Re­sus­ci­tat­ing Dor­mant Wells

The com­bi­na­tion of low oil prices and reg­u­la­tions is putting some ju­niors out of busi­ness


How to breathe life back into old wells when reg­u­la­tors push a ju­nior com­pany to the edge of bank­ruptcy

When low oil prices force pro­duc­ers to shut in wells, it’s never long be­fore the reg­u­la­tors call. Al­berta En­ergy can re­voke min­eral rights and the Al­berta En­ergy Reg­u­la­tor (AER) can force aban­don­ment in some cir­cum­stances. Aban­don­ment can cost up to $300,000, de­pend­ing on the well’s lo­ca­tion and age. Some 230 ju­niors are cur­rently tee­ter­ing on the edge of bank­ruptcy, ac­cord­ing to the Land In­tegrity Foun­da­tion.

Brad Her­ald, the Cana­dian As­so­ci­a­tion of Pe­tro­leum Pro­duc­ers’ vice-pres­i­dent of Western Canada, says there are two parts to pro­tect­ing the pub­lic from dor­mant wells. At the front end is the Li­censee Li­a­bil­ity Ra­tio (LLR), which tests as­sets against li­a­bil­i­ties. If this ra­tio falls be­low one, “the AER tells the owner to close some in­fra­struc­ture, sell some stuff, restart pro­duc­tion or pay a de­posit,” Her­ald says. “It’s hard on com­pa­nies right now, but ul­ti­mately the pub­lic is pro­tected.” The Or­phan Well As­so­ci­a­tion is on the back end, where col­lec­tively the in­dus­try pays for the safety net to pro­tect the pub­lic.

Al­berta En­ergy says that af­ter 12 months of non-pro­duc­tiv­ity, it con­sid­ers serv­ing a no­tice that can can­cel a well owner’s min­eral rights. The no­tice gives a com­pany one year to prove pro­duc­tiv­ity. This can be done by ei­ther demon­strat­ing the well is ca­pa­ble of pro­duc­ing in pay­ing quan­ti­ties, or pro­vid­ing ge­o­log­i­cal or tech­ni­cal data prov­ing pro­duc­tiv­ity. “A com­pany of any size can be served a no­tice of non-pro­duc­tiv­ity and re­gard­less of size, all com­pa­nies have equal op­por­tu­nity to prove the agree­ment pro­duc­tive with sup­port­ing ge­o­log­i­cal and/or tech­ni­cal data,” says an Al­berta En­ergy spokesper­son. But some ju­niors don’t have the where­withal to pro­vide such anal­y­sis. Troy Sid­loski, a con­sul­tant for Pris­tine Oil Field Ser­vices, says “cur­rent reg­u­la­tions some­times force com­pa­nies to put ce­ment to a well when it’s po­ten­tially still vi­able in the fu­ture. Th­ese com­pa­nies should be af­forded some breath­ing room in recog­ni­tion that their ef­forts are im­por­tant to to­tal re­cov­er­ies and rev­enues for the prov­ince.”

FOR­TU­NATELY, THERE ARE SO­LU­TIONS. The Land In­tegrity Foun­da­tion (LIF), a non-profit con­sul­tancy, pro­vides a man­age­ment plan and the as­sess­ment of ju­niors’ wells for the cost of a mem­ber­ship fee that’s kept af­ford­able by em­ploy­ing pe­tro­leum engi­neer­ing stu­dents. Deidre Macht, the LIF’s di­rec­tor says, “As­set val­ues and li­a­bil­i­ties are of­ten rid­dled with as­sump­tions. For ex­am­ple, a sin­gle well com­pres­sor can serve up to 10 wells, so a 10-well li­a­bil­ity can be as­sessed [by the AER] in the be­lief that the com­pres­sor is in­deed be­ing uti­lized to its max­i­mum ca­pac­ity. The onus is on a one-well firm to come back with a de­fense ar­gu­ment for chang­ing that ap­pli­ca­tion as­sump­tion.” The LIF as­sesses which wells are li­able and plugs in the tech­nol­ogy and ad­min­is­tra­tive pa­per­work and charts the pro­duc­tion de­clines. It pro­vides op­tions that would re­sult in one of sev­eral out­comes: switch the fa­cil­ity from a li­a­bil­ity to an as­set, in­crease the value of the as­set or mit­i­gate the risk as­so­ci­ated with the aban­don­ment.

