asset retirement obligations - xi technologies...xi’s llr analysis tool can be used for...

Asset Retirement Obligations: Managing risk in times of insolvencyKnowledge and tools for today’s Landman.

My how things have changed.

39th Annual CAPL Conference

ARO: Managing risk in times of insolvency • September 17, 2018

Our industry has evolved. So have Landmen.


BACK THEN…

Today’s Landman


Goals for this session


GAIN A COMMON UNDERSTANDING OF LLR AND ARO

• Key events and regulatory directives

• How have transactions evolved

• Discrepancies between LLR & ARO

DEMONSTRATE WORKFLOWS TO HELP YOUR EVALUATIONS

• LLR & Sensitivity Analysis

• Screening for opportunities to add value

• ARO estimations & corporate impact

REVIEW/ANALYZE SEQUOIA CASE

• What happens to chain of title when an operator goes bankrupt?

TOOLS & KNOWLEDGE TO ELEVATE THE LANDMAN’S ROLE

WHAT’S THE CURRENT SITUATION?


• LIABILITIES ARE IN THE SPOTLIGHT

• TRANSACTIONS HAVE EVOLVED

• LLR ≠ ARO

• SEQUOIA/PERPETUAL

• REACTIVE REGULATORY ENVIRONMENT

Key events in Regulatory Framework


Early 2000s 2013 - 2015 20182016 2017

LLR Program implemented

Directive 011 Revisions

Redwater Decision

Bulletin 2016-16

“2.0”

Bulletin 2016-21

Directive 067 revised

Area-Based

Closure Program

Sequoia Bankruptcy

Inactive Well Compliance

Program

What is LLR?


Deemed AssetDeemed Liability

Production only, no reserves • Bbl/d of oil is ~$41,500• Boe/d of gas is ~$22,500

Abandonment and Reclamation• Directive 011

Implementation of LLR “2.0”


REDWATER DECISION (MAY 19, 2016)

• Receivers’ priority in bankruptcy upheld

BULLETIN 2016-16 (JUNE 20, 2016)

• Announced transactions must be >2.0

BULLETIN 2016-21 (JULY 12, 2016)

• Clarified AER would use discretion on transactions <2.0

Transactions have evolved


BACK IN THE DAY…

• Golf course negotiations

• Clubhouse napkin deal

• PSA executed

Deal Closes

• Cocktails

• Back-slapping

• Red meat

Caesar’s for Lunch!!



TODAY…

•PSA executed

Deal Closes

•Submit liability management plan to AER

•45 – 60 days to review

Discretionary Approval Application •Objection to transfer

•Landowners, public, CNRL

•90 days to review (concurrent)

Statement of Concern



AND EVENTUALLY…

• Cocktails

• Back-slapping

• Fusion cuisine

Cactus Club after work!!

Changes to Directive 067

DIRECTIVE 067 APPROVAL IS REQUIRED TO HOLD AND TRANSFER LICENCES (WELLS, FACILITIES, PIPELINES)

• Change was a reaction to bankruptcies and asset stripping

• Operator’s must report material changes in corporate structure and

transactions (including share deals)

• AER can now revoke or change an operator’s approval status

• Directors and Officers must disclose bankruptcies and

provide photo ID


Vermilion acquiring Alphabow Michichi assets

LLR Case Example in AssetBook


Real Life Scenario

EVALUATE A PROPERTY AS IF WE ARE VERMILION

• Let’s look at a property that is actually for sale

• From the Sayer website we pulled an asset that is being sold by AlphaBow

• We can evaluate the asset very easily from an LLR perspective before committing to a data room process

ARO: Managing risk in times of insolvency • September 17, 2018 • 15

AlphaBow offering Michichi assets


Create the Area


Get Wells and Perform LLR Analysis



LLR for both companies would go down, but this is fine for Vermilion

which has an LLR value above 2.0


LLR for this package is 3.33 based on our replica of the AER LLR

calculations (Assets/Liabilities)


Calculation of abandonment and reclamation liabilities per license.

