retirement obligation (ARO) in Alberta. Unfortunately, as we at XI Technologies have discovered, these values may not provide an accurate assessment of ARO, resulting in values that are either too high or too low depending on the situation.

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For the next five weeks, our Word to the Wise posts will examine different ways in which relying on deemed liability values could give you an inaccurate estimate of your ARO. This week, we’ll look at how abandonment costs in LLR can be inaccurate based on a few factors. For a look at the cost impacts of relying on LLR liability values instead of a fully representative ARO calculation, download our case study entitled “LLR vs ARO:  The Cost of Uncertainty”.

Wells Drilled Prior to 1985

Drilling practices underwent changes in the mid-1980s that impact end of life costs. Wells drilled prior to this timeframe often have integrity issues at end of life that require specialized interventions, resulting in higher abandonment costs. The BC Oil & Gas Commission allows for this in their LLR program by applying a multiplier for wells drilled prior to 1985, but Alberta currently does not.

Sour Wells

Wells with an H2S concentration greater than 1% require specialized safety equipment and additional planning for abandonment that increases costs.

Suspended Medium Risk Wells Compliant with Directive 013

Wells defined as medium risk by AER’s Directive 013 require downhole intervention for compliance. Some of these wells will have permanent bridge plugs and cement set downhole, with only the cut and cap to complete. The LLR program assigns full deemed liability values to these wells, not recognizing that the majority of costs have already been incurred. As a result, if a company has a significant number of wells in this category, their government LLR number could reflect an unrealistically high liability valuation. Want to review Directive 013? Download it here.

Abandonment Cost Comparison

At XI Technologies, we have developed LLR Analysis and ARO Manager software tools that make it easier for companies to assess abandonment and reclamation costs with all the above factors in mind. For simplicity, let’s isolate and examine abandonment cost per well license – we’ll look at the typically more costly reclamation and remediation figures in a future article.

The table below compares the average abandonment cost per well license as calculated by XI Technologies’ AssetBook LLR and ARO Manager software. The cost differences demonstrate where abandonment estimates could vary when looking at LLR vs ARO. As we continue to gather cost data and update XI’s standardized ARO cost model we are finding that abandonment costs in general have been easing across most areas while remediation and reclamation costs have been climbing. The figures shown below represent an LLR-ARO average cost comparison for a company with 100 per cent production in Alberta, and wells distributed across most of the province. The LLR numbers are based on Directive 011 deemed liabilities, while the ARO numbers are derived from XI’s 2019 ARO Cost Model.

Average Base Abandonment Cost $58,007 $58,695
Ground Water Protection Factor $46,288 $46,288
Age Factor Not Included +30%
Sour Factor Not Included +30%
Gross Abandonment Cost (total company) $49,039,358 $71,551,292
Net Abandonment Cost (total company) $49,039,358  $46,129,018

XI’s ARO Manager is the ideal tool to help companies evaluate, track, manage, and report on asset retirement obligations. Companies can utilize a standardized cost model to assess total liabilities, or they can import alternate cost models and perform scenario analysis to determine the most efficient, low-cost approach to meeting the mandatory abandonment and reclamation deadlines.

For a more in-depth look at XI’s ARO Manager software book a personalized demo, or contact XI Sales.