The Orphan Well Association (OWA) is a government created group that abandons and reclaims old wellbores/facilities. Recently in this deep commodity down cycle, they have been bombarded with new entities from defunct operators. Its very common to hear individuals saying, “its going to be up to Albertan tax payer to clean up oil companies’ mess.” This couldn’t be further from the truth because the OWA is 100% funded by Alberta oil and gas licensees.
The 2017 OWA budget is $30,000,000 (split into two equal payments) and companies pay based on their total deemed liabilities. Each licensee pays as follows:
OWA Fee = $30 million x (Sum of total deemed liabilities / Alberta total deemed liabilities)
Unfortunately, the OWA fees may need to increase to compensate for more defunct operators, but so many existing licensees are financially challenged and struggle to even pay the basic contributions. So how do we give operators some relief?
What if we created an Endowment fund based on AER Security Deposits.
The AER currently holds over $220 million in security deposits. These deposits were provided by licensees that had liability ratios below 1.0. A 220 million investment portfolio could provide major distributions. Below is a list of bonds, and their coupon rate.
- Goldman Sachs (A- Credit Rating) – 3.00% Coupon
- FairFax Financial (BBB Credit Rating) – 5.84% Coupon
- AT&T (BBB+ Credit Rating) – 2.625% Coupon
- Gibsons Energy (BB Credit Rating) – 5.375% Coupon
- Royal Bank (AA Credit Rating) – 1.968% Coupon
A $220,000,000 investment with an average 3% coupon would payout $6,600,000 annually or 22% of the OWA budget.
For this endowment fund to be effective, the risk associated to the fund would need to be managed with a low risk tolerance. As well there would need to be rules on when licensees could receive a security return. Potentially, all funds held by the endowment would only have the opportunity for liquidity every six months.
Next, the portfolio has the opportunity to grow if the AER mandated that all new licenses required a small contribution to the fund (until the well, pipeline, or facility) is abandoned. Since January 2016, 4166 wells were licensed and if operators were required to put down a modest $5,000 for a new drill license, the endowment fund would grow by more than $20,000,000 annually. This $20 MM invested at 3% yield would provide an additional $600,000 to the OWA for abandonments and reclamations. All deposits could be eligible for a refund once the license was abandoned with a reclamation certificate.
Lighthouse Liability Solutions Inc. is a team of professionals who financially forecast asset retirement obligations. We are a full-service liability management team with diverse experience abandoning wells, pipelines, and facilities throughout the basin. We strive to find solutions to reduce abandonment and reclamation costs for all those in the industry.