National Post (National Edition)
LEXIN WOES COULD IMPACT MAJOR OIL COMPANIES.
Companies face tens of millions in liabilities
CALGARY • Major Canadian oil companies could face tens of millions of dollars in liabilities as a result of tiny Lexin Resources Ltd.'s insolvency and its inability to clean up over 1,500 oil and gas wells in Alberta, which has doubled the number of orphan wells in the province.
Receivership documents reviewed by the Financial Post show 51 companies — including major Calgarybased producers Canadian Natural Resources Ltd., Exxon Mobil Canada and
Husky Energy Inc. — may be held at least partially liable for Lexin's wells as a result of their ownership in some of those assets.
These companies were copied on correspondence between the Alberta Energy Regulator and Lexin before the regulator took the unprecedented step of pushing Lexin into receivership on March 21 because the company failed to comply with multiple regulatory orders. Lexin has a complicated ownership structure. The AER believes it is a subsidiary of Vancouver-based
MFC Bancorp Ltd., a publicly listed company. MFC did not respond to a request for comment.
AER spokesperson Tracie Moore said the regulator normally holds the existing licensee and its partners — in this case, Lexin and the 51 energy companies — responsible for reclamation work, but “there are instances where the AER may consider pursuing previous operators.”
Lawyers and consultants say Lexin's situation is the result of a wider problem in Alberta, where major oil and gas producers defer the liability to clean up their non-producing wells indefinitely or sell off the wells and a portion of the liability to smaller producers like Lexin.
“It’s common practice in the industry to package up non-producing wells, dry holes, wells that are problematic, with a few really nice good wells and then sell them to a smaller or medium-sized company,” said Keith Wilson, an Edmonton-area property rights lawyer.
Wilson said Lexin’s case will be the biggest example so far of how that practice can leave an environmental mess when the smaller company becomes insolvent. Lexin’s insolvency documents do not show which companies previously owned and operated Lexin’s wells.
Laura Chant, an insolvency management specialist at the AER, stated in an affidavit that Lexin’s case was unusual because of the massive number of wells that could be orphaned. Lexin held licences for 1,380 operational wells, 134 abandoned wells, 81 other facilities and 201 pipelines. She also said Lexin did not comply with an AER order to post more than $70 million as a security deposit for its well liabilities.
Lexin’s licences have all been added to the Orphan Well Association list, roughly doubling the quantity of wells and facilities under management by the association.
Chant’s affidavit stated that Lexin did not pay two Calgary-based producers, Crescent Point Energy Corp. and Pengrowth Energy Corp., royalty and other payments last year and the companies took control of operating some of Lexin’s properties in response. In Crescent Point’s case, the company took control of certain wells to ensure they operated safely.
Crescent Point CEO Scott Saxberg said the Lexin wells his company has interests in represent a tiny fraction of the company’s total, and therefore wouldn’t affect its decommissioning liabilities. Some of the Lexin wells Crescent Point partially owns, he said, are capable of producing and would not need to be plugged and reclaimed yet.
Saxberg said he couldn’t speak to how other companies handle their cleanup responsibility, but said the company allocates 35 cents from every barrel of oil it produces to well remediation, and that Crescent Point has spent money cleaning up well sites left in disrepair from previous owners after its own acquisitions.
“We feel the cost of these abandonments is going to rise over time,” Saxberg said, adding that his company follows a “clean-as-you-go policy.”
Caledonian Royalty Corp. president Charles Selby said his company also had royalties and liens on many of Lexin’s wells and Lexin failed to pay Caledonian. “They had promised to bring us up to date and pay what was owed to us but that never occurred,” Selby said in an interview. Caledonian and other oil and gas producers are evaluating whether it’s possible to resume operations at Lexin’s shut-in wells and reduce the potential liability for the OWA. “There are a number of wells in the (southern Alberta) area that are capable of commercial production,” Selby said.
Pengrowth did not respond to, and Canadian Natural and Husky declined, requests for comment on how the Lexin case could add to their decommissioning liability, a publicly disclosed measure of an oil and gas company’s responsibility for remediating their wells.
Exxon Mobil Canada spokesperson Todd Spitler said in an email, “We are currently assessing impacts, but will not speculate on potential impacts or timelines, as it remains a matter before the courts.”