Alberta’s Oil & Gas Liability Management Framework

21 Jan Alberta’s Oil & Gas Liability Management Framework

Alberta’s Oil & Gas
Liability Management Framework:

Changes to Oil and Gas Conservation Rules, the Pipeline Rules, and Directive 067

In July 2020, the provincial government announced its intention to develop a new Liability Management Framework (the LMF).  The LMF broadly outlines five policy components (for more detail see our blog post):

• Licensee Special Action under which the Alberta Energy Regulator (AER) indicates it will “proactively assess licences – including those who are distressed – to ensure they are addressing their regulatory and liability obligations throughout the entire life cycle of energy development” (quoted from the AER website).
• Licensee Capability Assessment System which will replace the current Liability Licensing Rating program to provide a “holistic evaluation of licensees throughout the energy development life cycle… and include looking at more information than strictly liabilities versus assets” (quoted from the AER website).
• Inventory Reduction Program will introduce “mandatory spending targets for closure work” as well as continue “voluntary spend targets for closure work … the area based closure program” (quote from AER website). This program will also allow landowners and other eligible parties to nominate inactive or abandoned wells or facilities for closure work.
• Addressing Legacy and Post-closure Sites will be examined by the Government of Alberta with a panel of experts to identify potential solutions and funding options.
• Expanding the Mandate of the Orphan Well Association (OWA) to allow it to “better manage and accelerate the clean-up of sites that do not have a responsible owner” (quote from AER website).

What has been done to implement the LMF so far?

Since the LMF was first introduced in late July of 2020, some steps, discussed further below, have been taken to implement certain  policy components outlined in the LMF.  It is worth noting that the AER has indicated that, over the next few months, there will be information and opportunities for public input provided as the liability programs are built.

Licensee Special Action

At this time, nothing specific for a licensee special action program has been proposed or implemented. Although, given the AER’s statement that it will “consider information gathered from the licensee capability assessment and use regulatory intervention if needed” under this program (quote from AER website), proposed changes to Directive 067 will play a role in this program.

Licensee Capability Assessment System

In order to implement this policy component, the AER has proposed changes to Directive 067 which it expects to be in place by mid 2021 (see Bulletin 2021-01).  Directive 067 sets out the eligibility requirements for acquiring and holding energy licences and approvals.  The amended directive is meant to increase the scrutiny of license applicants and holders by requiring additional information (in particular financial information) throughout the energy development life cycle.  The additional information is intended to enable the AER to (page 2):

• assess licensee eligibility,
• assess the capabilities of licensees and approval holders to meet their regulatory and liability obligations throughout the energy development life cycle,
• administer [the AER’s] liability management programs, and
• ensure the safe, orderly, and environmentally responsible development of energy resources in Alberta throughout their life cycle.

The AER may grant eligibility with or without restrictions, terms and conditions.  It may also refuse to grant eligibility or revoke eligibility.  Among other things, the restrictions, terms and conditions imposed by the AER may include a requirement to provide full or partial security, or the requirement to address outstanding non-compliances of current or former AER licensees that are directly or indirectly associated with the applicant or its directors, officers or shareholders (there is no indication of what constitutes an indirect association in this regard).

Inventory Reduction Program 

In Bulletin 2020-26 released December 17, 2020, the AER announced that changes to the Oil and Gas Conservation Rules and the Pipeline Rules have been made.  These changes contribute to the inventory reduction program by:

• allowing the AER to set binding closure spend targets (a.k.a. closure quotas);
• allowing the AER to request closure plans from licensees, as well as allowing the AER to direct timing and priority of the work, and to impose terms and conditions on the closure plans;
• allowing the AER to request company financial and reserves information (it should be noted the AER may require the information be provided as part its processes but cannot conduct a search and seizure of such information); and
• allowing landowners and other eligible parties to nominate inactive or abandoned wells/facilities for closure work through an “opt-in” process.

Relevant amendments to both the Oil and Gas Conservation Rules (OGCR) and the Pipeline Rules (PR) are:

• A new definition of closure which means the phase of an energy resource development that involves the permanent end of operations, including abandonment and reclamation (OGCR s. 3.05 / PR s. 1(1)(d.1).
• A new provision allowing the AER to set timelines for closure in directives (OGCR s. 3.012(g.1) / PR s. 82(9)(h.1)).
• A new provision allowing the AER to establish binding closure quotas (OGCR s. 3.014 / PR s.82.1).
• A new provision allowing the AER to require closure plans from licensees and allowing the AER to impose terms and conditions and to direct the timing and priority of work (OGCR s. 3.015 / PR s. 82.2).

The OGCR and PR merely set out the AER’s new authority regarding timelines for closure, closure quotas, and closure plans.  There is nothing in the OGCR or PR that requires the AER to take these steps within a certain period of time (or at all).  Presumably, however, the AER will be releasing directives which will indicate the manner in which it will implement these provisions of the OGCR and PR.  Some questions for implementation include the contents of closure plans, the timing for completion of closure plans once requested by the AER, consequences for failure to provide a closure plan, events that will “trigger” a request for closure plans (aside from the nomination process), and timelines for closure activities to occur.

