Alberta posts spike in orphan well count by Reid Southwick, July 26, 2016, Calgary Herald
Alberta posted a big spike in the number of oil and gas wells abandoned by industry in recent months, sparking renewed calls to fix what a landowners’ group says is a broken system of cleaning up old wells.
Low commodity prices have resulted in an “unprecedented number of corporate failures,” which has ballooned the inventory of so-called orphaned wells without owners financially capable of cleaning them up, according to an industry association.
The Orphan Well Association, the group that assumes responsibility for non-producing wells before plugging them and restoring the surface with funds from industry, had a list of 770 wells to be plugged and sealed at the end of March.
Just three months later, the tally ballooned to more than 1,100, a 45 per cent spike.
Similarly, the association had an inventory of 540 well sites in need of surface restoration, as of March 31. By the end of June, there were 744, a nearly 40 per cent jump.
“Everybody understands that the inventory is going to go up,” said Brad Herald, chairman of the Orphan Well Association, adding the group will be able to handle a big injection of wells in need of cleanup.
“We’ve been in this program for a couple of decades, and we’re not going anywhere.”
Should the Orphan Well Association receive a bigger influx of wells to clean up, officials will assess the risks of each one and schedule remediation efforts according to their priority, with safety being a top concern, said Herald, who’s also a vice-president at the Canadian Association of Petroleum Producers.
“Not every well would have to be abandoned (plugged and sealed) in the first year, as long as they are in a safe state.”
The association plugged a record 185 wells in the last fiscal year after doubling its total budget to $30 million, but it was not enough to keep up with demand. The inventory still grew by 63 wells in 2015-16.
“This has been a problem they’ve known about since the late 1980s,” said Barry Robinson, a lawyer at Ecojustice in Calgary, referring to an earlier oil price rout.
“There’s been a number of programs and they never quite addressed the real issue, which is that companies will go bankrupt, so you want to be holding money upfront so when they disappear you’ve got the money to do the cleanup.”
Robinson said the Alberta Energy Regulator’s rules have historically not required that oil and gas companies set aside enough money to pay for well remediation. He believes operators should place in security sufficient funds to clean up wells before they start drilling.
Private landowners’ groups warn the cost of cleaning up the ever-growing inventory of orphaned wells is so high that taxpayers may have to be saddled with part of the bill. [Haven’t oil and gas companies and Alberta’s regulator enablers been secretly planning that all along?]
Under the current funding model, the Alberta Energy Regulator collects an orphan fund levy and other fees from upstream oil and gas companies, and sends the funds to the Orphan Well Association for cleanup work.
In the last fiscal year, wells were plugged and sealed at an average cost of $60,900 each.
“The system is broken,” said Daryl Bennett, director of Action Surface Rights and a partner in a company that represents landowners dealing with industry. “There’s not enough money in the system to clean up everything …
“Industry should pay as much as possible, and the taxpayer should pick up the remainder.”
The NDP government said it supports the principle of “polluter pay,” which means industry is responsible for any cleanup costs linked to its operations. In a statement, the government said it is reviewing its approach to oil and gas liabilities to set a long-term plan to manage historic, current and future liabilities.
“Our ultimate goal is to have this issue addressed in a responsible way, one that protects Albertans and keeps our province competitive and investor-friendly,” the government said in its statement. [Emphasis added]
Orphan wells and unintended consequences in the oilpatch by Chris Varcoe, July 22, 2016, Calgary Herald
They’re two of the most feared words in the language of business.
It’s also something to be avoided when you’re the powerful [enabler]
regulator of the largest oil and gas market in the country.
Alberta Energy Regulator CEO Jim Ellis says the agency’s recent steps — making the bar higher for companies to transfer oil and gas well licences, following a precedent-setting court ruling — created “unintended consequences” last month.
That ignited consternation in the oilpatch.
And that’s why the AER recently clarified that its new rules won’t unilaterally block transactions already moving through the deal-making pipeline.
“Initially, we had to take action right away because of what was going on,” Ellis said this week.
“We put the first bulletin out in order to stop any of the bad actors that may have been out there that were looking to divest their stuff, move off and start another company up…
“We recognize that because we don’t work in the whole market, we actually tripped and had unintended consequences with that.”
