Liability Management
DATE
November 20, 2015
TO
Alberta Royalty Review Panel
SUBJECT
Liability Management
Overview
During the course of CAPP’s October 27th presentation to the Alberta Royalty Review Panel the
issue of liability management emerged as an area that may potentially be addressed through the
royalty framework to ensure that no future generation of Albertans (without the benefits of resource
development revenue) are burdened with the costs of remediation of legacy infrastructure. A request
was made of CAPP to return to the panel with considerations on how best to achieve this goal with
specific recommendations in relation to the royalty framework and how it can incentivize the timely
abandonment and reclamation of assets no longer in operation.
While CAPP appreciates the opportunity to discuss liability management within the royalty review
process, the discussion ought to be much broader as it touches on many other aspects, including
policy and regulatory objectives as well as social, environmental, and economic aspects. CAPP is
committed to taking actions to proactively address liability management however the complexity of
the file calls for broader stakeholder engagement and a process that can adequately consider any
concerns, objectives, and desired outcomes.
Recommendation
CAPP recommends that a full integrated review be undertaken immediately that looks at the policy,
regulatory and financial assurance elements of the liability management system with
recommendations and advice provided to the crown by mid-2016.
Background
In order to properly address any concerns in liability management it is important to understand how
the various management components work together. Below is CAPP’s proposed liability framework
which outlines a go forward approach to collaborative engagement with the regulator, government,
and other stakeholders to ensure a robust and effective liability management model that protects and
the public both today and in the future.
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Proposed Liability Framework & Governing Principles
CAPP views the liability file as having three key components, outlined below.
1. Inactive well management
The need for industry and the regulator to continue to work in cooperation to ensure operators can
address their inactive well portfolios pursuant to the principles of:
 Performance based
o Recognize responsible liability reduction
o Outcome focused vs. prescriptive
 Area Based
o Flexible closure programs to facilitate efficient and effective allocation of closure capital
beyond minimal compliance
 Risk Based
o Risk based abandonment and reclamation regulations
o Management framework commensurate with risk (probability x consequence)
o Reduce risk and effectively focus liability spend
Current State:
CAPP applauds the AER’s recent efforts on inactive well management programs reflecting the
principles of managing and/or abandoning wells within a comprehensive, risk-based framework.
 Current pilots include regionally integrated and area based infrastructure retirement projects
to develop a sustainable long-term program.
 Projects involve closure activities associated with suspension and abandonment of wells,
with the goal to integrate closure activities between wells, facilities and pipelines while
increasing the number of abandonments of the infrastructure and the reclamation of the
surface sites.
Key Consideration:
 Wells with potential should be either producing or suspended properly on a risked basis.
 Wells with no potential should be abandoned.
 Enforcement of non-compliant licensees on a timely basis.
Summary and Recommendations
 CAPP recommends continued engagement with the AER to review the current state of
inactive well programs, and evaluate whether the current solutions that have been put in
place and are being piloted are appropriately designed to meet the overall long term
objectives.
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2. Licensee Liability Rating (LLR) and the mitigation of orphan wells
The LLR Program is the current liability management system that tests for each licensee’s financial
capability to extinguish their liabilities. In addition, there are various regulatory instruments in place
that govern the suspension, abandonment and decommissioning requirements. The prime objective
of this approach is to ensure that the current system prevents the costs to suspend, abandon,
remediate, and reclaim a well, facility, or pipeline in the LLR Program from being borne by the rest
of industry should a licensee become defunct. This approach is guided by the following principles:
 Efficiency:
o Must be financially efficient & flexible for companies to comply
o Not administratively burdensome; cost-effective administration for companies/regulator
 Equity:
o Companies should self-fund their liabilities and not rely on other industry members;
licensees need to be adequately protected from one another.
o Elements of model should accurately evaluate the financial risk of the licensee and
require deposits while they are still capable to fund them.
Current State
 Licensee failures in the form of business insolvency, transfers the responsibility of their
liability to the Orphan Program which is funded by industry.
 The AER LLR Program mitigates the risk of licensee failures by conducting a monthly
assessment on each licensed operator’s ability to address its suspension, abandonment,
remediation, and reclamation liabilities; operators that fail the viability test in the assessment
are required to pay a security deposit equal to the difference between deemed liabilities and
deemed assets to a maximum asset-liability ratio of 1.
