Briefing Note

CAMPUT Energy Resources Committee

Managing Aging Infrastructure and Liabilities – Alberta’s Approach

Issue

The ERCB currently has a number of effective liability management programs in place for the upstream oil and gas industry, and is working with Alberta Environment (AENV), the Department of Energy (DOE), Sustainable Resource Development (SRD), and industry stakeholders to develop and implement appropriate liability management programs for all industry sectors it regulates by 2010.

Background

In the mid and latter half of the 1980s, the severe and uncertain economic climate in Alberta’s oil and gas industry focused ERCB attention and concern on the escalating number of ownerless “orphan” wells. Increases in corporate insolvencies and reluctant operators, coupled with rationalization activities that saw ownership of oil and gas properties shift to different industry sectors (trust companies, pension funds, etc.) and to numerous and less financial secure companies, contributed to a growing concern of unmanageable future well abandonment liabilities. A corresponding dramatic increase in the number of inactive wells also raised concern with respect to well bore integrity, public and environmental safety, and their potential to become orphans.

In February of 1986 the ERCB replaced its well deposit requirement with “a special well fund”. This change was implemented to enable the ERCB to finance the abandonment of those “few” wells where a licensee was unable to carry out proper operations. As the number of wells required to use this fund grew substantially over the next few years, the ERCB proposed changes to its legislation to ensure responsibility for the abandonment of a well fell to its primary beneficiaries. The most significant proposed changes were: the creation of an abandonment liability chain that included the previous owner of a well, joint and several liability of working interest participants (WIPs), and a fund of up to $250 million accumulated through a deposit program on activities and properties of the industry.

Industry expressed concern with some of these proposals, and particularly with the previous licensee being included in the liability chain. As a result in May of 1990, the Orphan Well Steering Committee (OWSC) consisting of senior representatives from government and the three major industry associations in existence at that time was established to consider addressing the liability associated with orphan wells.

In January of 1991 the OWSC advanced certain principles as the basis for a program to address the abandonment of orphan wells. The primary principle was that an abandonment fund would be established and maintained by industry to pay for the well abandonment costs of insolvent or non-existent licensees and Working Interest Participants (WIPs) in a well. This fund would be

maintained by an annual ERCB levy on inactive wells. The second principle was that the liability chain would be limited primarily to the current licensee and WIPs. Both industry and government committee members recognized the need to implement improved regulatory systems and processes to minimize the orphan burden. Legislation implementing these principles and establishing the Orphan Well Program was passed unanimously by the Alberta Legislature, and became effective May 25, 1994.

With the orphan well issue essentially resolved, the ERCB asked industry to address the problem of facilities and pipelines associated with orphan wells. After evaluation and recommendation by the Fund Advisory Committee (FAC) (successor to the OWSC), the scope of the Orphan Program was expanded to include the abandonment of orphaned upstream production facilities and pipelines, including related remediation and surface reclamation of sites in the program. The expanded Orphan Program would continue to be fully funded by the oil and gas industry. Legislation implementing these provisions became effective June 27, 2000.

Current Status

In order to improve its regulatory systems to manage aging infrastructure and liabilities, the ERCB has developed and implemented liability management programs designed to:

·  initially protect the public from the costs associated with orphaned sites, and to

·  promote the timely suspension, abandonment, remediation and reclamation of inactive and aging infrastructure

The public of Alberta is protected from orphaned liabilities in the upstream oil and gas industry through three ERCB liability management programs: the Licensee Liability Rating (LLR) Program, the Large Facility Liability Management (LFP) Program, and the Oilfield Waste Liability Management (OWL) Program.

LLR Program

In order to minimize the potential liability that could fall to the Orphan Fund, the ERCB implemented the LLR Program May 1, 2002. The program, which covers the vast majority of upstream oil and gas wells, facilities and pipelines, has been amended twice after formal reviews with stakeholders, with the current version contained in Directive 006: Licensee Liability Rating (LLR) Program and Licence Transfer Process.

The LLR is a risk-based industry backstopped program that evaluates licensees of wells and upstream oil and gas facilities monthly and on receipt of a licence transfer application. It compares a licensee’s deemed assets (primarily revenue from production reported to the Petroleum Registry of Alberta) to its deemed liabilities (the estimated costs to abandon and reclaim wells and facilities for which it is the licensee[1]). A licensee having deemed liabilities in excess of its deemed assets is required to provide the ERCB with a security deposit for the difference, as it is considered to represent a greater risk of creating an orphaned site. Should a licensee become defunct, any security deposit collected is transferred to the Orphan Well Association (OWA)[2] which will undertake the suspension abandonment, remediation and reclamation of an orphaned site covered by this program. Regardless of the amount of any security deposit collected, the Orphan Well Program will pay 100% of the actual costs of these activities.

LFP Program

Due to their large and unknown liability, the LLR Program specifically excluded large upstream oil and gas facilities, subsequently defined as sulphur recovery gas plants, in-situ oil sands central processing facilities having a design capacity of 5000 m3/day or greater, and stand alone straddle plants. The LFP was subsequently developed by the Liability Management Advisory Committee (LMAC) (successor to the FAC) and introduced in October 2005 through EUB Directive 024: Large Facility Liability Management Program.

