Word to the Wise: New draft of AER’s Licensee Life-Cycle Management Directive promises changes to asset liability management

July 20, 2021

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The Western Canadian oil and gas industry has been anticipating a new Liability Management Framework (LMF) from the Alberta Energy Regulator (AER) for quite some time now. The AER promised a new framework to better manage the clean up of oil and gas wells, pipelines, and facilities at every step of development, replacing the current, decades-old process.

Recently, the AER announced a significant step in the direction of a new LMF with the release of a draft of a new Directive for Licensee Life-Cycle Management (you can download the draft through the AER). They are currently seeking feedback for this draft, which will support the LMF. The Life-Cycle as defined by the AER consists of four stages: “initiate, construct, operate, and close”, with liabilities needing to be managed throughout all four.

The new directive:

introduces a holistic assessment of a licensee’s capabilities and performance across the energy development life cycle, which will be supported by the licensee capability assessment (LCA) system;
introduces the Licensee Management Program, which outlines how licensee management will occur across the energy development life cycle;
introduces the Inventory Reduction Program, which sets mandatory closure spend targets;
updates application requirements related to the licence transfer process; and
identifies security collection under this directive.

Perhaps the most significant news from this directive is that it will eventually replace Directive 006: Licensee Liability Rating (LLR) Program and Licence Transfer Process (elements in Directive 006 will remain in effect until replaced). The new holistic licensee assessment will take financial and other information reported for Directive 067 and combine them with a new Licensee Capability Assessment (LCA) to determine a company’s capabilities to meet its obligations.

While the new LCA is still in the proposal stage, the AER has announced the following factors for the LCA (subject to change):

Financial health
Estimated total magnitude of liability (active & inactive), including abandonment, remediation, and reclamation
Remaining lifespan of mineral resources and infrastructure, and the extent to which existing operations may fund current and future liabilities
Rate of closure activities and spending, and pace of inactive liability growth
Management and maintenance of regulated infrastructure and sites, including compliance with operational requirements
Compliance with administrative regulatory requirements, including the management of debts, fees, and levies
Any other factor the AER considers appropriate as the LCA evolves

In addition to the change from LLR to LCA (which will be a gradual change with no timetable announced as of yet), the new directive establishes the program that will allow them to proactively monitor licensees (Licensee Management Program), mandatory closure targets (Inventory Reduction Program), new rules to govern license transfers which are triggered by holistic licensee assessment of both parties, and new rules around security deposits also determined by the new holistic licensee assessment.

While a holistic look at liabilities will solve many problems not addressed in the current and dated LLR regulations, the new assessment adds complexity to managing and analyzing liabilities, with elements that lack public transparency – particularly in judging financial health and compliance. Lack of transparency is a significant concern of those trying to assess how they will perform A&D evaluations and will make it more important than ever to find reliable data to do over-the-fence evaluations to mitigate some of information gaps created by the directive. If your current process is designed around the LLR program, the time is now to adjust to a more holistic approach to your calculations.

XI Technologies’ AssetSuite — including AssetBook, ARO Manager, our LLR Report and our new Emissions Tool — is just such a solution, with quick access to well declines, working interest production and an industry-leading cost model that gives the robust depth that is needed for evaluating opportunities. We’ve put together two special sessions to demonstrate how AssetSuite can help your company navigate the new LCA, click here for more information on how to register.

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