On March 12, 2013, the ERCB announced important changes to the
Licensee Liability Rating (LLR) Program that will have a material
impact on operators of oil and gas wells, facilities and pipelines,
as well as their investors and lenders.
These changes, which will become effective on May 1, 2013, will
be rolled out over a three year period and will result in a
significant increase to the number of operators who will be
required to post security and to the amount of security which will
have to be posted by those operators.
The LLR Program, which governs most conventional upstream oil
and gas wells, facilities and pipelines aims to reduce the
likelihood that the costs to suspend, abandon, remediate and
reclaim a well, facility or pipeline will be borne by the Alberta
taxpayers if an operator is unable to do so.
Under the program, each operator must pay a security deposit if
its deemed liabilities exceed its deemed assets.
The changes to the LLR Program, which stem from a concern that
the old regime significantly underestimated the environmental
liabilities of operators, modify the formulae used to estimate
future abandonment and reclamation costs so as to ensure that these
costs are recovered without resort to public funds.
Some of the important changes to the LLR formula brought about
by Bulletin 2013-09 include:
a 25% increase to the prescribed average reclamation cost for
each individual well or facility (which will increase an
operator's deemed liabilities);
a decrease in the industry average netback from a 5-year to a
3-year average (which will affect the calculation of an
operator's deemed assets which are calculated by multiplying
production from the past year by the rolling average industry
netback. The reduction from 5 to 3 years means the average will be
more sensitive to price changes);
a $7000 increase to facility abandonment cost parameters for
each well equivalent (which will increase an operator's deemed
a change to the present value and salvage (PVS) factor from .75
for active wells and .50 for active facilities to 1.0 for all
active wells and facilities (which will increase an operator's
deemed liabilities as total site liability is multiplied by a PSV
factor to determine the final liability).
As an illustration of the potential effect of the changes, the
ERCB has estimated that while since 2006, 88 operators have been
required to pay approximately $13 million a year, commencing on May
1 and over the next three years, the ERCB will require 248
operators to post security in the amount of $297 million.
While the phased-in implementation plan is intended to give
operators time to make adjustments, the significant increase in the
amount of security required to be posted with the ERCB means that
energy companies (in particular junior energy companies who may be
disproportionately affected by price instability) will have to plan
The foregoing provides only an overview. Readers are
cautioned against making any decisions based on this material
alone. Rather, a qualified lawyer should be consulted.
Canada is a constitutional monarchy, a parliamentary democracy and a federation comprised of ten provinces and three territories. Canada's judiciary is independent of the legislative and executive branches of Government.
In Bank of Montreal v Bumper Development Corporation Ltd, 2016 ABQB 363, the Alberta Court of Queen's Bench enforced the "immediate replacement" provision in the Canadian Association of Petroleum Landmen 2007 Operating Procedure...
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