The background behind the affair is complex, but important for the industry, government and the regulator.
In late May, an Alberta Court of Queen’s Bench justice ruled that revenue generated from the sale of a bankrupt oil and gas company doesn’t have to be used to reclaim its old, non-producing wells.
The case, involving bankrupt Redwater Energy Corp., was seen as a showdown between the rights of secured lenders and the regulator’s requirement to clean up these wells.
Chief Justice Neil Wittmann ruled the trustee could decide not to take over Redwater’s idle, unprofitable wells — meaning about 70 would become orphans with no operator responsible for the clean-up tab.
In a province where 449,000 wells have dotted the landscape over the past century, it potentially has huge ramifications.
If the ruling holds, that would toss the reclamation costs into the lap of Alberta’s Orphan Well Association, a not-for-profit group financed by industry.
Despite completing 185 well abandonments for the fiscal year ending March, the organization has seen its to-do list continue to grow, even before the Redwater decision. The association added 258 new orphan wells last year.
“The low commodity pricing in late 2014 and 2015 has resulted in an unprecedented number of corporate failures in the oil and gas industry, which has contributed to growth in the inventory of orphan properties,” the association said in its new annual report.
The AER is appealing the Redwater ruling.
But faced with the court decision, the regulator also issued a directive last month that only companies with a liability management ratio (better known as an LMR) of 2.0 or above can buy well licences — double the previous asset-to-liability threshold.
With the change, however, only 28 per cent of the 788 oil and gas companies in the province meet the higher ratio. Those that don’t meet the new hurdle will have to take additional steps (such as posting security) if they want to buy assets.
Industry groups and companies argued the regulator’s response would threaten deals already in progress.
In a report issued this month, AltaCorp Capital said the problem with the AER’s response was “the haste in which the policy was enacted which gave no forewarning to, and had little consultation with, industry.”
Hit with mounting resistance, the regulator clarified the situation earlier this month. It noted companies with deals already in process could contact it and “arrange a review of their specific circumstances.”
“It wasn’t an elegant counter-measure, but they didn’t have many tools in their tool chest,” said Brad Herald, a vice-president at the Canadian Association of Petroleum Producers and chair of the Orphan Well Association.
“It’s intended to be short-term until the public policy gap gets resolved.”
Ellis agrees the latest directive is an interim step until new regulations deal with the broader issue, or the appeal is decided.
The AER is encouraging companies now involved in M&A deals to contact it early, rather than wait until the end of the process.
“There are really good companies that were just below the 2.0 on the LMR that were in the midst of doing their negotiations and their work — that when the (first) bulletin came out, it actually tripped them and stopped them from doing that,” he said.
“That was not our intention.”
Energy Minister Marg McCuaig-Boyd said the interim rules will stay in place until the appeal process is held on the Redwater decision. [Cowardice?]
Despite the recent shift to soothe industry fears, that doesn’t mean everyone is satisfied.
Alan Tambosso, president of Sayer Energy Advisors, which tracks Canadian oilpatch mergers and acquisitions, notes the AER’s latest step only helps transactions that are pending, not future activity.
He estimates only one-third of the 200-plus eligible acquirers under the new rules — or just 10 per cent of all licensees in Alberta — are potentially active purchasers.
“It’s going to hurt the juniors more than anybody. It will severely impact their ability to do M&A transactions,” he predicted.
Ultimately, Tambosso isn’t happy with how the regulator has handled the imbroglio, saying its approach “appears to be poorly executed and poorly thought out.”
But the energy regulator believes the initial turbulence has been smoothed out. [Because the AER ran like chicken, as usual?]
“Once we identified there were some unintended consequences as a result of the bulletin, we came out immediately and made those changes to it,” Ellis explained.
“And we’re quite confident and comfortable right now that, in fact, we’re seeing what we anticipated.” [Emphasis added]
Oil patch relieved as AER signals it will assess deals on a case-by-case basis by Geoffrey Morgan, June 27, 2016, Financial Post
Explorers and Producers Association of Canada president Gary Leach said he was relieved the regulator had listened to suggestions made by his industry association and a handful of its concerned members.
CALGARY – The Alberta Energy Regulator is poised to relax a key part of a new rule governing who can buy and sell assets in response to angry calls from oil executives and bankers worried that the changes could send some companies into bankruptcy.
