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Alberta Energy Regulator tries to stem tide of orphan wells

A sudden rule change from the Alberta Energy Regulator is intended to protect Albertans from a flood of orphaned wells, but will make it much harder to buy and sell oil and gas assets in the province.

It just got harder to buy oil and gas assets in Alberta

A recent court case in Alberta has prompted the provincial energy regulator to change the rules around the purchase of oil and gas assets. (Orphan Well Association)

Originally published June 21.

With little fanfare, the Alberta Energy Regulator has tightened up the rules for buying oil and gas assets. 

From now on, a company looking to buy oil and gas wells in Alberta will need a liability management ratio (LMR) of 2.0 or higher. That means the value of a company's producing wells must be twice that of the cost of abandoning and reclaiming the wells at the end of their life.

It is a double of the existing ratio of 1:1 and means that more than 70 per cent of the companies licensed in Alberta can no longer buy oil and gas wells without paying a deposit to the regulator.

This is a direct reaction to the Redwater Energy court decision last month that ruled energy companies have to pay back their secured lenders before paying to clean up old wells in the case of a bankruptcy.

The AER is very concerned about a possible flood of old wells into the Orphan Well Fund. In the bulletin dated June 20, the AER said the rule changes were intended to "minimize the risk to Albertans."

Carolyn Wright, an energy lawyer for Burnet Duckworth and Palmer (BDP), said she is concerned that the rule will have the opposite effect during a time when many energy companies are scrambling simply to survive.

"Those parties that were looking for opportunities to keep themselves alive and afloat. It's gone away now and those parties are typically left with no option but to fold up their tents," said Wright.

In a note to clients on Tuesday, BDP said the rule change would have "a chilling effect on the rise in transaction activity in a province that is struggling to get back on its feet following a two-year long rut in commodity prices."

Change concerns industry

AER spokesman Ryan Bartlett said companies can improve their LMR by cleaning up old wellsites, posting security or revamping their proposed well transactions.

The regulator acknowledged its regulations may "inconvenience some stakeholders" but pointed out it wants to work with industry and the province to develop broader permanent regulatory measures.

The rules change by the AER is intended to discourage companies from dumping old wells, like the inactive gas well that Tony Bruder has had on his land for more than 60 years. (Tracy Johnson/CBC)

Gary Leach, the head of Explorers and Producers of Alberta — which represents junior energy companies, said that he is concerned about the rule change. 

He says he also understands that the regulator is trying to strike a balance that protects the Orphan Well Fund, but still preserves a functioning marketplace for purchase and sale of oil and gas assets.

 "​When there's not enough money to go around, and that's the quintessential point in an insolvency, someone else gets stuck with the bill, said Leach.

"So what we have here is interim measures by the AER to provide some stability and guidelines on who they will permit to acquire assets while the issues that erupted from the Redwater decision are sorted out."

Before the Redwater case was decided, the AER had priority in the case of a bankruptcy. Any producing assets that had value had to pay for the cleanup of inactive wells.

But the Redwater decision cut the link between a company's "good wells" and its "bad wells," allowing the good ones to be sold off and the bad ones to be passed onto the Orphan Well Association.

New rule may not go far enough

On the flip side of this issue, Barry Robinson has long been sounding the alarm about the growing number of abandoned and inactive wells in Alberta.

He's happy that the AER is tightening up the rules, but thinks the regulator should go further.

"These are reasonable as an interim measure," said Robinson.

"However, in the long run, the LMR is still fundamentally flawed in how it calculates deemed assets and deemed liabilities. I still think that the long-term solution is regulated timelines [for cleanup of old wells] and full security."

This inactive oil well sits on farmland in southern Alberta. The Alberta Energy regulator recently tightened up the rules for oil and gas deals in an attempt to stem the tide of oil wells. (Tracy Johnson/CBC)

With files from The Canadian Press

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