Based on public data, we determine tubing, rods, GWP etc.

XI’s LLR Analysis tool

CAN BE USED FOR SENSITIVITY ANALYSIS TO:

• Carve out different versions of a deal (easy to filter out certain assets and determine the effect on LLR for the package)

• Identify effects of netback changes or other input criteria

• Discover arbitrage opportunities (look at the change in LLR if rods are pulled, GWP is applied for, etc.)

LLR IS NOT THE FULL PICTURE!

• ARO analysis is needed to determine end of life costs for an asset or company


Discrepancies between LLR and ARO

What makes up ARO?


What makes up ARO?


Regulatory timeline affecting ARO


1993 - 19961991 2001

Cementing Requirements

Abandonment Regulation

Soil, Water and Salt Contamination

Guidelines

Non-routine Abandonment

Regulation

Reclamation Criteria

Spill Reporting/

Drilling Waste

2003 20071990

High Risk Medium Risk Low Risk

How LLR differs from ARO


1. Remediation excluded

2. Understates abandonment on old/sour wells and overstates shallow

gas wells

3. Overstates over-licenced facilities

4. Working interest not accounted for

5. Present value ignored

Vermilion acquiring Alphabow Michichi assets

ARO Case Example in AssetBook


Same AlphaBow Assets - ARO


Create projects for any group of wells.


Create multiple cost models to apply to any project. The XI Cost model

incorporates average end of life costs based on a 4 year multi-operator study.


XI cost models can be modified and can be used as a basis for your own internal cost models.


Be sure to modify all aspects of the cost model – well abandonment, well reclamation and facilities.


Compare ARO values (gross and working interest) to LLR values.


Override any costs at the well level based on any criteria (status, spill occurrence, age etc.)

What happens when an operator goes bankrupt…

The Effects of Insolvency


The effects of insolvency


WHAT HAPPENS WHEN AN OPERATOR GOES BANKRUPT?

1. Offer to working interest parties to take over assets

2. Receivership process – identify saleable assets

3. Junk goes to the Orphan Well Association/partners

4. Directors can be on the hook for environmental liabilities

How does chain of title work?


1. HISTORICAL PRECEDENT (EARLY 1990’S)

• Government pushed for full lookback

• Industry offered to fund Orphan Well Association

• Chain limited to current operator/ working interest parties and receiver

2. PWC CHALLENGING THIS PRECEDENT UNDER SECTION 96 OF THE BANKRUPTCY AND INSOLVENCY ACT (SEQUOIA)

Sequoia/Perpetual Analysis


AS RECEIVERS, PWC’S SUIT CLAIMS THAT:

• Sequoia gave $223MM consideration (ARO) and received $5.6MM

consideration (assets)

• Susan Riddell Rose breached her fiduciary duty to Perpetual Energy

Operating Corp.

• The transaction should be set aside and declared void or the

defendants pay $217MM

• Rose should be accountable to PEOC for profit she realized

Area-Based Closure


OVERVIEW

• Voluntary program designed to facilitate ARO cost savings through

cooperation and economies of scale

• Participants commit to spending 4% of inactive deemed liability per

year on retirement activities

• Gain access to mapping tool to coordinate overlapping activities with

other operators

• Husky and CNRL conducted pilot projects in 2017

What should landmen do?


SUMMARY

• Embrace the change & take a leadership role

• Be strategic and thoughtful - LLR & ARO can be opportunities!

• Due diligence – acquisitions and divestures

• Estimate ARO earlier in the deal process

• Don’t be paralyzed by deals <2.0

• Consideration of ABC program

• Landmen are the catalyst for change

Here’s to the next 39 years!


Q&A TimeJennifer Baerg Mike [email protected] [email protected]

asset retirement obligations - xi technologies...xi’s llr analysis tool can be used for...

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