The LLR program was created by the government to estimate the deemed assets and liabilities of licensees to identify at risk companies. Although the asset values are based on outdated netbacks and are rarely used by anyone other than the regulating bodies, the deemed liabilities are widely used across the industry for financial reporting. Here is how liabilities directly affect cashflow.
Orphan Fund Levy’s
In 2016, the Orphan Fund Levy in Alberta was $30,000,000 and this was completely funded by all licensees in the province. Each operator included in the LLR and OWL program pays into the levy its proportion of its total deemed liability. The current total estimated deemed liability for Alberta is roughly $30.5 billion, so licensees should budget that for every million dollars of deemed liabilities associated to their LMR will result in $1,000 of Orphan Levy Fees.
Let’s look at the financial implications to the ARO models which in my opinion should have far more of an impact than the LMR rating.
Financial Reporting of Asset Retirement Obligations
Companies can choose to reflect their financial obligations based on the AER posted prices or they can use specific costs based on historical abandonment projects. The total liability (and asset value) is amortized over the life cycle of the property and is reflected on the income statement. A lower total ARO value results in less depreciation and higher net income.
Sales of assets
Regardless on how companies reflect their asset retirement obligations, there is major benefit in understanding and providing transparency to these costs. With depressed commodity prices, asset valuations don’t overpower the liabilities to the same extent as just a few years ago. It’s not uncommon to have deals fall apart because of abandonment and environmental liabilities being left unknown. Improving the certainty on liability costs, provides assurance to the purchaser.
Lighthouse Liability Solutions Inc. is a full-service liability management team with diverse experience abandoning wells, pipelines, and facilities throughout the basin. We assist companies by accurately reflecting retirement obligations and provide financial models to retire entire fields or corporations. We strive to find solutions to reduce abandonment and reclamation costs for all those in the industry.
Patrick Gratton, P.Eng
587-999-0339
lighthouseliabilitysolutions.com
gratton@lighthouseliabilitysolutions.com