New liability management framework
The Government of Alberta announced a new liability management framework in July 2020 and directed the AER to develop new programs to implement the policy. We are using a holistic approach with the new programs, systems, and processes to implement government’s policy and help industry reduce liability in the oil and gas sector. Our holistic approach applies at all phases of energy development rather than focusing late in the life cycle.
This graphic outlines when the new programs are involved during the life cycle of energy development.
A new directive and manual
The AER has developed a new directive and manual to improve liability management as we implement the new framework. Directive 088: Licensee Life-Cycle Management introduces programs that apply throughout the entire life cycle of development that allow us to proactively identify potential issues, develop timely solutions, and increase the amount of closure work done by companies. Directive 088 includes the following:
- a holistic assessment and licensee capability assessment
- the licensee management program
- the inventory reduction program
- an updated licence transfer process
- changes to security collection
Manual 023: Licensee Life-Cycle Management was developed alongside Directive 088 and helps to provide further details and clarity around the new programs.
The following video provides an overview of the new programs that were introduced by Directive 088: Licensee Life-Cycle Management as part of the new liability management framework.
Moving away from the liability management rating (LMR)
Historically, liability management has been largely reactive and not focused on the full life cycle of energy development. In particular, the liability management rating (LMR), which is a ratio of a company's liabilities and assets, has proven to not be an accurate measure of whether a company will be able to address their regulatory and liability obligations.
A company with an LMR of 1.0 — meaning they have the same amount of assets as liabilities — avoided having to post security for future closure work. When a company had more liabilities than assets, their rating would then drop below 1.0, and we would focus on collecting security. At this point it was often too late in the life cycle to collect security because the company was already in financial distress. Some companies that were in distress eventually become insolvent, and some of their liabilities would ultimately be managed by the industry-funded Orphan Well Association (OWA).
We saw companies become insolvent with ratings above 2.0, and some as high as 30, which highlighted the need for change. A more holistic approach was needed to assess whether companies can meet their regulatory and liability obligations and safely clean up their sites.
Our holistic assessment will replace the use of the liability management rating (LMR) over time. While we know that LMR is not an accurate measure of whether a company will be able to address its regulatory and liability obligations, it currently plays an important role in calculating the deemed liability in the oil and gas sector. The LMR is also integrated in several of our directives, as well as the Oil and Gas Conservation Rules, and cannot be easily or quickly removed without careful thought and consideration to impacts it could cause in other areas. As our first step towards removing LMR, the holistic assessment has replaced the use of the LMR for licence transfers and security collection for licence transfers.
Liability management in the oil and gas sector – a brief overview
Oil and gas companies in Alberta are responsible for ensuring their infrastructure and sites are safely closed and cleaned up. The costs associated with this closure work — also known as end-of-life obligations — are what is called "liability." This liability information will be available on our Liability Management Rating and Reporting page until the transition away from LMR is complete.
The Government of Alberta sets policy direction for how liability is managed and provides general oversight, with the goal of reclaiming land for other uses. The AER is responsible for implementing policy, monitoring progress, and providing enforcement when needed. Our mandate is to protect public safety and the environment while ensuring responsible energy development.
Liability management has been a growing area of public concern in recent years in Alberta. Through ongoing consultation with industry and other stakeholders, the Government of Alberta and the AER have identified gaps in how liability is managed in the province. As a result of this work, the Government of Alberta released a new liability management framework in July 2020 and directed the AER to implement new programs.
Why change was needed
Liability management in the oil and gas sector aims to reduce the number of inactive sites (wells, facilities, and pipelines) over time. Inactive wells, specifically, are wells that haven't produced and have been idle for 6 or 12 months based on the well classification. However, closure work has not kept pace with the steady growth of the number of inactive wells. While the recent economic downturn has played a factor, even during times of prosperity, the amount of closure work has often lagged behind. There were approximately 84 000 inactive wells in the province in 2018, 95 000 in 2019, 98 000 in 2020, and 92 000 in 2021. While the 2020 and 2021 totals are similar, it is clear that how we manage liability has not slowed the growth of inactive sites.
Regulatory changes to implement the new framework
Before we could implement the new government policy, changes were required to several rules and AER directives. In 2020, we announced updates to the Oil and Gas Conservation Rules and Pipeline Rules. We then published an updated Directive 067: Eligibility Requirements for Acquiring and Holding Energy Licences and Approvals, which also included a public comment period, in 2021.
We updated the Oil and Gas Conservation Rules and Pipeline Rules again in 2021, which enabled the new directive to be implemented. The creation of Directive 088 included a public comment period, and the extensive feedback we received through that process led to the creation of Manual 023 to help address that input.
You will see more proposed regulatory changes and information from the AER over the course of the next year, including opportunities to provide input, as we work to refine our liability programs.
Other liability initiatives not involving the AER
Site Rehabilitation Program
The Government of Alberta's site rehabilitation program is funded by the Government of Canada and allows eligible companies to apply for funding to complete abandonment and reclamation work. The Government of Alberta is responsible for awarding and distributing program funds. The program is not part of the new liability management framework, and the AER is not involved in its administration.
Companies participating in the program must continue to meet all AER requirements. Albertans can contact the AER's 24-hour response line at 1-800-222-6514 if they have any safety, environmental, or compliance concerns.
More information about eligibility, project requirements, and detailed guidelines can be found on the Government of Alberta's site rehabilitation program website. Questions about the program should be directed to the Government of Alberta at 1-833-680-9083 or @email.
Unpaid municipal taxes
Starting May 1, 2023, the AER will review all new well licence or well transfer applications to confirm companies do not have unpaid municipal taxes above $20 000 (see Bulletin 2023-22 for details). Companies with unpaid municipal taxes above this threshold amount must provide evidence they have paid their debt or have an acceptable payment plan in place with the owed municipality before the AER will review their application. If the required evidence is not provided, the AER will close the new well or well transfer application as incomplete.
The AER is not involved with the collection of unpaid municipal taxes and does not have jurisdiction to take compliance or enforcement actions related to non-payment.
Surface lease payments
The AER may request information from companies on unpaid surface lease payments when assessing their eligibility for energy development activities. When requested by the AER, companies must disclose the amount of any unpaid surface lease payments. This information helps us assess if a company has the financial capacity to hold a licence and if they can meet their regulatory and liability obligations, including closing energy infrastructure.
Those who are owed unpaid surface lease payments may submit a statement of concern on Directive 067 eligibility applications and on Directive 088 transfer applications. We post public notices for all applications we receive on our website.
Landowners should contact the Land & Property Rights Tribunal at 780-427-2444 or @email for information or questions about surface lease payments. Landowners are eligible to apply for surface lease compensation through the Land & Property Rights Tribunal. The Government of Alberta has more information on what to do when a company fails to make annual surface lease payments. The Farmers' Advocate Office provides support and resources for farmers and ranchers, including advocacy and energy, utility, surface rights, and rural dispute resolution. You can contact the Farmers' Advocate Office through 310-FARM (3276) or @email.
We know that Albertans are passionate about liability. If you have a question about a certain program, please connect with us.