By William Sattlegger,
P. Geo.President,
Foreshore Resources Ltd.
The energy industry is faced with accrued environmental liabilities in part due to end of life reserves, subpar economics, and the culture of deferring well suspensions, abandonments, and site reclamations has resulted in an ever-increasing inventory of inactive wells across the Western Canadian Sedimentary Basin. This is very true within the province of Alberta. Industry is strained by reduced cash flows, a stressed service sector, pressure to add reserves, increase daily production and boost net asset valuations.
The adage that ‘we can drill our way out of this’ or the realization of higher net-backs is not in keeping with the rate of a rapidly expanding liability obligation as compared to rate of increase of asset value where in many circumstances is actually deceasing, notwithstanding a ‘high commodity’ environment. It is clear from the monthly tabulation of the Liability Management Rating (LMR) – a comparison of deemed assets to liabilities, as calculated by the Alberta Energy Regulator (AER) – that on average, industry operators’ ratios are decreasing on a monthly basis.
There is no question that field-related environmental liabilities are real and need to be addressed from a wide cross-section of industry participants including: oil and gas operators, regulatory bodies, and of course, the impacts upon both the community and the environment. There are several solutions to this situation and this article intends to focus upon two key areas.
Accepting the reality that these ‘real’ environmental liabilities need to be addressed one solution would be to develop an ‘area approach’ to remediating certain types of liabilities. At a high level identify specific fields which have common issues and contact operators to participate in a project-based strategy of well suspensions as an example thus benefiting from a lower cost as compared to suspending a single well. Industry needs to collaborate both between themselves and with the service sector to implement a strategy which both add.
From our analysis of individual operator’s assigned liabilities as tabulated by the regulator, several key occurrences of certain liabilities are a result of historical events and non-compliance issues. Based upon our experience, a number of these liabilities are repeated within the portfolio of assets and would require revisions to historical submissions and addressing those compliance issues, that have resulted in significant assignment of liabilities against the operator. Targeting these types of assigned liabilities has the advantage of reducing liabilities in the near-term, thus improving the operator’s liability rating.
This is an abandoned well, once owned by Legal Oil and Gas Ltd., now defunct. The Supreme Court of Canada is deciding who pays – the bank who lent the money, the Orphan Well Association, or taxpayers.
We use the term ‘implied liabilities’ since the operator of record has not audited these liabilities and should this have occurred a significant amount of liabilities once identified would be reversible. Interestingly enough, many of these liabilities are replicated thus requiring just a single solution. From our analysis of specific operators assigned deemed liabilities, our due diligence process has identified up to an average of 25 per cent of liabilities attributable to wells and facilities which could be reduced through the effort of providing certain documentation, data, and revisions to historical applications or submission to the regulator. For the most part, this undertaking is administrative in nature, cost effective, and subject to number of entities completed in a timely fashion.
In that the energy industry is faced with a host of challenges we are of the view that any reduction in corporate liabilities without the need for major capital expenses of retiring accrued environmental liabilities is a significant value proposition. In our opinion, regardless of the corporation’s current LMR, there is an opportunity to potentially reduce assigned liabilities resulting in having a positive effect on the corporation’s financial position, access to capital, asset transactions, insurance coverage, and corporate compliance. We welcome industry inquiries to discuss how and where we may be of assistance.
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