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Environmental Legislation Centre | Managing oil and gasoline legal responsibility in Alberta: Modifications are being made (form of)


Managing oil and gasoline legal responsibility in Alberta: Modifications are being made (form of)

 

In July 2020, the Authorities of Alberta introduced a brand new Legal responsibility Administration Framework (LMF) which briefly sketched out a number of adjustments which have been meant to enhance the present strategy to grease and gasoline legal responsibility administration.  These adjustments are constructed round 5 pillars: licensee functionality evaluation, licensee particular motion, stock discount program, addressing legacy and post-closure websites, and increasing the mandate of the Orphan Nicely Affiliation.

 

What system was in place previous to the introduction of the LMF in July 2020?

Previous to July 2020 and presently, the important thing software for managing oil and gasoline legal responsibility is the Licensee Legal responsibility Score (LLR) Program which is delineated in Directive 006: Licensee Legal responsibility (LLR) Program. As will probably be mentioned under, the AER is transitioning away from the LLR program to a brand new, enhanced program which makes use of holistic licensee evaluation.

The LLR Program applies to all upstream oil and gasoline wells, amenities, and pipelines included inside the scope of the Orphan Fund as described in Appendix 1 of Directive 006. The LLR Program is designed to evaluate a licensee’s capability to handle its suspension, abandonment, remediation and reclamation liabilities. That is executed by trying on the Legal responsibility Administration Ratio (LMR) of a licensee which is the ratio of a licensee’s eligible deemed property to its deemed liabilities. The LMR evaluation happens month-to-month and on the time of a switch software. If the licensee’s LMR falls under 1.0, then a safety deposit is required.

A LMR evaluation embody property and liabilities within the LLR program, as properly these beneath the Giant Facility Legal responsibility Administration Program (LFP) and the Oilfield Waste Legal responsibility (OWL) program. The LFP is ready out in Directive 024: Giant Facility Legal responsibility Administration Program.  That directive units out which amenities are included within the LFP, the methodology to calculate deemed property and liabilities and the LMR, the license switch course of, and different facets of this system.

The OWL program is printed in Directive 075: Oilfield Waste Legal responsibility (OWL) Program and applies to all AER permitted waste administration amenities besides these that are solely devoted to landfill functions. Directive 075 units out safety deposit necessities, the methodology to calculate deemed property and liabilities and the LMR, the license switch course of, and different facets of the OWL program.

As evidenced by the existence of a major variety of orphan wells (i.e. wells that are licensed to defunct or bancrupt events, and designated as orphans by the AER), the LLR Program shouldn’t be at all times able to figuring out when it’s acceptable to request safety for properly clean-up.  Typically the LLR Program identifies issues at too late a stage (i.e. the licensee already beset by monetary difficulties) with the end result that the licensee is incapable of addressing its environmental obligation even earlier than the AER intervenes.

The influence of this shortcoming was highlighted by the Alberta Court docket of Queen’s Bench determination within the Redwater case (which was upheld by the Alberta Court docket of Attraction however finally reversed by the Supreme Court docket of Canada).  See our temporary commentary on the Redwater determination right here.

 

The brand new strategy…

On account of the preliminary Redwater determination, the AER was motivated to take one other take a look at the present oil and gasoline legal responsibility administration strategy. The regulatory response has basically been to boost the present strategy by requiring extra detailed monetary data initially, on an ongoing foundation, and upon license switch requests. Time will inform as as to if this enhanced strategy is adequate to catch potential insolvencies and forestall license transfers to underfunded corporations (i.e. the place closure liabilities exceed firm worth).

 

Licensee Functionality Evaluation System

The AER is transitioning away from the present LLR program to the Licensee Functionality Evaluation (LCA) system which will probably be used to find out whether or not an organization is financially secure sufficient to obtain a licence to function and whether or not up-front safety could also be required. Primarily, that is an enhanced model of the LLR program which can use “holistic licensee evaluation” to tell choices about licence purposes and, the place acceptable, to set off Licensee Particular Motion

The AER has taken already steps to exchange the LLR program with the LCA system, together with making adjustments to Directive 067: Eligibility Necessities for Buying and Holding Power Licenses and Approvals and introducing Directive 088: Licensee Life-Cycle Administration (Directive 088) which got here into impact on December 1, 2021. Over a number of phases, Directive 088 will ultimately exchange Directive 006 (which has already been amended to take away the elements associated to license transfers).