The LFP closely resembles the LLR program being a risk-based industry backstopped program where a licensee’s deemed assets are compared to its deemed liabilities monthly and on receipt of an application to transfer a licence. The LFP requires a licensee having deemed liabilities in excess of its deemed assets to provide the ERCB with a security deposit for the difference, as it is considered to represent a greater risk of becoming an orphan. However, unlike the LLR, all WIPs in the program are required to fund their proportionate share of any costs to suspend, abandon, remediate and reclaim a defunct licensee’s (and any subsequently defunct WIP) share of an orphaned facility.

While this program has been in place since October of 2005, no licensee has become defunct and the authority to levy WIPs, which is contained in Bill 28, The Energy Statutes Amendment Act, 2009 currently before the Legislature, has never been required. The OWA will assume responsibility for administering any activities required under this program. Similar to the LLR Program, should a licensee in the LFP become defunct, any security deposit collected from the licensee will be transferred to the OWA to offset its costs.

OWL Program

A full security liability management program for oilfield waste management facilities was introduced in June of 2001 through ID 2001-4 and subsequently continued in Part 16.6 of the Oil and Gas Conservation Regulations. This program requires holders of such facilities to provide a security deposit equal to the full costs to suspend, abandon, and reclaim their facilities based on a site-specific liability assessment. On implementation, the ERCB provided for this security deposit to be provided in 3 payments over a 5 year period to minimize the financial impact on this sector. To date all Waste Management Approval holders are fully compliant with these requirements, and the ERCB is holding approximately $110 million in security deposits.

After extensive discussion and stakeholder consultation, the ERCB has agreed to replace the current full security deposit program with a risk-based program that would be backstopped by participants in both the LLR and OWL programs. The proposed program would also closely resemble the LLR program and would be fully funded through a single combined levy. During the first five years of the program, non producer licensees would be responsible for up to the first $2 million in costs of an orphaned non-produced licensee’s facility. The replacement program should be introduced after the legislative changes required to support the program are approved, hopefully in May 2009.


Analysis

The ERCB’s liability management programs and the Orphan Well Program were developed in close collaboration with stakeholders. The programs are considered to:

  1. Provide a responsible balance between maximizing resource recovery and protecting the public of Alberta from the costs associated with suspending, abandoning, remediating and reclaiming orphaned oilfield sites.
  2. Minimize the risk to the Orphan Fund by assessing the financial viability of licensees, and requiring a security deposit where a licensee’s deemed liabilities exceed its deemed assets.
  3. Require the Orphan Fund, supported by a levy on the oil and gas industry, to pay for the suspension, abandonment, remediation and reclamation of orphaned well, facility and pipeline sites, thereby protecting the public purse.
  4. Provide a level playing field for industry, so that responsible licensees do not bear the costs of non-compliant licensees, and
  5. Increase public safety and environmental protection through both minimizing the number, and expediting the suspension, abandonment, remediation and reclamation of orphaned oil and gas development sites.

Regardless of the existence of its liability management programs, the ERCB considers the licensee to be the duty holder and to be fully responsible for the abandonment and reclamation of any licence held. Should a licensee become defunct the ERCB would pursue any WIP for their proportionate share of such costs, while the industry would pay the costs of a defunct licensee. Responsible parties who fail to comply with Board Orders or leave a debt to the Orphan Fund can be designated as “named individuals” under Section 106 of the O&GCA and have their ability to re-enter the industry restricted.

Future Actions

While the public of Alberta is protected from the costs associated with defunct licensees in the upstream oil and gas industry, the ERCB is actively working to reduce public exposure to orphaned liabilities in other industry sectors which it regulates, and to reduce the extent of liability associated with inactive wells, facilities and pipelines.

Mining Liability Management Program (MLMP)

The ERCB is working with AENV, DOE, SRD, and representatives of the coal and oil sands mining industries to redevelop a liability management program for this sector. The proposed MLMP developed in 2007 was considered by the Ministers of AENV and DOE not to appropriately address the financial risk and environmental impacts of this sector. A recommendation to the Minister of AENV is due in May 2009.

Transmission Pipelines

Oil and gas transmission pipelines were also specifically excluded from the LLR Program due to their unknown liability. As the National Energy Board regulates inter-provincial and international lines, and the newly formed Alberta Utilities Commission is responsible for their ‘regulated’ gas transmission lines, the number and the extent of liability of pipelines regulated by the ERCB is currently being determined. The development of a liability management program for this sector is planned for completion by year end 2010.


Industrial Licensees

The ERCB approves upgraders and issues well licences to a small number of industrial licensees. While to date such licensees have not created orphaned liabilities, the ERCB intends to conduct an assessment of their liability and financial health to determine whether a liability management policy or program is required.

Upstream Oil and Gas Industry Liability Reduction Initiative

While liabilities of defunct licensees in the upstream oil and gas sector currently pose little risk to the public, the ERCB is evaluating the sustainability of the Orphan Program to fund such activities as conventional oil and gas reserves decline. The need for an initiative to reduce liability in this sector, and the nature and extent of any regulatory policy or program required to effect such a reduction are under active review by the ERCB.

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[1] The LLR Program does not calculate a deemed liability for pipelines, though, with the exception of oil and gas transmission pipelines, the costs associated with the discontinuation and reclamation of an orphaned pipeline are included in the Orphan Well Program

[2] The Orphan Well Association is an “arms length” non-profit association formed to undertake operations on orphaned sites.