Bankrupt oil firms have dumped $100M in orphan well costs
Alberta worried court decision could foster practice of passing on bad assets
The Alberta government has been keeping a tab of the cleanup costs bankrupt oil companies have handed over to the Orphan Well Association since a controversial court decision last year made it easier for companies to dump liabilities.
That tab has now passed $100 million.
The Financial Post has obtained a copy of the Alberta Energy Regulator’s list of assets that have been transferred to the OWA — which cleans up the oil and gas sites whose owners have gone bankrupt — since a Court of Queen’s Bench decision in May 2016, which the Supreme Court of Canada said Thursday it will review.
The lower-court decision allowed the trustee for Redwater Energy to send the company’s uneconomic oil and gas wells to the OWA but keep control of better-performing wells, which could be sold to repay the company’s debt. The decision prioritized the rights of debt holders over environmental remediation in insolvency processes.
Alberta appealed the decision to the Supreme Court out of concern it would lead to more companies stripping off bad assets and handing the bill to the OWA and, potentially, onto taxpayers. The OWA is an industry-funded and governmentbacked group. The Supreme Court decision could affect industrial sites across the country.
The list obtained by the Post shows how many assets have been disclaimed since the lower court decision: 12 defunct oil and gas companies have disclaimed responsibility for 1,628 licensed oil and gas sites. The deemed liabilities for those sites exceed $100 million.
University of Calgary economist Blake Shaffer said that extra $100 million in cleanup costs adds to OWA’s burden.
Shaffer recently co-authored a report for the C.D. Howe Institute that pegged reclamation costs for orphan wells in Alberta at between $129 million and $257 million based on data from 2015-16. The $100-million tab contained in the AER’s post-Redwater list would be in addition to that estimate.
“This is 10 years of steady cleanup, assuming no more wells go into the Orphan Well Association. So this is going to be a problem for quite some time and the problem with Redwater is who bears that cost?” Shaffer said.
Significantly, the list does not include assets disclaimed in two other closely watched insolvency proceedings involving Calgarybased Lexin Resources, which owned more than 1,500 wells, and Southern Pacific Resources, whose receiver has applied to send an oilsands project to the OWA for the first time.
The cost of cleaning up orphaned oil wells has become a political flashpoint in Alberta, where hundreds of thousands of oil and gas wells dot the landscape and thousands have been orphaned.
This year, the Alberta government provided a $235 million to the energy industry to help pay for cleanup costs of orphaned wells, with the federal government agreeing to cover $30 million in interest payments on the loan.
Examples from the list of 12 insolvent companies also show that the AER is concerned that some insolvent companies, such as Sydco Energy, appear to be following the precedent set by Redwater.
Sydco went into receivership in February. Legal documents from the receivership proceedings show that in the following months, the AER refused to allow a second company, called 2032951 Alberta Ltd. with “virtually the same” principals as Sydco, to transfer some of Sydco’s wells to itself.
The documents also say AER has also refused to allow third company, Wormwood Resources Ltd., to assume Sydco’s well licences unless it can show that it is not related to Sydco.
In a brief filed in Sydco’s receivership process, the AER said it has “consistently and publicly expressed its concerns that the decision of this Court in (the Redwater case) would result in licensees organizing their affairs and choosing insolvency proceedings as a manner in which to shed their end of life obligations. This is exactly what appears to have occurred in this situation.”
AER spokesperson Ryan Bartlett confirmed the details of the list obtained by the Post and added the regulator has kept a close watch over exactly what responsibilities have been shed since the Redwater case. “By all means, we’re keeping track of it,” he said, adding the AER intervened in more court cases since the decision, implemented new rules for other oil and gas companies looking to buy or sell assets and is advising the government on a review of how clean up liabilities are managed.
“Any policy that comes out of this review, we will implement,” Bartlett said.
Shaffer said the Redwater case, by prioritizing the rights of debt holders in bankruptcy proceedings over the environment, forced the government to act. “Clearly, changes will have to happen,” he said.
The AER also took the “unprecedented step” of applying to become the court-appointed receiver in Lexin’s case, three Osler, Hoskin & Harcourt LLP lawyers Melanie Gaston, Janice Buckingham and Emily Paplawski wrote in a published commentary on Redwater earlier this year.