The amendments have been made to Directive 067 put into place extra necessities to supply monetary data on the time of software and all through the vitality improvement life cycle. The required data is listed in Schedule 3 of Directive 067 and the AER might request extra data because it sees match.

The data gathered beneath Directive 067 varieties a part of the holistic licensee evaluation and will probably be used to:

  • assess licensee eligibility (a possible licensee could also be decided to haven’t any eligibility, restricted eligibility, or normal eligibility);
  • assess capabilities of licensees and approval holders to fulfill regulatory and legal responsibility obligations all through the vitality improvement life cycle;
  • present additional course on which materials adjustments can point out a danger of licensees or approval holders being unable to fulfill their regulatory and legal responsibility obligations;
  • administer AER legal responsibility administration packages; and
  • guarantee secure, orderly and environmentally accountable improvement of vitality improvement of vitality assets in Alberta all through life cycle.

In figuring out whether or not an explicit applicant or licensee poses an unreasonable danger, the AER considers a wide range of components together with compliance historical past; company and possession construction; historical past of insolvency; excellent money owed to AER, Orphan Fund, municipal taxes, floor lease funds, public land use disposition charges or rental funds; and several other different components.

Directive 088 introduces the LCA system, the licensee administration program, and the stock discount program. As properly, Directive 088 updates the applying necessities associated to the license switch course of and describes safety assortment.

The LCA system makes use of a number of components to establish dangers posed by a licensee together with its monetary well being (i.e. the monetary data submitted beneath Directive 067) and the estimated whole magnitude of legal responsibility together with abandonment, remediation and reclamation.  Further details about LCA components and parameters is present in Guide 023: Licensee Life-Cycle Administration. Outcomes from the LCA will probably be integrated into the bigger holistic evaluation of the licensee which informs regulatory choices concerning the licensee (together with license eligibility beneath Directive 067 and choices beneath the licensee administration and stock discount packages launched in Directive 088).

Directive 088 signifies, no matter what agreements between events might say, all license transfers have to be permitted by the AER and can set off holistic licensee evaluation of each transferor and transferee. The AER might approve, approve with situations (together with safety), or deny the license switch. If a license switch software entails inactive licenses, then the transferor should replace its reported closure actions and spends earlier than submitting the switch software. Additional, in some instances,  a website particular legal responsibility evaluation accomplished inside 3 years have to be submitted together with an analysis of price adjustments for the reason that time of the evaluation (see Directive 001: Necessities for Website-Particular Legal responsibility Assessments in Help of the ERCB’s Legal responsibility Administration Packages). The AER considers the entire bundle of licenses to be transferred and should reject an software that doesn’t embody licenses which have both acquired reclamation certifications or are deserted and categorised as reclamation exempt.

Directive 088 additionally addresses safety deposits. The AER considers the holistic licensee evaluation in figuring out whether or not to require a safety deposit (and its quantum). Specifically, the AER considers whether or not a licensee poses an unreasonable danger as per part 4.5 of Directive 067. The utmost safety quantity is the licensee’s whole liabilities together with price of care and custody, and the associated fee to completely finish operations (which incorporates abandonment and reclamation). Requests could be made for a refund of safety deposits which triggers holistic evaluation of licensee to find out if a refund is suitable.

 

Licensee Particular Motion

In accordance with the LMF, licensee particular motion will present “sensible steering and proactive help for particular person or distressed operators”. Presumably, the rationale being that helping operators by way of difficulties will stop the creation of extra orphans. This idea seems because the Licensee Administration program outlined in Directive 088.

The Licensee Administration program is supposed to proactively monitor licensees to help the accountable administration of vitality improvement. The outcomes from holistic licensee evaluation (i.e. beneath the LCA program and Directive 067) are used to establish these licensees which might be at larger danger of potential failure in assembly regulatory and legal responsibility obligations. If a licensee is set to be at larger danger of failure, the AER might undertake particular engagement or regulatory actions with the licensees. These actions embody schooling, encouragement to comply with {industry} greatest practices, and initiation of regulatory actions the place acceptable (reminiscent of altering license eligibility beneath Directive 067, putting restrictions on new purposes, requiring safety deposits or issuing orders). As properly, the AER will encourage licensees to make use of collaborative closure planning instruments – reminiscent of, space primarily based closure – to cut back total closure prices and work extra effectively to cut back legal responsibility on the panorama.

