The issue of Licensee liability in Alberta’s oil and gas sector has been an evolving one for many years. The Alberta Energy Regulator (AER) introduced changes to the Licensee Liability Rating (LLR) from 2013 through 2015, and then again in 2016. Further changes are expected in 2018, as is the ruling on the Redwater Energy Corp. (Redwater) case which will determine the degree of liability that must be assumed by receivers of defunct companies.
No matter which way Canada’s Supreme Court rules, in the post-Redwater world it will be essential for E&P companies, lenders, and other investors to have an early and realistic estimate of the asset retirement obligation (ARO) associated with an oil and gas asset. If the Court rules in favour of the AER and the Orphan Well Association (OWA), then lending institutions will very likely impose ARO-related constraints and conditions on capital. If the Supreme Court rules in favour of Redwater’s receivers, then the government, through the AER and OWA, is likely to tighten regulations around LLR and ARO to ensure companies are setting aside enough funds to effectively cover the abandonment, reclamation, and remediation costs to retire wells and facilities.
Either way, astute E&P companies are recognizing the importance of having a clear upfront picture of Asset Retirement Obligations on both the assets they currently hold and any prospects they may consider adding to their portfolio. Having a simple, standardized process that can be used industry-wide will help companies to remain compliant and allow all stakeholders to make realistic, apples to apples comparisons when evaluating acquisitions and managing long-term liabilities. It will also help determine more realistic budgets and more realistic projections for return on investment (ROI).
During our research into the areas of LLR and ARO cost modelling, we discovered that most companies have relied on LLR as that standardized starting point for estimating long-term obligations. This seems logical until you realize that the AER’s LLR formulas were never designed for this purpose and, as a result, LLR overlooks five key components necessary to get a realistic estimate of true end of life costs. A recently published case study using real world data demonstrates the potential bottom-line differences between estimating ARO based on LLR deemed liability numbers versus a more comprehensive ARO cost model.
The study shows why the ARO model is the better approach for companies who want to get a better handle on their environmental liabilities earlier in the game. It may also help companies address the inevitable finance and/or regulatory changes that result from the Redwater decision.
Jennifer Baerg is VP Business Development with XI Technologies Inc., a Calgary company that provides the data driven solutions that Canadian energy companies need for informed decision making, competitive analysis, A&D scoping, asset planning, business development, drilling, operations, regulatory compliance and risk management. Jennifer and the team at XI introduced LLR and ARO Cost Model software tools to the Canadian market in 2016 and 2017.