Word to the Wise: Alberta reinforces its commitment to Asset Retirement Obligations with the new Liability Management Framework

August 11, 2020

Each week, XI Technologies scans its unique combination of enhanced industry data to provide trends and insights that have value for professionals doing business in the WCSB. If you’d like to receive our Wednesday Word to the Wise in your inbox, subscribe here

At the end of July, the Government of Alberta announced a new Liability Management Framework (LMF) to enable industry to “better manage the clean up of oil and gas wells, pipelines and facilities at every step of development”. This framework replaces a decades-old process and is designed to meet the needs of an aging oil and gas sector that currently has an estimated 97,000 inactive wells across the province.

In the announcement, the Government of Alberta identified five components to the new LMF:

  • Licensee Capability Assessment System – perhaps the most significant, and anticipated, component of the LMF is the replacement of the current Licensee Liability Rating (LLR) program. While the old LLR/LMR program was frequently criticized for inaccuracies and being too punitive on juniors through deposit requirements, the new system promises to be a “more comprehensive and accurate corporate health assessment by taking into account a wider variety of assessment parameters”.
  • Licensee Special Action – this component promises “guidance and proactive support for individual or distressed operators” as part of the province’s commitment to work together with the industry to help meet regulatory liability obligations.
  • Inventory Reduction Program – establishes a five-year rolling period of annual industry site closure spending targets. While the targets have yet to be announced, the goal is to reduce inactive well inventories while providing flexibility for operator-specific circumstances. Included in this program will be the existing Area-Based Closure (ABC) program and a new opt-in mechanism for landowners to nominate sites for clean-up.
  • Legacy and Post-Closure Sites – a panel will be established to address sites that were abandoned, remediated, or reclaimed before current standards were put in place to ensure they are up-to-date with current environmental requirements.
  • Expanding the Mandate of the Orphan Well Association – the expanded role of the Orphan Well Association set out in The Liabilities Management Statutes Amendment Act is included in this framework.

As currently announced, the Liability Management Framework is light on details and actionable information for producers. We know there will be closure spending targets, but only have rumours suggesting what those targets will be. We know the LMR program is ending, but don’t yet know when or how the new Licensee Capability Assessment System will be calculated.

What is clear from this announcement is the province’s renewed commitment to ensure that producers meet their environmental liability responsibilities. It is a priority for this government to reduce the number of inactive wells in the province and mitigate the risk of a growing inventory of orphan sites, with the hopes of improving Alberta’s ability to attract oil and gas investment. Which means that even during difficult downturns like the one currently facing our industry, producers cannot afford to neglect their Asset Retirement Obligations (ARO). It is essential that producers have plans in place to manage their liabilities, and if their current process was designed around the LLR program, they will have to change their plans when that program ends.

XI Technologies is here to help E&Ps strategically manage their liabilities with tools to estimate, analyze, and monitor ARO. XI’s cost model was developed independently of LLR through a combination of government resources, expert opinion, and industry data. To learn how ARO Manager can help your company navigate liabilities, visit our website or contact us today.