 

Stock Discount Program

The Stock Discount program launched by Directive 067 units obligatory closure spend targets for closure actions and spends by licenses (additionally see Bill12: Legal responsibility Administration Statutes Modification Act, 2020 which made adjustments to the OGCA and Pipeline Guidelines to allow these spend targets).  Every licensee should meet their annual obligatory goal, report yearly to the AER on all closure actions and spends, preserve data of all closure actions and spends, and supply data as requested to the AER. In lieu of assembly the obligatory goal by way of closure work, a licensee might present a safety deposit within the quantity of the obligatory goal. Failure to fulfill the obligatory goal or present safety in lieu, will end result within the AER requiring a further quantity to compensate for elevated legal responsibility amassed by way of the yr. As properly, different regulatory actions could also be taken to make sure compliance and achievement of outcomes.

Necessary closure spend targets have been set for 2022 and 2023, together with forecasts for 2024 to 2026, in Bulletin 2021-23: Necessary closure spend targets. The industry-wide targets for 2022 and 2023 are $422 million and $443 million, respectively. Particular person annual obligatory targets will probably be decided by the AER taking into consideration legal responsibility and historic closure spending, and the monetary data required by Directive 067.

As properly, the website rehabilitation program has been established to distribute $1 billion in federal funding to grease subject service corporations for the efficiency of oil and gasoline website closure and reclamation work. One fascinating facet of this program is a nomination course of whereby landowners, First Nations peoples on reserves or Métis Settlement residents can nominate an inactive website for clean-up. As soon as a website is nominated, the federal government posts it on-line, and an organization might apply for a grant. Nomination of a website doesn’t assure that it is going to be cleaned-up or {that a} grant will probably be made.

 

Addressing Legacy and Put up-closure Websites

The LMF supplies that there will probably be a “course of to handle legacy and post-closure websites, or websites that have been deserted, remediated or reclaimed earlier than present requirements have been put in place and websites which have acquired reclamation certificates and the operator’s legal responsibility interval has lapsed”. Except for indicating an intention to determine a panel to contemplate the right way to tackle this hole, there isn’t a indication of what this course of might consist.

 

Increasing the Mandate of the Orphan Nicely Affiliation

The mandate of the OWA was expanded in June 2020 by The Liabilities Administration Statutes Modification Act. This contains enabling the OWA to raised handle orphan websites (together with operation of these which might be nonetheless able to manufacturing) and to observe the behaviour and situation of orphan wells. It appears that evidently the LMF doesn’t envision extra adjustments to the OWA’s mandate past these made in June 2020.

 

Will this new strategy be sufficient?

The AER’s present LLR strategy to grease and gasoline legal responsibility has resulted in quite a few legacy and orphan wells on the Alberta panorama leaving a major legal responsibility on the general public purse (estimates run as excessive as $260 billion, see Mike De Sousa et al. and Carolyn Jarvis et al.).

Whereas adjustments have been made and will probably be made to handle the shortcoming of the present legal responsibility mannequin, it’s “patched-up model of the previous strategy” – there nonetheless isn’t any default safety, no timelines for closure, no safety towards oil-price crashes, debt calls by collectors and AER makes an attempt to implement come too late (i.e. when there are monetary pink flags, see Fluker & Yewchuk). Moreover, constant ongoing monitoring of the monetary well being of each AER licensee is an incredible enterprise which requires dedication of experience and funding which it might not really possess (see Fluker & Yewchuk). As properly, the sufficiency of the obligatory closure spend targets is questionable (see Yewchuk).

Slightly than merely fidgeting with the present strategy to grease and gasoline legal responsibility, the ELC wish to see:

  • safety deposits to handle environmental obligations being required for all oil and gasoline actions earlier than work commences.
  • legislated timelines for reclamation and remediation to keep away from inactive wells languishing on the panorama with out clean-up.
  • Monitoring being put in place for all inactive, orphan, legacy and post-closure websites.

Albertans deserve an strategy which is predictable and comparatively administratively easy; doesn’t enable wells to languish with out clean-up; and adheres to the polluter pays precept.

Interested by extra element? 

Oil & Fuel Legal responsibility in Alberta at a Look

Revealed: December seventh, 2021

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