May 19, 2020
At XI Technologies, we may be a little biased when it comes to the importance of staying on top of your Asset Retirement Obligations (ARO) and thus think it’s always a good time to tackle your liabilities. However, there are specific reasons why now is an especially good time to focus on retiring assets in a strategic matter that we’d like to share.
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We’ve written a lot lately about recent programs designed to help the Canadian Oil and Gas industry tackle their liabilities during our current struggle. To get more complete details on how producers can try to take advantage of the Alberta Site Rehabilitation Program, read this article. In short, while this program is in place, it is a good time to work with service companies to clear out inactive liabilities that can be affordably and relatively easily abandoned or reclaimed. Service companies can apply for up to $30,000 per service company for a given well, so if you have inactive liabilities that meet criteria that keeps vendors near or less than that cost for their particular service, you might increase your chances to work with a contractor looking to take advantage of the program and thus reduce your spend.
To state the obvious, now is a less than ideal time to produce oil and gas. Prices are well below break-even, to the point where even companies that have optimized their operations can’t find a way to produce at acceptable margins. This is just a reality of our current global situation and the lack of demand for the product and as a result, companies are wisely deferring drilling projects in the near term.
So, if producers are unable to bolster their balance sheets with production, the other way they can seek to improve their books is by removing a greater percentage of liabilities than they may have otherwise planned. By shifting focus from production to liabilities, companies can have better, more enticing balance sheets for future recovery.
Obviously, it’s not easy to increase operational spending in any areas right now, be it production or liability management. However, with the current economic collapse being spread through the entire industry, there are opportunities to increase the number of abandonments and reclamations in your liability program without increasing your planned spend.
Service providers are reducing rates and finding creative ways to operate in these difficult conditions in cost-effective ways. Smart producers are finding ways to work with their vendors to come up with creative solutions to reduce costs together through economies of scale and participation in government incentive programs like the Area-Based Closure Program. Taking a proactive approach to your liabilities now could result in reducing more liabilities for lower costs than are currently calculated in deemed liability ratings, saving producers money in the long-term and making them more attractive for future investment.
The current restrictions designed to prevent the spread of COVID-19 can limit the types of operations a producer can undertake. Certain things require more people and interaction than is allowable under current guidelines. But this isn’t true for a lot of abandonment and reclamation work. Service companies and operations teams have found that abandonment tasks can be done in isolation or within the safe distance guidelines currently in place, making it ideal work to focus on at this time.
As the saying goes, don’t let a good crisis go to waste. In a regular operational environment, it might make sense to only take the minimum amount of liabilities required to meet ABC obligations or keep your Licensee Liability Rating (LLR) at an acceptable number. But now, the current pricing and restrictions have changed the equation. A strategic producer can take care of more liabilities now at a lower cost at a time when the ROI on other operations is low enough to favour a focusing on future costs rather than current profits. Due to circumstances out of their control, producers today are forced to focus on a future turnaround, a turnaround that will be aided by lowering their inactive liabilities today.