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.
Background
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.
Material Changes
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 liabilities); and
- 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).
Commentary
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 accordingly.
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.
© Copyright 2013 McMillan LLP
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