November 15, 2022
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In September, the AER released Bulletin 2022-29 — Validate WIP Information Accuracy. The purpose of the bulletin is to remind licensees of the importance of the accuracy of their working interest participant (WIP) information on file with the AER. While the bulletin contains no new information or directives about calculating and reporting on WIP information, its release highlights some of the difficulties present in dealing with WIP when dealing with Asset Retirement Obligations (ARO).
When it comes to calculating liability obligations and dealing with retirement obligation planning, working interest partners are one of the biggest sources of confusion and frustration. Because the most commonly used liability measure, LLR, applies 100% of deemed liability values to the licensee, many assume that those liabilities rest with the licensee operator, thereby believing that non-op partners don’t need to pay attention to their ARO on non-op assets.
Of course, this isn’t true. As Bulletin 2022-29 reaffirms, working interest partners are held liable for their portion of retirement and abandonment responsibilities and will be called on to pay their share of the liabilities.
For many producers, non-op assets are a big part of their portfolio, and sometimes make up the majority. But tracking ARO for their non-op assets, including staying on top of who they share those assets with and the potential for some of those assets to be retired by primary operators, can be much harder to do. Without a system in place for monitoring and evaluating their non-op wells and facilities, they might not be aware of pending non-op ARO liabilities until a cash call comes in and wreaks havoc with their budget.
Large asset portfolios combined with years of acquisitions, swaps, and divestitures make it especially difficult to maintain a solid understanding of one’s working interest properties, liabilities, and partners. Most companies know what their own working interest properties are but keeping up with ever-changing asset partners can be particularly challenging. Properties can change hands multiple times through various sales, leaving you sharing abandonment and reclamation obligations with new companies outside of your knowledge, which could become significant should one of those companies cease to exist.
Due to the critical role working interest plays in determining liabilities, it’s essential that producers establish a process of accounting for them when calculating their ARO. That requires a cost model that goes beyond LLR and takes working interest into account. You need a process for tracking where your non-op working interests are in their lifespan and staying on top of who your working interest partners are for every asset you share.
The AER offers help with this, reminding licensees that they can review their WIP information through the Closure Activity and Spend Report in OneStop. This report shows a licensee where their company is identified as holding a working interest in well and facility licenses held by other licensees as well as in their own inventory. However, these records can fall out of date given the constant ownership changes in our industry. Moreover, the AER will not update records managed by active licensees.
This makes the need for a tracking system – one that tracks WIP information and adds them to ARO calculations – even more important. This is especially true for A&D scoping, where over-the-fence WIP information is not available through OneStop.
An even trickier proposition than knowing all your own working interest partners is to have a good understanding of the working interest of an over-the-fence potential asset of interest. Historically, this has been an important piece of information during the preliminary analysis of an asset acquisition.
The importance of WIP information for ARO is nothing new. But the release of Bulletin 2022-29 shows that it’s still an area of concern for the AER and suggests that it remains an area of difficulty for licensees. Depending on the size and breadth of your portfolio, traditional spreadsheets might not cut it. And simply ignoring the problem is not an option. The release of this bulletin is a useful reminder to all licensees to examine their own operations and look for gaps when it comes to WIP information.
AssetBook serves up the best-detailed listing of working interest production in the Western Canadian Sedimentary Basin. The AssetBook ARO Manager module calculates working interest as part of its industry-leading cost model for internal calculations and third-party scoping. To learn how XI Technologies can help you stay on top of your WIP information, contact us to book a personalized demo.