 The program is designed to work towards an ideal future state in which the costs of
extinguishing liability risk is not borne by the rest of industry, hence the risk to the industry
Orphan fund is minimized. These long term objectives can be achieved through continuous
improvement by introducing changes that can enhance the robustness of the LLR viability
test.
 The LLR Program protects industry, and industry protects the public.
Summary and Recommendations
 CAPP recommends continued engagement with the AER to review the current state of key
gaps in the LLR Program, and design solutions that meet the overall long term objectives.
 Key considerations include:
o Updating the liability formulas and thresholds to be more forward looking and less of a
lagging indicator.
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3. Legacy Infrastructure:
There is currently an inventory of industrial infrastructure (wells, sites, facilities, and pipelines) that
were previously abandoned and reclaimed by non-defaulting companies, who had extinguished
liabilities to the standard of the day and are no longer in existence.
Current State
 Legacy liability materializes when one of these retired industrial infrastructure elements
exhibits some form of adverse effect that needs to be addressed.
 In its current form, the polluter pay principle is applicable indefinitely for legacy liabilities
attributable to active licensees, and loses applicability when the last licensee on record of the
underlying infrastructure has received regulatory closure (reclamation and remediation
certified) and has exited the business.
 To date, the AER has required the industry funded Orphan Program to address the issue.
 As the industry matures, and companies exit the industry one by one, any issue with
abandoned wells, pipelines, facilities and reclaimed sites will have to be paid for by a
shrinking pool of players thereby creating an unsustainable situation for the industry.
Summary and Recommendations
 As the inventory of legacy infrastructure continues to grow over time, it is critical for
government, regulators, and industry to be proactive in developing a funding model to
finance the potential liabilities outlined above.
 By its very design, the Orphan Program alone cannot possibly finance the aggregate of past,
current, and future legacy infrastructure issues.
Proposed framework moving forward:
The previous sections serve to illustrate the levels of discussion that have, are, and must increasingly
continue to take place between industry, the regulator, and the government in addressing the liability
issues that exist in the upstream oil and gas industry in Alberta.
Considerable progress has been made in recent years on program improvements. For example, in
2013, the AER implemented the first phase of the LLR Program changes that were first proposed by
industry in 2006. The second phase was completed in May 2014, and the third phase was completed
in August of this year. These changes have had a noticeable impact on industry today, and will
continue to as the next phase of LLR changes commence in May of 2016 that will update the cost
and netback parameters from 2012 values to current values. Other enhancements will be enacted in
future years as the program evolves.
Despite this productive partnership, further stakeholder collaboration is required as a fully funded,
fully integrated program remains incomplete. The current liability management system has evolved
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significantly throughout its history, and continues to change in order to adapt to an ever changing
industry. In order to build a fully functioning liability management system, decision makers need to
carefully evaluate the gaps in the current system, and implement the required changes in a timely
manner.
In order to achieve this, a structured dialogue between industry and the government needs to be reinitiated and in general, a return to the cooperative partnership that characterized the liability
landscape in the past. Without a collaborative and constructive engagement, the issues highlighted in
this document will continue to expand and grow in size, to the detriment of all stakeholders. This
will put tremendous pressure on the Orphan Program, and on the licensees that are contributing to
the annual Orphan levy. It is incumbent upon industry, the regulator, and government to address the
policy/regulatory gaps in the very near future, as the longer this is deferred the more problematic it
will become for all parties involved.
CAPP recommends that a full integrated review be undertaken immediately that looks at the
policy, regulatory, and financial assurance elements of the liability management system with
recommendations and advice provided to the crown by mid-2016.
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Current State of the Liability Landscape
As of March 2015, there were roughly 443,900 wells in Alberta1. The breakdown of this inventory is
illustrated in Table 1.
Table 1 – Breakdown of all wells in Alberta by well status
Well Status
Description
Count
Active
Wells that are actively used to produce or inject fluids.
196,686
44.3%
Non-Active
Wells that are not actively used to produce or inject fluids.
77,626
17.5%
63,072
14.2%
2,654
0.6%
67,328
15.2%
36,534
8.2%
443,900
100%
Abandoned
Re-Entered
Rec Certified
Rec Exempt
Wells that are sealed to the regulatory standard of the day, and cannot be
used to produce or inject fluids.
Abandoned wells that were re-entered to be used to produce or inject fluids
again.
Well sites that were remediated and/or reclaimed to the regulatory standard
of the day.
Well sites that were exempt remediated and/or reclaimed to the regulatory
standard of the day.
Total
1
Data from AER Database as of March 2015
6
% of Total