Farmers' Advocate Office: Liability Management Ratings (LMR) & Landowners

 
 
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 What is the Licensee Liability Rating (LLR) Program?
As a landowner, you may have heard people talk about the Alberta Energy Regulator’s (AER) Licensee Liability Rating (LLR) Program, which was established in 2013. This document serves to explain the LLR Program to Albertan landowners.

What does the Licensee Liability Rating (LLR) Program mean to landowners?
The intention of the LLR Program is prevent the cost associated with suspension, abandonment, remediation, and reclamation from being borne by the public of Alberta. A wellsite, facility, or pipeline is considered an “orphan” if the licensee becomes defunct or insolvent and there is no working interest participant to address the end-of-life needs. The Orphan Well Association (OWA) takes care of the suspension, abandonment, remediation, and reclamation of orphan sites.

How does the LLR Program work?
Each licensee with the AER receives a Liability Management Rating (LMR) based on the following formula:

LMR = Deemed Assets
Deemed Liabilities

When a licensee’s LMR dips below 1.0, the licensee must post a security deposit with the AER. The amount of the security will be equal to the deemed liabilities minus the deemed assets.

If the licensee becomes defunct and the site is not sold, the security deposit collected through the LLR Program will be forwarded to the Orphan Well Association to be used for suspension, abandonment, remediation, and/or reclamation.

How are deemed assets and deemed liabilities calculated?
Deemed Assets = Volume of Production x Netback x 3

The volume of production is determined by the licensee’s reported production of oil and gas in the preceding 12 calendar months.

The industry netback is calculated by the 3 year industry average netback. Currently 2008-2010 netbacks from the Canadian Association of Petroleum Producers are being used.

Deemed liabilities are based on the cost of abandonment and reclamation for the wells belonging to a licensee. A standard formula is used based on the status and type of site. Sites that have been as “problem sites” by the Alberta Energy Regulator will be assigned have a site-specific liability value, as with oilfield waste facilities and gas plants.

There are so many acronyms…. what is the difference between an LMR and an LLR?
The LMR is the overall rating of a company’s liabilities and assets within the Oilfield Waste Liability (OWL) Program, Large Facility Liability Management Program (LFP), and the Licensee Liability Rating (LLR) Program.

Landowners will hear most about the LLR because it is this program relevant to most landowners as it governs most convention upstream oil and gas wells, facilities, and pipelines.

I’ve heard that companies will try to offload their liabilities onto smaller companies. Is this possible?
When an application for a transfer is received, the AER will assess how the transfer would affect each company’s LMR. If the transfer causes either company’s LMR to dip below 2.0, that company will be required to post a security deposit before the application is approved. (See recent changes in Bulletin 2016-16) The AER may refuse a licence transfer based on previous compliance issues if they believe it is not in the best interest of the public.

How do I view a company’s LMR?
The LMR ratings are updated the first Saturday of every month. It is also calculated whenever a licence is transferred. Please click here for the AER’s most recent monthly report. Companies marked with asterisks have been required to post a bond with the AER. This does not mean they are bankrupt or insolvent – it means that their deemed liabilities have exceeded their deemed assets. Certain companies choose to have the AER hold extra security for them.

Do companies contribute to the Orphan Well Association before they become insolvent?
Yes, each licensee must contribute annually towards an orphan levy for the Orphan Well Association regardless of their LMR. The total amount of the levy is determined by the AER on an annual basis. Each licensee pays into the program based on their share of the total liability. All companies will contribute, but some will contribute more than others.

Questions? Call the FAO through the Ag Info Centre at 310-FARM (3276) and farmers.advocate@gov.ab.ca
 
 
 
 
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For more information about the content of this document, contact Jeana Schuurman.
This information published to the web on July 25, 2016.
Last Reviewed/Revised on September 15, 2017.