An­other so­lu­tion is that the reg­u­la­tions in­ad­ver­tently al­low aban­doned wells to be put to other uses such as geother­mal en­ergy. Sim­ply putting a green­house over the well and adding an elec­tri­cal pump and heat ex­changer changes the well use, which means it only has to carry out zonal aban­don­ment—plug­ging the well above its pro­duc­tion per­fo­ra­tions in the well cas­ing. It avoids sur­face aban­don­ment— restor­ing the land back to its orig­i­nal state be­fore drilling—which is the lion’s share of most aban­don­ment costs. Mitchell Pom­phrey, CEO of Pom­phrey In­dus­tries, which of­fers con­sul­tancy work on well con­ver­sions, says this can be done within the ex­ist­ing di­rec­tives. “It would be a win-win for well li­censees, Al­ber­tans and geother­mal sys­tem in­te­gra­tors,” he says. “It would pro­vide a way to de­fer the cap­i­tal cost of sur­face aban­don­ment in­def­i­nitely.”

Ali­son Thomp­son, chair of the Cana­dian Geother­mal En­ergy As­so­ci­a­tion, says geother­mal en­ergy in western oil-pro­duc­ing prov­inces of­fers a sig­nif­i­cant op­por­tu­nity for re­new­able en­ergy, as well as for food pro­duc­tion. “The tech­nol­ogy trans­fer be­tween the oil and geother­mal in­dus­tries is sig­nif­i­cant and the de­ploy­ment of geother­mal en­ergy in Al­berta is a mean­ing­ful way to help put the oil patch back to work,” she says. Ja­son Ed­wards, CEO of Sun­dial En­ergy, an oil­field ser­vices firm that works in geother­mal en­ergy, says the idea can go be­yond green­houses. If an oil pro­ducer’s off-gas-grid build­ings are close to an

aban­doned well and use elec­tri­cal heaters in each build­ing, a geosys­tem is a cheaper op­tion, he says. “At $100 per bar­rel no­body cared about th­ese ef­fi­cien­cies, but in this low-price en­vi­ron­ment cost cut­ting is a top pri­or­ity.”

Pom­phrey says po­ten­tial geother­mal pro­duc­ers could bring in a third party op­er­a­tor as a part­ner to do the con­ver­sion work on their well leases, and then theoretically apply to the AER for a com­plete re­fund or re­lief from their aban­don­ment obli­ga­tions. “You would ef­fec­tively be say­ing that you have com­pleted a zonal aban­don­ment and per­formed as much sur­face recla­ma­tion as pos­si­ble, if any, and it is now the re­spon­si­bil­ity of the third party,” he says. This would fol­low trans­fer­ring some con­trol of the as­set to them, so they ben­e­fit from the geother­mal heat to in­cent the bailout, he says. Pom­phrey would like the AER to com­pare the risk pro­files of new en­ergy ap­pli­ca­tions de­rived from oil wells, such as space heat­ing and cool­ing, and ver­ti­cal farm­ing—an ex­ten­sion of the grow­ing sea­son—and apply a dif­fer­ent set of li­a­bil­ity man­age­ment reg­u­la­tions to geother­mal op­er­a­tors. Thomp­son rec­om­mends that oil pro­duc­ers who con­vert aban­doned wells to geosys­tems should be able to claim tax ben­e­fits and car­bon cred­its.

The next rules that could hurt some ju­niors lurk just over the hori­zon with new meth­ane reg­u­la­tions. Prime Min­is­ter Justin Trudeau an­nounced in March that Canada will cut the oil and gas sec­tor’s meth­ane emis­sions to 45 per­cent be­low 2012 lev­els by 2025. This com­pli­ments the Al­berta gov­ern­ment’s planned 45 per­cent re­duc­tion of the prov­ince’s meth­ane out­put from all sources by 2025. The pro­vin­cial gov­ern­ment says in an on­line re­port that Al­berta’s oil and gas in­dus­try is the largest source, ac­count­ing for 70 per­cent of emis­sions—spew­ing out 30.4 mega­tons in 2013. The gov­ern­ment will take ac­tion on vent­ing and fugi­tive meth­ane, in­clud­ing en­hanced mea­sure­ment and re­port­ing re­quire­ments for fa­cil­i­ties.

The plan echoes a re­port into well emis­sions by Uni­ver­sity of Water­loo, which calls for dras­tic im­prove­ment in mon­i­tor­ing and reg­u­la­tion, in­clud­ing more over­sight of well­bore ce­ment­ing and “do­ing it right in the first place.” The re­port says 6 per­cent of Al­ber­tan wells leak meth­ane, 10 per­cent of B.C.’s and 20 per­cent of Saskatchewan’s.

Geother­mal con­ver­sion of­fers a par­tial so­lu­tion. “When it comes to meth­ane leak­age, us­ing an aban­doned well for geother­mal heat­ing puts a pair of eyes on it,” Ed­wards says. Any meth­ane leak­age into the well bore would trig­ger an im­me­di­ate sud­den pres­sure change in the geo-sys­tem.

