Dawn of a new era: Alberta Energy Regulator introduces mandatory abandonment spending targets and calls for feedback on Directive 006 and a new Life-Cycle Management Directive

In July 2020, the Government of Alberta announced its plan to overhaul the regulatory regime for managing oil and gas liabilities in the province, with the goal of reducing the number of inactive and orphaned wells. Changes have rolled out gradually over the past year, with more expected in the coming months.

Details of the new Inventory Reduction Program revealed

Among the changes announced in the summer of 2020 was the introduction of minimum annual spending towards the cleanup of oil wells, pipelines, and facilities. Described at the time by Energy Minister Sonya Savage as a requirement akin to "paying down a mortgage", the program is meant to encourage ongoing service to companies' abandonment and reclamation obligations (AROs).

On June 8, 2021, the Alberta Energy Regulator (AER) released Bulletin 2021-23 (the Bulletin), setting out particulars of the new Inventory Reduction Program. When the change was announced in 2020, Minister Savage indicated that spending requirements could be calculated as a percentage of a licensee's AROs, and stated that companies "may be required to spend at least four per cent of the estimated cost of their inactive wells, which would increase over time". The Bulletin describes licensees' obligations in different terms—setting out industry-wide closure spend targets for 2022 and 2023 ($422 million and $443 million, respectively), and forecasting targets for subsequent years up to 2026. In keeping with the AER's increased scrutiny of licensees' financial health and ever-broadening discretion, it will be the Regulator that sets each licensee's annual mandatory spending targets. Time will tell whether the "four per cent" of companies' closure costs remains the high water mark for required spending on AROs. The AER has indicated that it will take into account financial disclosure submitted under the new Directive 067 along with a licensee's total liabilities and their historical spending on AROs in setting the targets.

Not all abandonment and reclamation work will count towards a company's target. In the Bulletin, the AER provides examples of eligible closure work, including, surface abandonment of an active or inactive well, reclamation site work, facility abandonment work and downhole abandonment. Conversely, spending on wellbore suspensions, pipeline discontinuation, remediation on active sites, and activities undertaken under the Site Rehabilitation Program do not count towards mandatory targets.

The AER's Cara Tobin commented on the consequences of non-compliance with spending targets in a press release issued following the release of the Bulletin:
"Should a company fail to meet their spend target — or any other AER requirement — we have a number of compliance and enforcement tools we can apply. Specifically, the AER could collect security for the portion of the target not met, have that company make up any shortfall in subsequent years, or even limit their eligibility to hold a licence."

The mandatory spending requirements will come into effect on January 1, 2022, and according to the AER, Licensees' closure targets will "be visible by July 31 for [2022] within the OneStop closure report", and closure spending will be reported through OneStop as well. Licensees will have the option to spend more than their allocated targets, and further information about such incentives will likely be available in the fourth quarter of 2021.

Call for feedback on New Licensee Life-Cycle Management Directive

A hotly anticipated change to the AER's regulatory regime is the replacement of the Licensee Liability Rating (LLR) Program with a "more comprehensive and accurate corporate health assessment that takes into account a wider variety of assessment parameters" in addition to assets and outstanding reclamation liabilities. The Government of Alberta and the AER have been hinting at the new Licensee Capability Assessment (LCA) framework since last summer, but details only now being unveiled. Contemporaneously with the release of the Bulletin, the AER released a draft of Directive XXX: Licensee Life-Cycle Management, (Directive XXX) and called for public feedback on the draft. Key features of Directive XXX include:

• the replacement of the Liability Management Ratio calculation with a "holistic assessment" of "LCA Factors" set out in Appendix 1 of Directive XXX;
• confirmation that the results from the holistic assessment conducted through the LCA will inform ongoing regulatory decisions regarding the licensee, including licence eligibility under Directive 067;
• the introduction of the Licensee Management Program, a new framework through which the AER may monitor licensees across the energy development life cycle;
• rules for the Inventory Reduction Program described in the first section of this article, including an annual January 30 deadline for licensees to provide a security deposit to the AER in lieu of meeting their mandatory targets; and
• confirmation that in the case of licence transfer applications that involve the assignment or transfer of a public lands disposition, if either party has arrears in respect of any debt to the Crown or of any taxes owing to a municipality, the AER will reject the public lands application for assignment or transfer of the disposition.

There are 11 mandatory requirements that apply to each licensee, as enumerated in the draft Directive. Overall, Directive XXX seeks to define the wide scope of the AER's discretion when it comes to regulating licensees' eligibility to hold and transfer licences, and the LCA Factors set out in Appendix 1 will provide some guidance to companies going through eligibility and licence transfer processes.

Corresponding changes to Directive 006

Included in Directive XXX is a note that the new Directive is being developed in phases and, ultimately, will replace Directive 006: Licensee Liability Rating (LLR) Program and Licence Transfer Process, but elements in Directive 006 will remain in effect until that time. The AER indicates that after Directive XXX is finalized, requirements around licence transfer applications will be moved from Directive 006 to the new Directive. Subsequent phases of the Liability Management Framework rollout will include additional changes to Directive 006 and other AER directives related to liability management (e.g., Directive 001, Directive 011, Directive 024, Directive 068, and Directive 075).

To provide feedback on the proposed new Directive, complete the Comment Form, and submit it to DirectiveFeedback@aer.ca. The deadline to submit feedback is Sunday, July 25. Note that the comments provided through this consultation process will form part of the public record and, at the discretion of the AER, any comment received may be attributed to the specific individual(s) that provided it.

This bulletin is general information only, not legal advice. For further guidance, including on providing feedback on Directive XXX or completing transactions while the regulatory regime remains in a state of flux, please reach out to our Energy Group.