Word to the Wise: What you need to know about the new Licensee Capability Assessment in Directive 088

January 11, 2022

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While many of us were prepping for the holiday season and some much earned time off, the Alberta Energy Regulator (AER) finally released a new Liability Management Framework (LMF) on December 1, 2021. This change has been more than a year in the making, and while many of us knew much of what to expect from previous announcements, we thought it would be best to start 2022 by examining the new directive for those who may have missed it.

The new framework was published in Directive 088: Licensee Life-Cycle Management to better manage the clean up of oil and gas wells, pipelines, and facilities at every step of development, replacing the former, decades-old process. According to the AER, 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);
• introduces the Licensee Management Program, which determines how licensees will be managed throughout the energy development life cycle;
• introduces the Inventory Reduction Program, which sets mandatory closure spend targets; Alberta Energy Regulator 2 Directive 088: Licensee Life-Cycle Management (December 2021)
• updates application requirements related to the licence transfer process; and
• outlines security collection under this directive.

Perhaps the most significant news from this directive is the introduction of the Licensee Capability Assessment (LCA). The new LCA necessitates changes to Directive 006: Licensee Liability Rating (LLR) Program and Licence Transfer Process, which was also amended on December 1. Directive 006 will continue to be amended on a rolling basis as the province transitions away from the current LLR program. The December 1 amendment removed requirements related to licence transfer applications from Directive 006 and added to the to the new Directive 088.

The new LCA uses various factors to identify risks posed by a licensee:

• 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 fund current and future liabilities
• management and maintenance of regulated infrastructure and sites, including compliance with operational requirements
• rate of closure activities and spending and pace of inactive liability growth
• compliance with administrative regulatory requirements, including the management of debts, fees, and levies

The magnitude of liability is based on a licensee’s site-specific liabilities under Directive 001 and abandonment, remediation, and reclamation liabilities under Directive 011. Licensees with a total magnitude of liability of less than $25 million will be assigned a “low” rating, between $25 and $150 million as “medium,” and greater than $150 million as “high.”

The other elements of a licensee’s LCA are assessed relative to licensees in the peer group (defined as those with similar business type, size, and production portfolio). They are ranked within their peer group in three tiers (upper, median, lower) based on remaining lifespan of resources, operations, closure, and administration. Licensees are only able to see their own LCA data; they can see where they rank relative to their peers, but they cannot see the detailed data for other peers or even who their peers are.

The current LLR system remains in place as the LCA is implemented (to be gradually phased out), so in the meantime, licensees will need to pay attention to both. In fact, any current transfer applications not yet dispositioned as of December 1, 2021 will require a reapplication to the AER.

In addition to the change from LLR to LCA, the new directive establishes the program that will allow them to proactively monitor licensees (Licensee Management Program), mandatory closure targets (Inventory Reduction Program) – the industry-wide target for 2022 has been set at $422 million, 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.

XI Technologies’ AssetSuite — including AssetBook, ARO Manager, our LLR Report, and our new Emissions Tool — provides 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 recently made updates to our software and cost model to help our clients get a better picture of how companies perform against these new AER Risk Groups and Performance Groups. We will continue to add features and reports as necessary to ensure it meets the needs of users adapting to the changing regulatory environment.

For more information on AssetSuite, visit our website or contact us today.