The Alberta Energy Regulator (AER) has released Directive 088: Licensee Life-Cycle Management, which finalizes the draft Licensee Life-Cycle Management Directive (Draft LLCM Directive) for energy infrastructure and sites licensed under the Oil and Gas Conservation Act and Pipeline Act. Directive 088 outlines the AER's framework for managing energy sector liabilities through holistic assessment of licensees' capabilities and performance throughout the energy development life cycle.
In our previous post, The AER's Holistic Approach to Liability Management, we identified three significant new obligations introduced by the Draft LLCM Directive:
- The Inventory Reduction Program will require licensees to meet mandatory closure spend targets determined by the AER.
- License transfers will trigger a holistic assessment of both the transferor and the transferee to ensure that that the parties can meet their regulatory and liability obligations throughout the energy development life cycle.
- The AER may require licensees to post security as part of a transfer application.
These three features of the Draft LLCM Directive remain essentially unchanged in Directive 088. To supplement Directive 088, the AER has also issued Manual 023: Licensee Life-Cycle Management which provides additional information on the criteria used to assess and group licensees based on risk, the mandatory and voluntary spend requirements and the AER's approach to transfers.
Inventory Reduction Program
As noted in our previous post, the Inventory Reduction Program marks a significant shift from previous AER policies, which for the most part did not set timelines or firm requirements for when abandonment and reclamation activities would occur. Directive 088 will create minimum obligations for all licensees with inactive inventories to spend annually on abandonment, remediation and reclamation activities.
The AER will annually publish industry-wide closure spending targets based on inactive liability and historical closure spending. In July of each year, the AER will release licensee-specific mandatory targets based on the licensees' proportion of inactive liability and the licensee's level of financial distress. Each year, a licensee may commit instead to a voluntary closure spend target that is greater than its mandatory target. Submitting a voluntary spend target may entitle a licensee to an extended deadline for removing equipment and materials associated with abandoned well licenses, and may make the licensee eligible for a maximum three-year extension for expired Crown mineral lease wells.
While the Draft LLCM Directive suggested that any licensee could elect to meet its mandatory targets by providing a security deposit in the full amount of the target (instead of by completing closure work), under Directive 088 this option will only be available to licensees who meet an annually determined threshold.
As both mandatory and voluntary spend targets are based on inactive inventories, it is critical that licensees keep complete records of closure activities and spending, report to the AER all closure activities and spends as required by the AER and ensure that the AER's records are accurate. Details on applicable targets and eligible closure spends are provided in Manual 023.
Holistic Assessment of Licensee Capability
Directive 088 introduces a holistic assessment approach, which will replace the AER's prior liability management ratings. The AER will use holistic assessments to determine a licensee's capability to meet its regulatory and liability obligations for the entire life cycle of an energy development. This assessment approach would be used to determine, for example, whether a transferor or transferee must post a security deposit in respect of a license transfer, or whether the AER will refund all or a portion of security collected.
The holistic assessment approach implements financial factors outlined in section 4.5 of Directive 067. As stated in Directive 088, the assessment will include the following six factors to determine the level of risk posed by a licensee:
- financial health;
- estimated total magnitude of liability (active & inactive), including abandonment, remediation and reclamation;
- remaining lifespan of mineral resources and infrastructure and the extent to which existing operations fund current and future liabilities;
- management and maintenance of regulated infrastructure and sites, including compliance with operational requirements;
- rate of closure activities and spending and pace of inactive liability growth; and
- compliance with administrative regulatory requirements, including the management of debts, fees and levies.
These factors will create an overall licensee profile to inform AER decision-making. Assessments will not be publicly available, but licensees will be placed into peer groups. Those who are ranked in the bottom quartile of performance metrics relative to industry peers may face additional regulatory burdens.
While Directive 088 explicitly notes that the holistic approach will evolve over time, it is clear that as part of the evolving program, there will be increased reporting requirements, additional scrutiny associated with the AER's assessment of a licensee's ability to meet its obligations and increased discretion for the AER in relation to transfers and security requirements. For licensees, it will be critical to ensure that the AER has accurate information to utilize in its risk assessments.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.