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In April, the BC Oil and Gas Commission (BCOGC) implemented the Permittee Capability Assessment (PCA) Program, designed to replace the existing Liability Management Rating (LMR) program. This comes after the Alberta Energy Regulator’s (AER) Directive 088, which introduced the Licensee Capability Assessment (LCA) to transition away from their existing Licensee Liability Rating (LLR). These changes reflect an increased focus on liabilities from the governing bodies in the Western Canadian Sedimentary Basin, moving toward more holistic evaluations of asset holders throughout the energy development life cycle.
The purpose of the PCA is to assess the financial risk of each permit holder’s operations in British Columbia and to mitigate any identified risk while permit holders are financially viable. In practice, this risk is measured as the potential financial impact to the Orphan Site Reclamation Fund (OSRF) in the case of an insolvency or other event. Risk under the PCA is defined as Likelihood x Consequence where Likelihood is the Level of Financial Risk and Consequence is the Magnitude of Liability.
As with the AER’s LCA, the big change in how BC will determine risk is to factor in the financial capability of permittees to meet their liability obligations. To do this, permit holders are asked to submit annual financial information within 5 months from their year-end, and 3 months from their quarterly-end and reserves information annually 5 months after year-end. Companies that do not submit their information within this timeframe will be considered high risk and assessed with maximum security requirements.
The BGOGC will then assess financial risk based on five ratios:
- Current Ratio
- Net Profit Margin (three-year Average)
- Interest Coverage
- Cash Flow to Debt
- Debt to Equity
Refer to the PCA Program Guidance document for clarification of what these ratios mean.
As for the Magnitude of Liability portion of the risk calculation, it is based on the deemed abandonment, assessment, remediation, and reclamation liability associated with each permit holder’s Dormant, Inactive and Marginal sites, referred to as their DIM Liability. DIM sites are those where the value of the remaining potential production is likely exceeded by the costs of site closure and are historically the sites that end up orphaned in BC. The initial launch will only include wells in the DIM liability calculation, then expand to include facilities and pipelines.
The PCA will target companies with moderate or high levels of financial risk for corrective action, allowing for 12 months post-assessment for the permit holder to take corrective action and develop a plan with the BCOGC. These plans will include a security payment schedule and a clear plan for how and when any liability reduction commitments are to be completed. Permit holders who fail to submit required security deposits within the allotted timeframe may be in noncompliance with Section 30 of OGAA.
Whether it’s BC’s PCA program or Alberta’s LCA program, the new regulations surrounding liabilities in the WCSB reflect an increased desire to address the issue of dormant assets and addressing end-of-life commitments. This increased desire comes not only from the regulators but also from the lending community who want to ensure that borrowers are positioned to address ARO and investors concerned with sustainability reporting.
The provinces are moving past the easy-to-understand, but flawed liability calculations for systems that each describes as “more holistic evaluations” of the complete life cycle. While past methods were largely reactive, these new changes recognize that to truly determine if a permittee or licensee is capable of meeting their liability obligations, the financial health of the entire organization plays a factor.
To adapt to these changing regulations, producers need to ensure that they have the data they need not just for their own internal reporting and planning, but also to assess the potential impact on LCA/PCA calculations of potential acquisitions. The nature of liability assessments is changing throughout Western Canada and it is incumbent on producers to ensure that they’re best equipped to keep up with these changes.
XI Technologies’ AssetSuite provides quick access to well declines, working interest production, and an industry-leading cost model that gives the robust depth needed for evaluating liabilities for opportunities. We’ve recently released an LCA report to view peer group information and view LCA calculations for acquisition targets. For more information on AssetSuite, visit our website or contact us today.