Oh, ABC, It’s Easy as, 1 2 3…

Recently, the AER has rolled out the new Area Based Closure Program (ABC) whereby operators can relax inactive well requirements in exchange for committing to an annual inactive liability reduction target. Goals of the Area-Based Closure Program are to encourage cooperation between operators to realize economies of scale for area based asset retirement and ultimately combat the growing inventory of inactive infrastructure. Licensees can participate in the ABC program by committing to spending 4% of their Inactive Deemed Liability on closure in the coming calendar year.   Since roll-out of the program in the early fall, there has been a slow, steady addition of licensees who have formally committed and posted programs to the AER’s ABC portal.

The current framework for calculating the Inactive Liability Reduction Target is measured at 4% of a Licensee’s Inactive Deemed Liability (Source: ABC FAQs). The 4% target was determined using average historical industry expenditures on closure and is an interesting value as it is applied to all licensees regardless of the size/production volume of the company and will likely increase as the program progresses. Regardless of the target percentage, the value will likely affect the small, medium, and large sized producers differently.

Ideally, a company’s decision to pursue Area Based Closure should be in alignment with the AER’s goal to maximize closure and realize economies of scale. However, depending on the size of the licensee, and more importantly, a licensee’s inventory of inactive wells, the target has the potential to reduce the annual spend on closure for an oil and gas company.

An interesting case arises when a licensee possesses a disproportionate amount of inactive wells compared to their active assets. If the licensee is coming up on a big year where a large inventory of wells change their Directive 13 risk class from Low to Medium, a cost benefit analysis must be made. The new framework presents the potential situation where the budgeted spend on inactive well compliance is much higher than the 4% target. If the gap between these two values is significant, a licensee could choose the less expensive option of opting in to ABC and spending the minimum 4% and foregoing the need to bring the medium risk well into compliance. This ultimately leads to less spend towards closure and seems contrary to the goal of the ABC program.

It would be unfair to suggest that all licensees will proceed this way, however it points out a potential area of improvement for the ABC program. It is only natural that the roll-out of a new system will have its own kinks to work out, but providing a framework for a collaborative approach among industry is a much needed breath of fresh air.

It will be interesting to see how the industry responds to the “carrot” provided by the AER. If industry does not embrace ABC, will the AER follow up with a much heavier “stick” which outlines annual quotas for asset retirement similar to the IWCP program? Or, perhaps the AER provides a variable mandatory annual percentage rate as a function of the inactive count of a company. All of that remains to be seen.

The new Area Based Closure Program is a great step in the right direction for addressing inactive liabilities and the AER should be lauded for their willingness to think outside the box and be more malleable with regulatory requirements. Given the growing count of inactive wells in the Province, a framework needs to be put in place to efficiently address these existing liabilities and the new liabilities which are added annually. The AER’s Area Based Closure program is a huge step in the right direction.

360 exists to make growth simple. Contact us today to help you plan for your retirement.

The Full Circle is a content initiative by 360 to inform, inspire, and spark conversation around a wide variety of technical and business-related topics. We endeavour to use this forum not only to inform our clients and industry about relevant topics, but also to hold ourselves accountable, grow professionally and personally, and constantly challenge the way we do things internally. There will be a wide range of topics posted over the next while, so we encourage dialogue and look forward to speaking with those who would like to converse further –info@360elm.com.

Recent Insights

  • Navigating the Human-Tech Partnership: Embracing Soft Skills in an Automated Era

    If my computer had arms, it would probably slap me in the face at the end of my work day.  I swear at it, give it dirty looks, and then throw it in a bag until I need it again.  However, I rely on it to perform most of my daily work routine.  Whether it’s…

    Read More

  • 2023 Year in Review

    Welcome to 360’s last insight of the year. As tradition dictates, the team has scoured the office for anyone willing to support a summary of our year of Insights and has come up empty. The pleasure now falls on me to hit the “high notes” and reflect on the year that was, while we prep…

    Read More

  • Carbon Credits & Site Closure in Canada & the USA – A Win Win Win

    The landscape of environmental site closure in North America is undergoing a dynamic transformation. In both Canada and the USA, the infusion of voluntary carbon credits into the equation is revolutionizing the way we think about site closure projects. These credits serve a purpose far beyond the simple offsetting of emissions; they are becoming a…

    Read More

  • Keep it Simple, Scientists: The Benefits of Applying Risk Principles to Simple Sites

    In the realm of environmental site assessment, it’s often the complexity of the task that can confound even the most experienced scientists. However, what’s sometimes overlooked is the potential for simplicity, and the benefits that come with applying risk-based principles to sites and their associated data. This is particularly relevant when dealing with seemingly straightforward…

    Read More