August 27, 2020

Adapting to Change – Liability Management and Asset Retirement in Western Canada

I was once told in rugby to “control the controllables”, when lamenting a big rainstorm prior to a match.  That message has stuck with me in business and holds well to turbulent times.  The message is that the goals often remain the same despite a constantly changing environment.

To start to paint the picture (and for fun), I’ve taken a stab at mentioning a few (sarcasm) of the events which have impacted the ARO world in the past 6 years.

  • Initial Redwater decision is supported, then overturned
  • Area Based Closure Program rolled out
  • Area Based Closure Program paused
  • IWCP program completed
  • Provincial regulator in AB is overhauled on each government change and amid scandal
  • New Liability Management Framework (LMF) openly discussed, but then paused for election
  • New Liability Management Framework announced, but not detailed
  • BC Dormant Site Program released
  • No less than 5 major bankruptcies leading to a spike in Orphan Well inventory
  • Provincial NDP Government elected, then defeated
  • Provincial Conservative government defeated then elected
  • Federal Liberals elected and reelected
  • 2x (more?) major oil price collapses
  • $1.7B in federal funding programs announced
  • Alberta Site Rehabilitation Program battles through early struggles
  • 5 different Phases of SRP (each with different criteria) are rolled out in 4 months
  • Unique grant funding vehicles rolled out across each province (BC, AB, SK)

I realize that I am omitting a number of major industry events (and COVID19), but one could easily continue on this list without pause.  The intent here is not to rant, but rather to highlight the constant state of flux that licensees/service companies in oil and gas have found themselves in when it comes to trying to plan for ARO activities.

Unfortunately, what all of this has done is create an environment where starting and stopping is the norm, or even worse, where inactivity for fear of doing the “wrong” thing is occurring.  This is especially true for 2020 and the federal grant programs.  Licensees across the basin have pushed ARO programs from summer to fall and fall to winter as they wait for subsidized dollars, and in many cases, the window for closure activities has been missed and as a result, full closure is pushed back another year (at least).

In the spirit of not just outlining the problems (and for fear of being a hypocrite –  https://www.linkedin.com/pulse/problem-isnt-ryan-smith/?trackingId=Q7372uuKkIVJSBJgijzdEQ%3D%3D), we feel like there are ways to steady the proverbial ARO Ship.

Key to success in these strategy discussions are a few simple tenants:  Understand the true costs, plan long term and ensure your execution is focused. 

Understanding the true costs associated with closure is paramount to knowing how to plan.  Without a strong, realistic and in-depth assessment of liability, it is impossible to build a pragmatic program to meet your corporate objectives.  Essentially it would be flying without any instruments – doable, but if a storm pops up, you might have to land the ship.  ARO assessments at the corporate level have become a growing segment of liability management and the underpinning of those assessments are real-time execution costs, historical data and a database to pull it all together.

Planning long term is no different than tucking away money for retirement – it just makes sense.  The regulatory environment has shifted in the last couple of years and there is growing pressure to commit to specific closure targets.  Additionally, the ability to build and flip an oil company has been diminished, so pairing your ARO closure plans with the full lifespan of your assets makes sound long-term sense.  In the most utopian scenario, the day the last well produces is the day you would commence closure on that last well also.  While this over-simplifies the issues, the philosophy stands.   Not only does this take what can often look like a daunting task and turn it into manageable, annual chunks, but also it allows for a different mindset when thinking about resource allocation, technology applications and potential repurposing applications.

Lastly, execution in closure activities must be focused on.  Gone are the days where part-time practitioners are going to yield the same results as fulltime professionals, so the need for closure focused individuals/teams is of utmost importance.  We are living in a dynamic shift in our industry and ARO professionals and Liability Management roles are becoming more prevalent as the basin continues to age.  While this statement will come across as self-serving (as the whole insight likely will also), our business has grown/established/excelled to some degree in the middle of this shifting environment.   We can 100% attest to the improvement when focusing solely on closure and also to the comprehensive improvements that come with laser focus.

So in saying all this, the goal is to give comfort to those who might lament the lack of activity as a result of the SRP or who might bemoan the slow-moving government machines.  We can and will be able to have action and help our businesses.

Heraclitus apparently said some version of “the one true constant in life is change”.  Never has that been more true than in our unique world of oil and gas liability management and asset retirement obligations (ARO).

Best,

 

Ryan

Let’s Make a Deal: Opportunities and Concerns with E&P Consolidation
Read the Insight
Beyond the Fog Lies Clarity – The History, Perils, and Future of ARO Evaluation
Read the Insight
The Case for Investing in Closure Right Now
Read the Insight
Risk Lies in the Eye of the Beholder
Read the Insight