Canada: NEB’s Decision On Abandonment Funding Set-Aside And Collection Mechanisms Has Been Implemented

Last Updated: October 29 2014
Article by Michael G. Massicotte and David Farmer

Most Read Contributor in Canada, September 2016

Introduction and Background

a. Decision RH-2-2008 – May 2009

As a part of its Pipeline Abandonment – Financial Issues program, in May 2009, the National Energy Board (NEB) issued its Reasons for Decision RH-2-2008: Land Matters Consultation Initiative Stream 3 (found here).  In this decision, the NEB directed all pipeline companies to begin setting aside funds for the abandonment of their facilities. In its Reasons,  the NEB set out the guiding principles and attributes for permissible mechanisms that companies may use for this purpose. It also set out a ten step Action Plan to be implemented over a five year period to ensure the development of these mechanisms.

b. Decision MH-001-2013 – May 29, 2013

On May 29, 2014, the NEB issued its Reasons for Decision MH-001-2013: Set-aside and collection mechanisms (found here), thereby complying with the tenth and final step set out in RH-2-2008, which was to issue decisions respecting set-aside and collection mechanisms prior to May 31, 2014. Following an oral hearing and the consideration of evidence and submissions from most of the significant NEB-regulated pipeline owners and operators, affected shippers and industry and landowner associations, the NEB determined that by January 1, 2015 all NEB regulated pipelines must have in place a mechanism for the accumulation of funds to pay for future pipeline abandonment. Most pipelines will be required to establish an irrevocable trust, or provide a bank issued letter of credit or surety bond, that reflects amounts sufficient to cover the abandonment of each of its pipelines.

These mechanisms must be submitted to the NEB for periodic review and approval along with a demonstration as to how the set-aside funds will cover the company's estimated abandonment costs, and how these funds will grow to capture future anticipated costs. Moreover, set-aside funds must be submitted to the Board in the respective companies' annual reports to the NEB.

Acceptable Mechanisms

NEB designated Group 1 Companies, (those with extensive pipeline systems), may utilize trusts as their preferred set-aside mechanism. The form and terms of each proposed trust will be evaluated by the NEB.  Specifically, Qualifying Environmental Trusts, as defined in the Income Tax Act, the use of which was advocated by all companies who were in support of the use of a trust, may be used in an effort to promote tax efficiencies. For guidance, the NEB provides an example of a form of acceptable trust as an appendix to Decision MH-001-2013.

NEB designated Group 2 Companies, (those with smaller pipeline systems), may post letters of credit or surety bonds, the terms of which must be approved by the NEB. As with the model form of trust mentioned above, acceptable forms of surety bonds and letters of credit are provided as an appendix to Decision MH-001-2013.

The methodologies for companies' estimates of the amount of future abandonment costs were considered in previous decisions issued by the NEB and are also attached as appendices to Decision MH-001-2013. Companies are required to follow these methodologies in preparing their respective abandonment cost estimates and to provide estimates, on a pipeline by pipeline basis.

A significant aspect of the NEB's Reasons is its finding that the amounts to be collected and set aside for abandonment are not subject to negotiation, nor may they be the subject of settlement agreements. Further, the NEB expressly rejected the use of growing letters of credit, related company guarantees, trust accounts and the implementation of a licensee liability rating program, such as those in place in Alberta (discussed immediately below), British Columbia and Saskatchewan, as alternative set aside mechanisms.

Alberta's Liability Management Programs

In the case of provincially regulated energy undertakings, there exist three liability management programs administered by the AER: a) the Licensee Liability Rating (LLR) Program, introduced by the Alberta Energy and Utilities Board in October 2000, which is the liability management program governing most conventional upstream oil and gas wells, facilities, and pipelines included within the scope of the expanded Orphan Fund, as specified in Appendix 1 of AER Directive 006; b) the Large Facility Liability Management Program (LFP), which is the liability management program governing the large upstream oil and gas facilities specified in Appendix 1 of AER Directive 024; and c) the Oilfield Waste Liability (OWL) Program, which is the liability management program governing oilfield waste management facilities specified in Appendix 1 of AER Directive 075.

The Orphan Fund (established under Part 11 of the Oil and Gas Conservation Act, found here), will cover the costs to suspend, abandon, remediate, and reclaim a well, facility, or pipeline included in the LLR Program, if a licensee or working interest participant becomes defunct. The Orphan Fund is fully funded by licensees in the LLR Program and OWL Program, through a levy administered by the AER. As set out in AER Directive 006, one of the purposes of the LLR Program is to minimize the risk to the Orphan Fund posed by the unfunded liability of licencees in the program.

Under the LLR Program, the ratio of deemed assets to deemed liabilities is calculated for each licensee on a monthly basis to estimate the degree of risk associated with that licensee's abandonment and reclamation obligations. Licensees with unacceptable risks are required to either reduce their liabilities or to post security deposits for abandonment and reclamation costs. The intent of the LLR Program is that licensees will abandon and reclaim their wells, facilities and pipelines in a timely manner in order to maintain a satisfactory assets to liabilities ratio and avoid the need to make security deposits.

Industry Implications

To date, a number of Group 1 and Group 2 Companies have finalized their set aside and collection mechanisms (a listing of which may be found here) and more are expected as the deadline for doing so approaches.

The NEB mandated set-aside process has been required in response to the significant magnitude of future abandonment costs of energy infrastructure, and in order to ensure the responsibility for same.  As with the provincial responses, including Alberta's LLR Program, the effect and success of these federal measures will be closely monitored in the coming years as infrastructure continues to age and requires abandonment.

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