In addition to the above amendments which appear in both the OCGR and PR, only the OCGR is amended to enable the nomination process for inactive wells/facilities (s. 3.016).  The new provision provides that where a well or facility has remained in either an inactive or abandoned state for 5 or more years, and a request has been made by an eligible requester, a licensee must prepare a closure plan (unless otherwise directed by the AER).  An eligible requester is defined as a landowner (if well/facility on private land), the Minister or public lands disposition holder (if well/facility on public land), or the relevant band council under the Indian Act, the Métis settlement or municipality (if well on Indian reserve/Métis settlement/municipal land).  Unfortunately, there is no provision for a public interest group to act as an eligible requester for wells/facilities located on public lands.

The AER’s expanded authority to request financial and reserves information is found in a new OCGR provision (s. 12.152), there is no comparable provision in the PR.  The information can be collected and used to assess licensee eligibility, administer liability management programs and otherwise ensure safe, orderly and environmentally responsible development.  The draft Directive 067 expands on the OCGR provision, indicating that financial and reserves information may be requested by the AER at the time of an application for licence eligibility.  In addition, in order to maintain eligibility financial statements are required annually or as directed by the AER and licensees must provide notification of material changes (such as amalgamation, merger or acquisition) within 30 days.

The AER must keep financial information confidential for 5 years and reserves information confidential for 15 years. There is no indication in the OCGR as to whether such information will automatically be released after the confidentiality period has passed or as to whether the AER has the discretion to keep such information confidential for a longer period of time.  Perhaps this will be addressed in future directives issued by the AER?

Addressing Legacy and Post-closure Sites 

No steps to date. According to the LMF, this policy component is to be led by the Government of Alberta (rather than the AER).

Expanding the Mandate of the Orphan Well Association (OWA)

In June 2020, the mandate of the OWA was expanded by The Liabilities Management Statutes Amendment Act.  This includes enabling the OWA to better manage orphan sites (including operation of those that are still capable of production) and to monitor the behaviour and condition of orphan wells.  It seems that, at least for now, no additional changes to the OWA’s mandate beyond those made in June 2020 are envisioned.

Moving forward to address Alberta’s oil and gas liability problem

As outlined in our previous blog post  on the LMF, Alberta has an oil and gas liability problem. Alberta has a significant backlog of orphans and legacy wells. Without taking steps today, that backlog will continue to grow.

There are some changes following from the introduction of the LMF in July 2020 which have potential help address this problem: closer scrutiny of licensees throughout the life cycle of an energy developments, the ability to impose timelines for closure activities, and the authority to set closure quotas.  Unfortunately, these powers of the AER are discretionary and the legislation does not set out events or circumstances which compel the AER to act.  While future directives issued by the AER may provide more detail,  it remains that much of the LMF is being left to AER discretion rather than being created by legislated requirements.

Clear steps are needed to prevent future orphans and legacy sites.  Good first steps are (1) mandatory legislated timelines for abandonment, reclamation and remediation and (2) mandatory upfront payment of security to cover clean-up costs.  As well, there needs to be mechanisms in place to closely monitor existing legacy and post-closure sites to ensure they are not causing negative environmental impacts.  While Alberta needs an approach which is predictable and relatively administratively simple, it also needs an approach which doesn’t allow wells to languish without clean-up and adheres to the polluter pays principle.

The nomination process enabled by the OCGR is a step in the right direction.  However, a big gap is created by not providing an avenue for concerned members of the public to qualify as eligible requesters for those wells/facilities located on public lands.  This means that wells/facilities located on public lands may be left to languish.  It is recommended that the OCGR definition of eligible requester be expanded to allow nomination by members of the public when wells/facilities are located on public lands.

The nomination process can trigger a requirement to prepare a closure plan but questions around these abound (hopefully to be answered in future AER directives). For instance, the OGCR/PR does not indicate what information must be provided in a closure plan or the timeframe for preparation of a closure plan once requested by the AER (presumably these details will be detailed in a future AER directive).  Nor does the OGCR/PR provision indicate if a security payment must accompany the closure plan (to ensure closure costs are covered and to ensure compliance with the closure plan).   While the OGCR/PR provisions indicate that a licensee must comply with the terms and conditions of an approved closure plan, there is no indication of what happens if a licensee fails to comply (other than committing an offence under the Oil and Gas Conservation Act/ Pipeline Act).  Timelines for preparation of and compliance with a closure plan should be made mandatory and enforceable (either through the OGCR/PR, regulations or AER directives).

At this point in time, it appears that further clarification and detail on the LMF is still to come.  It is our hope that the issues raised in this blog will be addressed.  We will keep an eye on the AER and Government’s websites as details of the LMF continue to unfold.  As well, for those who are interested, the AER is accepting feedback on the draft Directive 067 until February 14, 2021.

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