The outcry from the oil patch followed an AER bulletin last week announcing that any company buying or selling licensed assets in Alberta would need to meet a new, higher threshold for proving they are financially capable of cleaning up old wells.
The rule change was intended to prevent oil and gas companies from filing for bankruptcy without cleaning up and remediating their idle assets, as Redwater Energy Corp. recently did, but critics warned the change could force additional companies into bankruptcy. [Or, is it really about companies not wanting to part with any of their millions or billions in profits? Greedy multinationals wanting ordinary Alberta families to pay for the billions in clean up ahead]
“What is most puzzling about the change in policy is the unintended consequences of potentially accelerating bankruptcies, that will see an influx of wells enter the (Orphan Well Association) fund, not stem them,” a team of AltaCorp Capital analysts wrote in a report on Monday.
“By restraining the transfer of assets from one company to another, the policy is hindering those companies attempting to improve their standing as a going concern by removing potential buyers from the sale process,” they wrote, adding that only 28 per cent of energy companies in Alberta could meet the regulator’s new liability management ratio threshold. [Then, the 72 per cent of companies that can’t, ought not to be operating here, or likely anywhere in the world]
The AER confirmed Monday, however, that it would look at proposed deals on a “case by case” basis and signalled that some deals that have already been announced could be allowed to proceed. [Like Encana breaking the law and contaminating a community’s drinking water supply gets the big OK?]
AER spokesperson Jordan Fitzgerald said the bulletin released last week was intended to protect Albertans from the financial liability of cleaning up orphaned oil wells.
“Now that the AER has ensured that Albertans are protected in the interim, if a company has been in discussions on an acquisition, is operating in good faith and can demonstrate to the regulator that their liabilities are covered, the AER is willing to review their situation on a case-by-base basis,” AER spokesman Jordan Fitzgerald said in an email. [But, never harmed Alberta landowners, unless they gag and settle with their abuser]
Explorers and Producers Association of Canada president Gary Leach said he was relieved the regulator had listened to suggestions [ANGRY PHONE CALLS?] made by his industry association and a handful of its concerned members.
“We urged them to look at grandfathering transactions that were in the queue prior to the release of the bulletin,” Explorers and Producers Association of Canada president Gary Leach said. “I believe that they’re taking that approach.”
Executives at numerous companies, including Penn West Exploration, were concerned about the rule change because they feared it would prevent deals that had already been struck.
We urged them to look at grandfathering transactions that were in the queue prior to the release of the bulletin Penn West had recently reached a deal to sell its assets in Saskatchewan for $975 million, as well as $140 million worth of assets in Alberta. The rule change could have scuttled the sale of those Alberta assets.
Penn West president and CEO David Roberts expressed his concerns about the bulletin at the company’s annual meeting last week and indicated he would be talking directly with the AER.
Now, assuming that Penn West can demonstrate an ability to cover its liability, the deal in Alberta will at least be considered by the AER. Penn West did not respond to a request for comment Monday.
If I knew that all it took was a few “angry calls” to the AER to get changes in operations, I would have done that years ago….then likely gotten arrested.
Instead, three years and still going, all our letters, respectful phone calls and emails to the AER, regarding intentionally negligent and harmful operations, requests for mandated air quality testing, sour gas pipeline maintenance failures and unmitigated vent flows, just get ignored.
The only outcry the AER bends their ear and actions to, are the companies that pay their inflated salaries and excessive expense accounts. Must broker those deals, so we can continue to attend Galas with the Pembina Institute and lunch at the Pete Club. After all, the public interest (that would include liabilities) and public health are not mandates of the AER under REDA.
good post, very good
same old, should be simple, you dig the well you clean up the well
No more hot potatoe, of course the oil companies are upset and worried! [Can’t have a “regulator” interfere in the plan to make Albertans pay for the multinational polluters’ greed and billions in well site and facility messes left unattended for decades? The abandoned well problem is decades old, and not caused by the drop in oil and gas prices.]
[Just a few days ago:
Just more AER hot air or a slick devious plan? Alberta looks at different ways of making sure companies clean up old wells (Who is to fix the aquifers Encana frac’d?), AER warns it could go after directors & executives to ensure proper reclamation ]