Word to the Wise: How working interest can affect the accuracy of LLR and ARO estimates

August 13, 2019

If you operate or are looking to acquire a stake in a working interest asset, your ARO calculations might not be accurate.

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For the past month, our Wednesday Word to the Wise series has focused on various reasons why the AER’S LLR deemed liability values may not provide an accurate assessment of ARO. This week, our fourth article on the subject will discuss how LLR fails to account for working interest and the effect this has on estimating the end of life costs of an asset. This and other shortcomings of the LLR formula are demonstrated in our case study LLR vs ARO: The Cost of Uncertainty.

The Alberta Energy Regulator’s Licensee Liability Rating (LLR) Directive 011 applies 100% of deemed liability values to the licensee and does not account for non-operated working interest. Realizing that, it’s fairly obvious how the LLR for any working interest asset would result in an inaccurate ARO.

If you’re examining your own licenses, you can apply working interests to the properties to make your ARO calculations. However, the task is more difficult when trying to evaluate an asset acquisition opportunity as the non-licensee properties will be hidden from the overall cost. So, if you’re using LLR to estimate the ARO of working interest assets, your estimate could be off by a significant amount.

At XI, our ARO calculating tool, ARO Manager, takes working interest into consideration. Our proprietary algorithms have been the leading industry standard for estimating working interest for the past 20 years.  Our calculated working interest, while not perfect, has frequently been recognized as very close to actuals by users. When actual ownership percentages are not available, XI’s working interest factor results in more useful ARO calculations for working interest assets, enabling our clients to look over the fence prior to committing to a deal.

For a more in-depth look at ARO Manager book a personalized demo, or contact XI Sales.