AN­OTHER SO­LU­TION FOR PRO­DUC­ERS with shut-in wells could be fed­eral fund­ing of a well-aban­don­ment pro­gram. In March, the Pe­tro­leum Ser­vices As­so­ci­a­tion of Canada (PSAC) asked the fed­eral gov­ern­ment for $500 mil­lion to aban­don some of Al­berta’s 75,000 sus­pended wells. CEO of PSAC Mark Salkeld says, “While we ab­so­lutely agree well de­com­mis­sion­ing is the re­spon­si­bil­ity of the li­censee, eco­nomic cir­cum­stances and steadily in­creas­ing costs due to ever-im­prov­ing reg­u­la­tions are caus­ing this work to be de­layed or post­poned and reg­u­lar ac­tiv­ity has al­most come to a stand­still.” Ot­tawa, how­ever, didn’t in­clude such a pro­vi­sion in the fed­eral bud­get an­nounced in March, but it could con­sider it for fu­ture bud­gets.

Th­ese so­lu­tions come too late for Ray De­saulniers, owner of Welleco Ven­tures a ju­nior oil pro­ducer, who says he’s be­ing driven into bank­ruptcy by red tape. He says af­ter three months of shut­ting in pro­duc­tion—not the 12 months that the Al­berta En­ergy spokesper­son said is given be­fore serv­ing a min­eral rights can­cel­la­tion no­tice—he was served with the Sec­tion 18 no­tice. Welleco Ven­tures had planned to lower its op­er­at­ing costs by putting waste water into a nearby CNRL dis­posal well, in­stead of truck­ing it out. This would have made the well prof­itable again and al­lowed its restart. In De­cem­ber, CNRL de­cided it would trans­fer the dis­posal well, “but it was too late. We had been shut in for close to a year and our LLR as­signed by the AER was not in com­pli­ance

so they would not ap­prove the trans­fer. To be in com­pli­ance I would have to come up with aban­don­ment costs of two wells plus the well from CNRL. It is im­pos­si­ble to raise,” he says. Al­though, an aban­don­ment would im­prove the LLR of his two wells, should they no longer be vi­able as­sets, it’s a cost De­saulniers could not swal­low at the time.

“If I were a farmer los­ing ev­ery­thing and was be­ing forced into bank­ruptcy by a Gov­ern­ment pol­icy I guar­an­tee there would be demon­stra­tions in front of the leg­is­la­ture. At this point I’m near­ing bank­ruptcy—the prov­ince has bankrupted me,” De­saulniers says. Al­berta En­ergy, which im­ple­ments poli­cies set by the pre­vi­ous gov­ern­ment, wouldn’t com­ment on this par­tic­u­lar case.

Sid­loski says, “If AER didn’t make com­pa­nies put up th­ese bonds the gov­ern­ment would be left hold­ing the bag. It’s tough to get it right. The AER says it op­er­ates un­der the man­date to pro­tect in­dus­try, and ul­ti­mately gov­ern­ment, from as­sum­ing aban­don­ment and recla­ma­tion costs.” De­saulniers says, “All that is needed is a re­lax­ation of lay­ers of over­reg­u­la­tion, a break on all lev­els of gov­ern­ments for lease, ac­cess, prop­erty taxes, roy­al­ties for the low pro­duc­ing wells. We also need a com­pletely dif­fer­ent sys­tem for reg­u­lat­ing small pro­duc­ers.”

Gary Leach, the pres­i­dent of the Ex­plor­ers and Pro­duc­ers As­so­ci­a­tion of Canada (EPAC), says, “There will al­ways be sit­u­a­tions at the mar­gin where the Li­a­bil­ity Man­age­ment Pro­gram is un­able to de­liver an op­ti­mal so­lu­tion for all af­fected par­ties.” The de­sign of the pro­gram is not static and th­ese prob­lem sit­u­a­tions of­fer ideas for im­prove­ment—it’s up­dated reg­u­larly. Ideas to im­prove the pro­gram, in­clud­ing as­sess­ing the im­pacts of the cur­rent deep eco­nomic down­turn, are the sub­ject of on­go­ing dia­log be­tween EPAC, CAPP, the AER and the Or­phan Well As­so­ci­a­tion, he says. The Al­berta pro­gram has been copied very closely in both B.C. and Saskatchewan. “There is no U.S. ju­ris­dic­tion, to our knowl­edge, which of­fers any­thing com­pa­ra­ble to the com­pre­hen­sive scope of the Al­berta pro­gram,” Leach says.


MAY 2016

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