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Practice Guide to Auditing Oil and Gas Revenues


Managing Liabilities for Site Remediation

To prevent governments from becoming responsible for the remediation of oil and gas wells and facilities and to reduce the financial burden on taxpayers, many governments have taken measures to ensure that leaseholders fulfill their responsibilities for decommissioning and remediating their oil and gas production sites.

Some governments have set up remediation funds to which oil and gas companies must regularly contribute. These funds are used to remediate legacy sites as well as any new abandoned site (as the result of a company going bankrupt, for example).

Other governments require private companies to provide sufficient financial assurances (such as securities and bonds, letters of credit, certificates of deposit, and cash) to guarantee that there will be enough resources to remediate their active sites once operations cease. These financial assurances are only released once a government is satisfied that a site has been remediated as expected. This is the approach taken in British Columbia, for example, where every well operator has been required since 2004 to submit a security deposit under the Petroleum and Natural Gas General Regulation. A generic financial assurance process is described in Figure 2.

Figure 2

The Main Steps of the Financial Assurance Process Over the Life of an Oil and Gas Extraction Site

The Main Steps of the Financial Assurance Process Over the Life of an Oil and Gas Extraction Site

The main difference between remediation funds and financial assurances is that a fund can be used to clean up any decommissioned oil and gas site, whereas a financial assurance provided by a company can only be used to clean up a particular site leased by that company if it cannot meet its remediation responsibilities. Another difference is that financial assurances are returned to companies once they have met their remediation obligations, whereas fund contributions are not refundable.

While financial assurances do not provide a revenue stream, they do mitigate the risk of governments inheriting financial liabilities for sites abandoned by private companies. By establishing financial assurances requirements, governments can protect taxpayers from new liabilities for site remediation.

The effectiveness of remediation funds and of financial assurance programs depends on a number of design and implementation factors. The funds or programs must be based on adequate risk assessments and on reliable estimates of remediation costs. They must also be well-adapted to each natural resource sector (for example, traditional oil and gas wells, “fracking” wells, oil sands, and offshore wells).

Sufficient resources must also be made available to:

  • collect financial assurances,
  • assess the adequacy and completeness of remediation plans submitted by private companies,
  • monitor progress on remediation work,
  • attest that remediated sites have met all applicable standards and requirements, and
  • regularly update estimates of future remediation costs.