Alberta Announces New Liability Management Framework

Bennett Jones LLP

Bennett Jones LLPOn July 30, 2020, the Government of Alberta announced that it will introduce a new oil and gas Liability Management Framework over the coming months. The framework is intended to accelerate the responsible reclamation of oil and gas sites and ensure a cleaner environment, all while improving Alberta's competitiveness to attract oil and gas investment.

Addressing the liabilities associated with inactive and orphaned wells, facilities, and pipelines continues to be a concern in Alberta. As the Government of Alberta notes in its press release, 456,729 licences have been issued to drill oil and gas wells in Alberta since the early 1990s. Of those, 96,969 wells are inactive, 70,785 are abandoned, 88,851 are reclamation certified, and 36,773 are reclamation exempt. Of the remaining wells, 162,530 are active and 821 have been drilled but are not producing.

The framework builds on the expanded role of the Orphan Well Association passed in April 2020's Bill 12 - Liabilities Management Statues Amendment Act, 2020 which came into force June 15, 2020, and amendments to the Orphan Fund Delegated Administration Regulation, Alta Reg 45/2001 effective the same day. The framework is being introduced as Alberta allocates $1 billion in COVID-19 emergency funding to closure activities through the Alberta Site Rehabilitation Program to support employment in oil field services companies and additional funding to the Orphan Well Association.

Contents of the New Framework

While few details have been released at this time, an early description published by the Government of Alberta suggests that the new framework will include the following key features:

  • More Support for Struggling Operators: "Licensee Special Action" is intended to prevent facilities from becoming orphaned in the first place by providing practical guidance and proactive support for individual or distressed operators, helping them to maintain operations. At this time it is unclear as to whether this will be part of or in addition to the Alberta Energy Regulator's (AER) current Global Refer Status.
  • Replacement of the Licensee Liability Rating (LLR): A "Licensee Capability Assessment System" is slated to replace the current LLR program to better assess oil and gas operators' capability to meet their regulatory liability obligations before receiving regulatory approvals (currently, such considerations only appear to be reviewed by the AER as part of transfer applications), and to allow the AER to identify and proactively reach out through the Licensee Special Action if operators are struggling.
  • Mandated Minimum Annual Closure Spending: An Inventory Reduction Program will establish annual industry site closure spending targets over a five-year rolling period to help reduce inactive wells in operators' inventories. The targets are to provide some flexibility to account for undefined "operator-specific circumstances". This program is also to include an area-based closure program to encourage operators to work together to share the cost of cleaning up multiple sites in an area.
  • Landowner Nomination Program: Landowners will be able to nominate sites on their land. Nomination will trigger review by the AER and require the operator to justify why a site should not be immediately brought through closure stages. The public will also be able to nominate sites located on public land. The concept of a landowner nomination program is currently being tested through the government's Site Rehabilitation Program whereby landowner's and Indigenous communities can nominate sites for closure while the licensee retains discretion on whether to proceed. As of June 30, 2020, 610 sites had been nominated.
  • Panel to Determine New Process for Legacy and Post-Closure Sites: A panel will be established to determine how best to address sites that were abandoned, remediated or reclaimed before current standards were put in place and the operator's liability lapsed.
  • Mandate of Orphan Well Association to Be Expanded: As provided by the amendments introduced in Bill 12, the Orphan Well Association will be able to manage and accelerate the clean-up of orphan wells, infrastructure and pipelines. This includes more delegated authority to protect the value of producing assets, protect jobs, protect public safety, and mitigate the risk of a growing inventory of orphan sites.

Conclusions and Next Steps

At this point in time, the broad-brush measures described in the framework appear to be moderate steps and fairly uncontroversial. To an extent, the measures are also already at least partially implemented by the AER such as the enhanced review by the AER of a company's ability to manage liabilities as part of transfer applications, landowner nomination of sites for closure, and closure spend targets which currently exist under the voluntary area-based closure program and appear to be a common consideration as part of transfer discretion requests under Bulletin 2016-21: Revision and Clarification on Alberta Energy Regulator's Measures to Limit Environmental Impacts Pending Regulatory Changes to Address the Redwater Decision.

What is notable in Alberta's proposed approach is that Alberta will not be following British Columbia's approach of incorporating timelines into its closure requirements nor does it appear that Alberta is intending to increase security requirements.

The framework's potential effectiveness and impacts will become clearer once more details are released. In particular, the ability of the AER to enforce the changes and its ability to help companies maintain operations while continuing to address liabilities remains to be seen. We will provide updates as the framework is developed.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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