Managing the challenges to Alberta’s oil and gas industry in 2020 has proven to be daunting for the current Alberta government. In 2019, post-election, the government was tasked with addressing Alberta’s thousands of inactive oil and gas wells – changing how those wells are managed and overhauling how that work is paid for including a request for federal funds. The government had been ready to finalize new policy in March this year when the COVID-19 pandemic struck, along with the “fairly significant issues within the oil patch,” according to Alberta Energy Minister Sonya Savage.
Although delayed for months, the changes in the new Liability Management Framework announced this week are part of a long term implementation of many recommendations stemming from years of examination of flaws in policy that have resulted in the current inventory of wells. The fact that it has taken sixty to seventy years to accumulate the current number of wells is sometimes overshadowed by a recent steep increase in inactive oil and gas wells.
“It has been a problem that’s been festering for decades to the point that there’s now over 91,000 sites out there that are inactive and not fully cleaned up,” Energy Minister Sonya Savage said in an interview. “Without mandatory rules that number could grow.”
After the Alberta court Redwater decision in 2016, The AER licensee liability rating program (LLR) doubled the required liability management ratio (LMR) for purchasers of licensed assets- changing the requirement for a well, facility, or pipeline license transfer to be approved. The purchaser had to have an LMR of 2.0 or higher and this froze acquisitions as most companies struggled to get the 2.0 rating. The result was that significantly fewer companies qualified, and the hardest-hit group has been junior oil & gas companies. In previous downturns, junior oil & gas companies were an important part of the recovery of the industry however, the current rate of failure of junior companies in this downturn is concerning.
There are many critics of the old LMR rating. Some critics say that an LMR of 2.0 does not go far enough to protect the public. Others say the LMR is a flawed measure, and that raising the standard had unintended consequences.
In the years following the change, the inactive well inventory continued to increase dramatically while substantial deposits were required from companies that had a low LMR rating. Juniors say the deposit took too much out of their operating capital while still covering only a fraction of potential abandonment & reclamation costs. In addition, heavy debt load and over-extended credit have taken a toll on juniors.
There was a sense that the LMR increase was initially intended to be part of a group of temporary stopgap measures to give the AER time to work on more comprehensive regulatory changes. The LMR rating according to Alberta Energy Minister Sonya Savage, “ wasn’t an accurate indication of a company’s financial health because they only assess two things: assets and reclamation liabilities.”
The new Liability Management Framework promises a more fulsome assessment. The new Licensee Capability Assessment system looks more closely at a companies’ records including quarterly financials and the AER will now have the ability to exchange data to track payments with the Ministry of Environment and Parks who can now ensure landowners are being paid. Data on non-compliance can now be shared. There is a sense in Industry and within Government and the Regulator that requiring a security deposit of a licensee “sterilizes capital” and doesn’t serve any of the parties. The AER can now use its discretion to develop better solutions. For example, instead of requiring a deposit, a licensee can agree to an abandonment plan. Industry reaction has been favorable.
”Getting rid of the deposit program is perhaps the best part of this new policy. It helps operators use that money to straighten up their well inventories and it assists new investors to proceed with acquisitions without tying up extra cash. I think if the Regulator can assist with moving out insolvent operators and getting their joint venture partners in place, that will be another good measure instead of tying up the courts to do so. Of course, a timetable to abandon wells is better than none. It’s a very positive piece of legislation in my view. “ says Larry Buzan, P. Land, Consulting Landman active with E&P clients.
The new Inventory Reduction Program will establish reasonable annual industry site closure spending targets but allows some flexibility to account for operator-specific circumstances. It includes the option for companies to coordinate efficient, area-based closure programs with cost savings of up to forty percent compared to prescribing wells in separate areas of the province for abandonment. Abandonment work can now be accelerated due to the availability of interest-free government loans. Additionally, the new Licensee Special Action component provides more help to producers with practical guidance and proactive support for individual or distressed operators to help them maintain their operations.
“The announced changes provide the AER with tools that allow the regulator and industry to focus on positive outcomes rather than prescriptive requirements. “ according to Mark Taylor, Principal at Taylor Energy Advisors.
Addressing Legacy and Post-closure sites is part of the new framework and is perceived by insiders as a small and manageable percentage of the orphan well inventory that will be addressable even though the Industry is challenged by a downturn. The framework prescribes a panel review process and returns contaminated site clean-up back to the original owner. In the face of this change, some original owners will opt to do work on contaminated sites without needing AER intervention.
The new Liability Management Framework coordinates many moves in the right direction by implementing recommendations from Industry and the AER made during years of consultation. “I’m not concerned if it takes six months or a year to have the right rules in place for this,” said Minister Savage. “I’d rather have … it done efficiently and rolled out with a lot of thought and have it done right than to rush it.”
Maureen McCall is an energy professional who writes on issues affecting the energy industry.