​Liability strategies reinforce regulator's protection of the ‘public interest’

The old axiom “...the more things change; the more they stay the same” exists for very good reason.

Consider that axiom in the context of these two quotes – both reflecting on the regulatory agency which oversees Alberta’s energy sector.

Bear this in mind: they were written 25 years apart.

Guess which one is from 1993 and which is from 2018?

“...the board has been influential in shaping contemporary Alberta. Its decisions have had profound consequences, often beyond Alberta. Because of its key role in the energy sector, the board is one of Canada’s most important regulatory bodies.”

“In everything we do, we strive to deliver on the key outcomes of protecting the public and the environment, ensuring that the public feels confident about how energy is developed, and building a regulatory system that enables economic benefits for Albertans.”

Tough to pick out the timing? Both seem “timeless”? Germane, then as now?

Still struggling?

The first quote comes courtesy of Dr. David Breen, who in 1993 produced a seminal study in honour of the regulator’s 50th anniversary a few years earlier; the second was recently made by Alberta Energy Regulator (AER) president and CEO Jim Ellis.

The quotes are linked over the decades by some timeless truths about the challenges of regulating for the here and now – but also prepping for future unknowns. The key timeless truth: a often-elusive yet critical concept called the “public interest.”

Now, consider this quote:

“Not long after its creation, it seems that that a typical agency is inevitably co-opted by the industry it was designed to regulate. Professional regulators soon come to see and interpret the world through eyes similar to those of the regulated industry.”

Public interest is potentially a victim in such situations.

To be clear, the context in which that perspective was offered was not specifically about the Alberta regulator per se. Rather, it was proposed as a provocative rationale to justify asking whether the Alberta regulator’s effectiveness ought to be assessed in the context of what typically happens to other regulators in other sectors. Breen again is the quote’s author. As a researcher in the late 1980s and early 1990s, he was responding to the paucity in his view, within the academic literature, of anything that that resembled rigorous examination of the Alberta experience with regulation.

Indeed, it was the sense that the Alberta regulator was somehow different than typical regulators – in terms of defining the boundaries of its relationship with industry – that piqued his curiosity to unpack the agency’s history. His main focal point of inquiry, as a result of having posed the question, was the legislative foundation on which the regulator had been built – and how those legislative tools evolved over time on a foundation of the public interest.

Put more directly, Breen set out to examine as part of his study whether or not the Energy Resources Conservation Board, as it was known at the time, had been in any way co-opted by the petroleum sector it was created to regulate.

It was as worthy a question then as it is today. And today, we have a timely opportunity that allows Albertans to again pose the industry co-opting question. It is an opportunity which includes all-important subtext: is the regulator truly working in the public interest?

That opportunity? Watching the AER grapple with the issues related to liability management. Two new tools are in the regulator’s toolkit: Directive 067 and a innovative concept called Area-Based Closure. Both are part of the AER’s ongoing efforts to evolve and update its tools in a way that recognizes both the public interest and industry realities. (See www.aer.ca for more details.)

What is unique about the AER, however, is that it recognizes that there is also a linkage between industry realities and the public interest – a perspective that is often lost on regulatory critics. This practical reality speaks directly to a nuanced and therefore often-overlook reality: the regulator must always work within the often-opposed twin imperatives of economic reality and environmental impact. It is no easy task.

Take liability management as an example.

Every Albertan has by now likely been exposed to the accelerating narrative of how many “wells” the industry needs to be abandon; the numbers tossed around define the problem's magnitude, as do the headlines of corporate insolvencies (think Lexin and Sequoia, among others) which are steady fodder for the number of wells heading to the Orphan Well Association (OWA) program.

Wells serve as proxies for larger asset liabilities, which include all the infrastructure required in resource development. The liability problem is as bad for the sector’s reputation as it is for the regulator’s. It’s also not a stretch to define the negative economic consequences. Every well in the OWA is essentially a tax back on the operating companies; as well, investors are increasingly skittish about risks associated with unmanageable liability burdens. And, perhaps most important, these assets represent a significant environmental challenge.

Thus how the “public interest” is bound up directly in the issue is pretty clear.

Liability management – the duty of care oil and gas companies owe to ensure they manage the lifecycles of their wells, pipelines and facilities – is, of course, only one thread in the sectoral tapestry the regulator deals with. But it is a big thread and tugging on it today is a useful way of understanding how the AER continues to track on the right public interest path – a navigational challenge that ought to have, as it has, been predicated on effective consultation with industry.

Let’s be clear: consultation does not de facto mean co-optation. Indeed, consultation is critical to drawing important boundaries in the sand.

Breen’s study in 1993 did not explicitly address asset liability beyond its treatment as more or less routine part of doing energy business in Alberta. Nor should he have, because it wasn’t the problem then as it is now. Now liability management is anything but routine.

No one could have anticipated the heady days in the 2000s when drill bits were turning at speeds and volumes that seem now almost incomprehensible – which turned corporate attention more to the future than the past. Nor could anyone have imagined the deep economic troughs into which many balance sheets plunged unceremoniously, thus compromising a company’s ability to deal effectively with asset retirement obligations.

All of this hands Alberta and the regulator with a massive challenge: how to, through a combination of regulatory compliance and moral suasion, convince the industry it is now time to take ownership of liability dynamics in a way that past behaviours have not signalled an overt willingness to do so.

Breen in 1993 was also puzzled by another dynamic: given the regulator’s critical role in balancing conservation and regulation, and its role in creating the post-war economic powerhouse that is the Alberta economy when it is humming, why did the board then not have a higher profile beyond the tightest of industry inner circles?

Today’s regulators, not just the AER, are in anything but the shadows. That’s a good thing. The AER has demonstrated it’s comfortable with that limelight as it has creatively and innovatively stepped up its communication game on all fronts and continues to innovate in the way it regulates – without compromising its core obligation to Albertans; in fact, almost certainly enhancing it.

All axioms like “the more things change...” are, of course, open to vigorous interpretation. Some things do actually change in a way that ruptures them from their timeless sameness – ideally for a positive reason. History will tell us that Directive 067 and Area-Based Closure will prove important watershed moments in the province’s regulatory history. And as Breen suggests vis a vis previous legislative tools, they will likely be viewed as critical to moving the industry's economic health forward.

Thus, Albertans can think of liability regulation as a contemporary conservation effort: conserving the sector’s ability to remain financially viable – although not without some pain.

No one in 1993 would have – or could have – predicted that asset liability would have become the problem it is in 2018. Now, it is a problem whose magnitude those outside of industry’s inner circles are just beginning to understand. Another quote by Jim Ellis, in what could be considered a fairly atypical “public statement” recently released is illuminating in both the signals it sends, but in the independence it declares vis a vis the AER's relationship with industry.

“We know we must strike the right balance between being protective without controlling a company’s day-to-day business decisions. But we also know we must protect public safety and the environment while holding companies accountable.”

Interesting times – and timelessness – ahead.

But Albertans should be comforted in knowing their interests are still being watched over as they were in the 1930s when the regulator was conceived and birthed.

Bill Whitelaw is Managing Director, Strategy & Business Development at geoLOGIC Systems Ltd. & JWN Energy. Bill is a director on many industry sector boards including the Canadian Society for Unconventional Resources and the Canadian Petroleum Hall of Fame. He speaks frequently on the subjects of social licence, innovation and technology, and energy supply networks.

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