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Bankrupt oil & gas companies could burden Alberta with orphan wells

by Mark Sabourin
EcoLog, 4/28/2017 1:05:00 PM

The Alberta Court of Appeal has upheld a lower court decision that could leave the province and its Orphan Well Association on the hook for the abandonment and closure of the oil and gas wells of bankrupt companies. The Court of Appeal agreed that the trustee of the bankrupt Redwater Energy Corporation could renounce non-producing wells that represented liabilities, and sell producing wells that represented valuable assets.

Abandonment and closure of the renounced wells would become the responsibility of Alberta’s already-strained Orphan Well Association financed mostly, but not entirely, by the oil and gas industry.

The Alberta Energy Regulator calculates a liability rating for each of its licensees, dividing the value of its assets by the estimated cost of end-of-life abandonment and closure. Liability ratings must not fall below 1.0, meaning that the value of assets must always exceed projected liabilities.

Redwater Energy Corporation, which went bankrupt in 2015, had producing wells with a deemed value of $6.4 million and deemed liabilities of $2.248 million. But it also had non-producing wells with a deemed value of only $547,000 and deemed liabilities of $5.252 million.

Grant Thornton Limited, the trustee in bankruptcy, informed the Alberta Energy Regulator that it intended to take control of only 20 of Redwater Energy Corporation’s properties, disclaiming the remaining 107 and the onerous environmental liabilities attached to them.

The Alberta Energy Regulator responded with an order requiring abandonment and closure of the disclaimed wells. Grant Thornton refused, and the Alberta Energy Regulator and the Orphan Well Association took it to court, seeking to rescind the disclaimer and enforce the clean-up order.

The trial judge found that there was a conflict between the federal Bankruptcy and Insolvency Act and Alberta’s Oil and Gas Conservation Act and Pipeline Act. When that happens, the federal statute prevails (see EHScompliance.ca newsletter, June, 2016, for a summary of the case at trial). The Alberta Court of Appeal, by a 2 to 1 majority, agreed with the trial judge’s decision.

The Redwater decision casts a fresh light on an issue raised in the February 10, 2017 issue of EcoLog News. There, University of Calgary economist Lucija Muehlenbachs discussed how Alberta’s oil and gas exploration policy encourages inactivity rather than abandonment and closure of the province’s marginally-productive or unproductive wells.

Unlike many other jurisdictions, Alberta does not require formal abandonment of a well after a specific period of inactivity. The result: Alberta currently hosts more than 80,000 inactive oil wells, the vast majority of which will never produce another drop of oil, according to Muehlenbachs.

The example of Redwater decision shows that if the owners of any of those wells go bankrupt, the cost of abandonment and closure may fall on the Orphan Well Association or, possibly, the Alberta taxpayer.

EDITOR'S NOTE: The Alberta Energy Regulator announced on April 28, 2017 that it will be seeking leave to appeal to the Supreme Court of Canada this Alberta Court of Appeal decision.

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