Towards “Holistic” Assessment - Part I: Directive 011 Updates and Implementing the Liability Management Framework

In accordance with the timelines provided by the Alberta Energy Regulator (AER) Bulletin 2024-16[1] and updates provided in a recent public information session on estimated liabilities,[2] it is expected that the AER will introduce further updates to Directive 011 in October 2024.

The upcoming updates to Directive 011 are expected to coincide with the introduction of further changes to estimated liability, including the much anticipated replacement of the existing Liability Management Rating (LMR) system with the revised Liability Management Framework (LMF). The AER’s implementation of the new LMF is envisioned as a two-year phased approach starting with substantial updates to Directive 011. It is hoped that these changes will provide additional clarity regarding the specific steps that will be taken to modernize the province’s licensee liability regime.

Phase 1 Changes to Directive 011

The first phase of implementing the new LMF began with earlier updates to Directive 011 which were released on June 26, 2024.[3] These changes—to the soon-to-be replaced Licensee Liability Rating (LLR) metric—were introduced to improve liability estimation and align the LLR program with the “holistic” approach to assessing a licensee’s capabilities and performance prescribed by the LMF.[4] Specifically, these June 2024 revisions included updated costing for regional well abandonment based on real-world closure spend data as reported by industry and the Orphan Well Association. As set out in Directive 011, the AER has indicated that these figures will continue to be used under the new LMF.

The AER published these first phase updates to Directive 011 prior to setting the closure spend requirement for 2025. This amount, which contemplates a total of approximately $750 million in mandatory closure spend quotas for licensees, is partly calculated by reference to industry-wide inactive liability estimated using updated Directive 011 figures. By beginning the phased implementation of the LMF with these revisions to Directive 011, the AER has signaled its intent to provide licensees and the industry with a clearer picture of both estimated liability and each party’s role in meeting end-of-life obligations.

Phase 2: LMF Implementation and Further Directive 011 Revisions

We expect that further updates to Directive 011 in October 2024 may elaborate on the recent June 2024 changes by making liability costing more indicative through the use of additional industry parameters and further clarification of key costing variables. These changes are expected to align with the AER’s more holistic rubric of Licensee Capability Assessment proposed in Directive 088.

Phase two of the LMF implementation will reportedly involve further revision to not just Directive 011, but eventually Directives 001, 068, 088, and Manual 023, as well as updates to the Oil and Gas Conservation Rules. Significantly, it is also expected to involve the rescission of Directives 006, 024, and 075.

It is hoped that these changes will advance the AER and the Government of Alberta’s shared goal of expediting reclamation efforts through improved assessment of licensee capability, performance, and risk. At a minimum it is expected that these updates and the LMF’s implementation may bring some much needed reliability and transparency, particularly given that the AER itself has admitted that the current LMR system is reactive, not focused on the full life cycle of energy development, and inaccurate.[5]

We will continue to monitor further updates to Directive 011 and the implementation of the LMF closely. The Environmental & Energy group has extensive experience with standards and proceedings before the AER.

If you have any questions regarding these developments, please contact a member of the Environmental & Energy Law group.