December 2024
Liability is estimated using calculations outlined in Directive 011 and through site-specific liability assessments (SSLAs). The estimated liability has changed over the last 20 years due to both changing operational practices and varying costs for closure work. Directive 011 determines estimated liability for a licence based on regional costs for different scenarios and infrastructure characteristics. Site-specific estimated liabilities are determined through SSLAs.
Total estimated liability includes decommissioning and reclamation liabilities associated with wells and facilities and for sites with site-specific liability assessments. Figure 8 provides the total, active, and inactive estimated liability. These estimates will continue to improve over time as more closure spend data is collected and analyzed. Directive 011 was updated with well decommissioning costs, increasing the total liability to approximately $36 billion as of June 2024. See the Directive 011 webpage for more information.
Historically, “deemed” liability was the liability used for the liability management rating (LMR), and the values in figure 8 correspond with previous LMR reports. In 2020, with the introduction of the new liability management framework, the AER began reviewing and removing historical overrides to calculate the estimated liability. The increased estimated liability in 2021 was due to the inclusion of sweet multiwell batteries that had not been included previously.
Figure 8. Estimated Liability, 2018–2023
Note: This figure has been adjusted to reflect the liability at the end of each calendar year to be consistent with how the data is reflected in this report, whereas the previous report had shown the liability at the beginning of each calendar year.
It’s important to understand that the actual cost to complete closure will not always match the estimate. The actual amount spent is reported by licensees as closure spend, and those values are used to inform the regional costs listed in Directive 011, which are updated from time to time (see Bulletin 2024-16 with recent updates to Directive 011 liabilities). When a closure milestone is reached, the estimated liability is reduced by the values in the most recent edition of Directive 011 or the associated SSLA, not the amount actually spent.
Licensee Capability
While understanding liability is important, it is also essential to understand the ability of companies to meet their regulatory and liability obligations across the life cycle of energy development.
To do this, we use a holistic licensee assessment (see Directive 088 and Manual 023 for details). Two important factors this assessment considers are a licensee’s magnitude of liability and their level of financial distress.
Figure 9 outlines the number of licensees in each category based on the magnitude of the total estimated liability and their level of financial distress. It highlights the percentage of total liability held by each of the groups. Most of the estimated liability (84%) is held by licensees in low financial distress, whereas 7% of the total liability is held by licensees in high financial distress.
Figure 9. Licensee liability by magnitude of liability and level of financial distress
Note:
1. A licensee’s magnitude of estimated liability is categorized as high ($150+ million), medium ($25-150 million), and low (under $25 million). Financial distress is calculated using financial information required under Directive 067 (see definitions in Manual 023).
2. The AER is providing financial and liability information while maintaining confidentiality requirements.
3. Percentages may not add to 100 due to rounding.
4. Data as of October 2024.
Transfers
Holistic licensee assessments are now used in various regulatory processes. Specifically, when licensees want to buy or sell assets, they must submit a transfer application to the AER. When transfers are reviewed by the AER, the licensees involved are assessed using numerous factors, including their level of financial distress and the amount of inactive liability that is included in the transfer (see Manual 023 for more information). Licensees presenting higher levels of risk are subject to higher levels of scrutiny, which may result in the collection of security. Table 1 summarizes transfer applications based on licensee capability.
Table 1. Transfer analysis by licensee capability, 2022 and 2023
| Assets Transferred To | Well Count | Facility Count | Pipeline Count | Total Liability (millions) | Inactive Liability (millions) | Security Collected (millions) | Security Collected as % of Inactive Liability |
|---|---|---|---|---|---|---|---|
| Licensee (more capability) | 6412 | 727 | 963 | $492.7 | $192.5 | $0.4 | 0% |
| Licensee (less capability) | 1661 | 311 | 441 | $211.8 | $81.8 | $18.8 | 23% |
| New licensees | 10,733 | 1065 | 1627 | $906.2 | $270.3 | $25.2 | 9% |
Note: Licensee capability is assessed through the holistic licensee assessment, including their level of financial distress. New licensees are defined as having a new business associate (BA) code registered with the AER within the last 3 years.
Most transfers are from existing licensees to new licensees (since 2022, there has been $906 million in estimated liability transferred to new licensees). As a result of these transfers, 9% of the inactive liability value was collected via security.
The second most likely transfer situation is when assets are going to a more capable licensees ($492 million in estimated liability since 2022). The licensees receiving these assets are deemed more financially capable, and therefore less security is requested on these transfers ($426 000 in security collected on these transfers since 2022).
When licensees are transferring assets to less capable companies ($200 million in estimated liability since 2022), these transfers collected 23% of the inactive liability ($18.8 million in security collected on these transfers).
