We hear the word holistic used in many places. Project management, mechanical diagnoses and more commonly, our health. A holistic approach can be incredibly beneficial when it comes to our health. We are examining ourselves as a whole rather than individual parts. When all those individual parts are taken care of, as a whole we thrive. So how does this apply to the realm of liability management? This is where the newly introduced Directive 88 comes into the spotlight.
First let’s take a step back and look at the background of liability management. Current programs are seen as being reactive, rather than proactive, when it comes to managing companies’ liabilities. With new government liability policies introduced in mid-2020, a direction for companies to follow had been established at a provincial level. That said, closure work cannot keep up with the ongoing increase of inactive infrastructure.
Fast forward to December 1st, 2021, when the Alberta Energy Regulator (AER) announced Directive 88 – a new liability management framework from the initiation of an asset to its closure and post-closure. Licensees are assessed holistically on their capabilities and performance across the asset’s life cycle. This assessment replaces the liability management rating (LMR) and results are considered prior to regulatory decisions being made.
Licensee capability assessment is part of the holistic approach and looks at both financial health and liability risk of a licensee. Financial health is based on the analysis of financial statements, while the liability risk is an estimated total magnitude of liability, both active and inactive. This also includes abandonment, remediation and reclamation phases. Simply put, the greater the level of financial stress and magnitude of liability, the greater the risk index.
Performance group assessments divide companies into peer groups based on size, activity and assets. An example of a peer group could be coal bed methane (CBM) producers. These assessments include the remaining lifespan of resources, operations, closure and administration. Each of these factors are then put into one of three tiers. The first tier being the top 25%, tier two is the middle 50% and tier three rounds out the bottom 25%.
Using both risk and performance group assessments, a licensee assessment profile is created. This profile is used in the Licensee Management Program which will better allow the AER to proactively monitor licensees to support the management of energy development. The results of the assessment under this program will to identify licensees that have exposure to not meeting their liability obligations throughout the development lifecycle.
A licensee’s profile assessment will be used in consideration to determine mandatory spend targets for the year. When determined, all licensees with inactive liability will receive their mandatory closure spend as a minimum requirement. In addition, a licensee will have a voluntary spend target of mandatory + 0.3%, which is applicable to all licensees.
While Directive 88 has already been launched, the AER will be actively adjusting its processes to further develop and optimize the new sets of frameworks. What this means is that over the years, replacement phases will transpire to further develop the Licensee Management Program and proactively manage the lifecycle of an asset. A significant benefit of a holistic approach assessment is the ability to tailor the requirements and strategies for closure with the licensee.
But what is the Licensee Management Program? Directive 88 states that it is how the AER will proactively monitor licensees to support the responsible management of energy development, using the results from licensee assessment to identify those who are or likely to be at risk of not meeting regulatory liability obligations throughout the development life cycle. Outside of the definition, there are some ambiguous statements on how this will happen, but not much else. So, to answer the original question, we are not sure.
There are many parts to Directive 88, some of them seem to be moving. The reason for change makes sense, as does a holistic approach to solving it. To make this stage relatable, it is like wanting to take a holistic approach to your personal health, but consulting Dr. Google to do so. We are left with more questions than answers. Perhaps future seminars will provide meaningful follow-ups.
Over the next several months, we encourage everyone to take advantage of the seminars and sound boards the AER is providing, to better develop the growth of the program and to get a proper diagnosis on their holistic approach to the lifecycle of an energy development.
The AER will also be hosting information sessions with specific topics:
Feb 10, 9:00AM – 11:00AM – License Transfer Process and Security Collection Information
Feb 16, 9:00AM – 11:00AM – Inventory Reduction Program Information
For more information you can check out their website, and check it frequently to be in the know of the latest updates for Directive 88
Liability Management | Alberta Energy Regulator (aer.ca)
Stay safe,
Derek
