A pumpjack works at a well head on an oil and gas installation near Cremona, Alta., Saturday, Oct. 29, 2016. Alberta's rural municipalities say the amount of unpaid property taxes they're owed by oil and gas companies has more than doubled over the past year.THE CANADIAN PRESS/Jeff McIntosh
cgallant@medicinehatnews.com@CollinGallant
A rating used to determine an oil and gas company’s ability to properly abandon its wells is no longer being published by Alberta regulators, who say a new calculation is being developed of wider changes due this winter.
The Alberta Energy Regulator says removing individual company’s ratings from its public website has been done to provide a better picture of the industry’s assets and liabilities, but critics say it’s more likely to obscure it.
“Taken on its own, the LLR is not a good indicator of a company’s financial health,” reads a statement from AER officials in response to new inquires.
“For this reason, we are no longer posting the reports for individual licensees … The AER is working with the Government of Alberta on a more holistic assessment of a company’s ability to address its end-of-life obligations.”
In Alberta, well operators are assigned a Licensee Liability Rating that is a ratio of its assets – including expected revenue from operations and reserves – against the estimated liability to properly close wells and reclaim well sites.
They had been published each month on the AER website until December 2019, when only a grant total was provided.
The rating also determines contribution levels to the industry funded Orphan Well Association, to clean up sites of bankrupt companies.
But the ratio has also been used by environmentalists, activist investors groups and other public policy critics to highlight what they say is a looming abandonment crisis in Alberta.
Regan Boychuck heads Reclaim Alberta, an advocacy group arguing for tougher rules, and told the News that he sees potential changes to the system as a “gift” to industry.
“It’s pretty amazing to hear that from the AER about a regulatory program that’s been in place for 17 years,” he said.
“These numbers … are now an embarrassment and an obstacle to companies that are trying to raise money.”
“(That’s) all lenders care about … if you’re in the red zone where you’ll have to start spending money to start cleaning up, you’re not an attractive investment.
“It’s a gift to put that behind the curtain.”
Media reports on Thursday quoted Energy Minister Sonya Savage saying the new system could be in place by the end of the first financial quarter of 2020.
This month the Alberta Auditor General said it would investigate the abandonment regimen and how it is financed.
Last year, the Supreme Court presented more hurdles to securing financing when it ruled that environmental cleanup costs could be placed ahead of secured creditors in bankruptcy proceedings.
Industry officials told the News this week that they agree the LLR requires updating and they support a review.
“There certainly are opportunities for enhancement of the LLR system to support more of a risk-informed approach and the companies ability to address end of life liabilities,” said Richard Wong, the director of western operations for the Canadian Association of Petroleum Producers.
“We support the review and believe there needs to be more timely and efficient inactive (well) liability reduction in the province.”
Industry in general has argued the system is based on out-dated pricing models, but also the decreasing costs of abandonment caused by technological chance.
Boychuck’s group also says the system doesn’t take into account potential worst-case scenarios such as wide or more rapid than expected transition from fossil fuels.
“We’ve known for a long time that it (the LLR system was) going to be cancelled, and taking down the company specific is the first step before that,” he said.
City’s situation
The City of Medicine Hat’s LLR sat at 1.02 in November.
That means that its assets – including potential revenue from operating the wells until the end of their useful economic life – were valued at slightly more than the current liabilities.
Because future revenue and reserves are taken into account, ratios only rise as production continues unless wells are reworked to recover more petroleum, thereby boosting reserves and potential income.
A company’s rate can also drop when low production or money-losing wells are retired, capped and the area reclaimed.
Medicine Hat plans to begin a $90-million reclamation program this spring with a first batch of 2,000 total well closures over three years. Only about 500 wells would remain.
That corresponds with figures about liabilities in its own financial reports and statements that say that if wells were operated until the end of life, potentially for another decade, the total cleanup cost could be as high as $250 million or more.
City officials have told the News that since the program targets wells that are losing money due to low production and low commodity price, the move makes financial sense from both an operational and long-term standpoint.
City of Medicine Hat, as a municipality, has different accounting and disclosure practices than privately owned or even publicly traded companies.
