Decoding Directive 88 – A Transparent Look at Risk, Performance, and Security
June 17, 2025
When the Alberta Energy Regulator (AER) introduced Directive 88 and Manual 23, it marked a turning point for regulatory oversight in Alberta’s oil and gas sector. Aimed at minimizing the risk of orphaned wells and ensuring that companies are fully accountable for their environmental responsibilities, the framework now demands a deeper evaluation of licensees during acquisitions and divestitures.
This blog explores the critical aspects of the AER’s Licensee Capability Assessment (LCA), the transparency challenges facing industry stakeholders, and how public data can be used to reverse-engineer the “black box” of Directive 88.
Understanding Directive 88: A Holistic Regulatory Framework
Directive 88 introduced a five-pronged approach for assessing licensees:
1. Licensee Capability Assessment (LCA)
2. License Transfers
3. Licensee Management Programs
4. Inventory Reduction Programs
5. Security Deposits
These components work in concert to provide a holistic picture of an operator’s financial and operational health, especially during transactions. These are truly good metrics on which to evaluate any company!
However, despite its clear structure, the lack of transparency in how LCA metrics are calculated has become a common frustration among E&P companies, banks, legal teams, and investors.
Transparency Challenges in the Deal Space
Although Directive 88 provides a comprehensive roadmap, its application often feels opaque. Many stakeholders continue to rely on traditional tools like the Liability Management Rating (LLR) ratio due to its simplicity and transparency. In contrast, the LCA metrics—while more robust—require deeper analysis and access to data that’s not always clearly presented or in the public domain.
During a presentation at the PADA Society breakfast in collaboration Burnet, Duckworth & Palmer LLP (BD&P), XI Technologies shared how publicly available data can be used to demystify the LCA. By reverse-engineering the metrics using strategic data compilation, stakeholders can anticipate potential risks and obligations, better prepare for security deposits, and streamline the deal process.
Breaking Down the LCA: Risk and Performance
The AER classifies licensee capability into two primary categories:
– Risk: Focused on financial distress levels and liability magnitude.
– Performance: Includes operational metrics such as remaining resource lifespan, inactive wells/facilities, marginal wells, and closure readiness.
Key Performance Metrics:
– Production Trend
– Inactive Well Ratio
– Marginal Well Ratio (wells producing under 10 boe/d)
– Inactive Facility Ratio
– Crossover Timeline (anticipated production decline)
These indicators help regulators assess a company’s operational efficiency and long-term sustainability—key factors in license transfer approval. They can be reverse engineered along with the liability magnitude to give a close approximation of the regulatory picture. These metrics are also critical to understanding in terms of deal structure and should be evaluated regardless of any regulatory obligation.
For example, XI’s analysis of a portion of the Juniors Peer Group companies showed how even within the same classification, operational performance and crossover dates varied significantly. These variations can influence transaction outcomes, security requirements, and even lending rates.
Directive 88 also emphasizes Inventory Reduction Programs through mandatory and supplemental spend plans. Identifying potential closure-nominated sites—especially for municipalities, freeholds, or First Nations—becomes critical for liability planning. Tools like XI’s ARO Manager help users uncover trends in closure planning and spend forecasting, adding another layer of transparency.
Moving Forward with Confidence
As the industry adjusts to the new regulatory reality, the key to success lies in leveraging transparency wherever possible. Public data and strategic tools can help reverse-engineer assessments, benchmark peer groups, and plan proactively.
By embracing the complexity of Directive 88 rather than resisting it, stakeholders can make smarter, more informed decisions while ensuring alignment with environmental and regulatory expectations.
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Upcoming AssetBook LCA (LLR) Product Showcase Webinar:
Join us online for an exclusive look at how these features in LCA help you:
- See your company’s ranking compared to peer groups
- Create scorecards for any potential acquisition target
- Analyze opportunities for potential bond rebates
What: Sneak Peek: What’s New in LCA
When: Tuesday, June 24, 2025
Time: 9:00am – 9:40am
Where: Online – Register Here
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Additional Resources:
📘 Download the Whitepaper: Licensee Capability Assessment: A Peek Into the Black Box
📊 Explore the LCA Report: See how companies rank across key performance and risk metrics.
🎓 Upcoming Course: ARO Manager for Financial Tracking and Reporting Certification – July 21 & 22, 2025 at XI Technologies’ Calgary office. Register Today!
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