Have you ever wondered what it would like to be a first-hand witness to evolution as it happens? Anyone living in Western Canada should take a few moments to read this Insight, and learn how the oil and gas sector has adapted and evolved to make Closure a vital part of its operational framework.
Closure is the abandonment, remediation and reclamation of oil and gas infrastructure when they are no longer economically viable. Ten years ago, there was almost no regulatory requirement, financial incentive or political driver for Closure in Western Canada. The fundamental shift in the recognition of closure arguably started in 2014 when Alberta implemented the Inactive Well Compliance Program (IWCP) under Directive 13. This regulatory tool was designed to ensure industry was responsibly monitoring and maintaining inactive wells and really foreshadowed to industry that change was coming.
Next in 2016, Alberta introduced OneStop, a digital entry porthole that reduced reclamation certification application turnaround time from 1-2 years to 30 days. By fixing this regulatory bottleneck in the approval process, many companies were able to submit hundreds of reclamation certification applications over a short period of time. This improvement did not go unnoticed by oil and gas executives, as many companies eliminated hundreds of thousands in annual surface rent payments, and for the first-time people were talking about environmental and Closure saving money in the same sentence.
The Alberta Energy Regulatory (AER) and Orphan Well Association’s appeal to Court of Queen’s Bench of Alberta “Redwater Decision” (2016) was the next critical event that changed how Closure is managed. They were insisting that environmental and Closure liabilities be addressed before assets were liquidated to repay creditors – Federal bankruptcy law said otherwise. In June 2016, the AER responded to the denied Redwater appeal by slamming a restrictive regulatory bulletin on Industry that would require any oil and gas producer wanting to acquire wells in Alberta to have 2:1 asset to liability ratio or post cash security to make up the difference.
This Discretionary Approval process is still used today for all Acquisitions and Divestitures (A&D) to give the regulator the opportunity to evaluate the insolvency risk before a transaction happens or to pick up on bad companies that were trying to take advantage of the system. Through this process Alberta implemented mandatory closure spend targets on producers who wanted to buy or sell wells and were able to promote and effectively force small fledgling producers into their newly conceptualized Area Based Closure Program.
The Supreme Court of Canada ruling to overturn the Redwater decision in 2019 was extremely important in the evolution of the Closure sector. It has made the cost to abandon, remediate and reclaim retired oil and gas infrastructure a financial commitment and real liability that had never been considered by many producers and investors.
It wasn’t until 2020 that industry would realize any substantial impact from the Redwater decision. February 2020 saw negative oil prices on the heels of a 5-year natural gas slump. Both producers and the service sector were laying people off; the future did not look good in any direction. On April 17,2020 the Federal governments recognized the stress facing the oil and gas sector by announcing a program within the COVID-19 recovery plan that would see $1.7 Billion split between Alberta, British Columbia, and Saskatchewan. The intention of the program was to create jobs in the Closure sector with no funds going directly to a producer.
Working with a 3-year deadline and administrative restrictive restrictions, each province rolled out their own programs designed for their specific needs; The Site Rehabilitation Program (SRP) in Alberta, Accelerated Site Closure Program (ASCP) in Saskatchewan and the Dormant Sites Reclamation Program (DSRP) in British Columbia. Each respective provincial program works with the oil and gas service sector and Indigenous Peoples to provide Closure services on inactive oil and gas infrastructure. The federal program prohibited any funds from going directly to producers but required them to sign-off on the completed scope of work and pay GST on services.
In the year following the release of the Federal funding, over 1 billion in Closure funding had been administratively released to industry across the 3 provinces. Most producers and service providers have benefitted from the program however all three provincial programs have been administratively challenging for the service sector and producers. The unexpected benefit of the Federal Government’s Covid-19 Recovery Plan has been the rapid recognition of the growing Closure liability in the oil and gas sector, and a much greater understanding of the time and energy required to retire oil and gas infrastructure.
In 2020 British Columbia, Alberta and Saskatchewan responded to the rising awareness associated with Closure liability in Western Canada by implementing regulatory tools that prescribe mandatory Closure work each year.
- British Columbia’s Dormancy Regulation gives each site a prescribed timeline to complete Closure activities where sites must be abandoned, remediated and reclaimed within a predetermined period of time;
- Alberta has proposed Directive 088: Licensee Life-cycle Management which promises to have mandatory spends calculated through inactive liabilities determined from executed corporate costs rather than utilizing dated industry averages (Directive 11). All producers have 2022 spend targets but the rationale used to calculate targets is pending release in Fall 2021; and
- Saskatchewan’s Financial Security and Site Closure Regulations is similar to Alberta’s by using inactive liability in determining spend targets but is more flexible, allowing industry to strategically utilize Closure Companies and reduce spends when the economy is weak. Producers in Saskatchewan will have a mandatory Closure spend in 2023 following the completion of the ASCP.
Although each of these respective programs are different, they all show a long-term commitment to Closure in Western Canada. With these regulatory changes and mandated spend targets Closure will forever be part of oil and gas operations.
It has taken us over 100 years of oil and gas operations to create this massive inventory of liability. We have gone from an industry that didn’t know what Closure and reclamation was 10 years ago, to a culture where we have a regulated annual budget and commitment to Closure at all levels. Closure has evolved to the point where it can walk on its own, we just have to give it a chance.