Tougher Alberta rules convince oil and gas producers to accelerate well cleanups

Farmer Tony Nichols says he has mixed feelings about news that oil and gas companies in Alberta are accelerating voluntary reclamation of old well sites and pipelines.

The handful of wells on his east central Alberta farm make navigation challenging for his farm equipment, but they've also been valuable contributors to farm income, paying between $2,000 and $3,000 each per year.

"Yeah, they're a nuisance," says the 75-year-old. "You have to go around them. But you get something for it."

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Energy companies are obligated to eventually restore land and return subsurface Crown leases to the province, though many find it's a difficult decision to spend money to take an asset off the books.

That's now changing, industry observers say, in part because legacy wells are depleted and commodity prices are low. But it's also thanks to new rules imposed last spring by the Alberta Energy Regulator to prevent financially shaky companies from running up reclamation liabilities to unaffordable levels.

Tougher rules

The AER rules, in short, say that if a proposed oil and gas transaction results in the estimated value of a company's assets falling to less than twice its future reclamation liabilities the province may require payment of a deposit to ensure cleanup. If the deposit isn't made, the province can refuse to transfer the Crown licence to the new owner, essentially scuttling the deal.

To determine if a company will be required to pay a deposit, the AER calculates its licensee liability rating or LLR and the higher the rating, the better the chance of being free to buy and sell oil and gas properties.

Previously, companies were allowed to have an LLR as low as 1.0 before being restricted. Now companies must have an LLR of at least 2.0.

"Regulations have become a lot more stringent with respect to the LLRand specifically the amount of unfunded liability the companies are carrying," said Dave Humphreys, vice-president of operations at Calgary-based intermediate producer Birchcliff Energy (TSX:BIR), which boasts a high LLR of about 12.0.

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"Companies are going to have to get with the program or not be able to do deals."

Speeding up reclamations

Humphreys said it can take two to five years to obtain a provincial reclamation certificate after the company decides to abandon a well, depending on the cleanup work required. Birchcliff expects to receive six certificates this year and nine next year after receiving none in 2015 and six in 2014.

According to the AER, the average LLR among 775 licensed companies as of Oct. 1 was 4.36. It says 349 licensees 45 per cent had LLRs below 1.0, which will make it difficult for them to buy assets.

The LLR for Canadian Natural Resources (TSX:CNQ), Canada's largest natural gas producer, is listed as 3.13. The drive to increase that LLR rating is part of the reason it, too, is accelerating its reclamations, said spokeswoman Julie Woo.

"Our 2016 year-to-date number of reclamation certificates submitted to the regulator has increased 37 per cent compared to the total submitted in 2015," she said in an email, adding that translates into about 490 reclamation applications so far this year, versus 357 in all of 2015.

RBC Dominion Securities oil and gas analyst Shailender Randhawa said in a recent research note he believes producers are budgeting to spend more on reclamations.

RBC estimates there are more than 93,000 oil and gas wells in Western Canada that have been inactive for six months or more as producers turn off the taps rather than sell at current low prices.

About half of the 60,000 active conventional oil wells produce less than 10 barrels per day, accounting for 11 per cent of oil production, says the RBC report.

Thousands of old wells

Nichols, meanwhile, said one well on his farmland has been producing cheques for 23 years despite never actually producing commercial volumes of oil or gas for its owner, Apache Canada.

"We're not pushing them. That one there, we farm right over it," he said. "Right now there's swathed barley on top of it."

Apache spokesman Paul Wyke said three of the company's five wells on the Nichols land have been scheduled for reclamation over the next two years, including the one drilled in 1993 that has failed testing and therefore never been produced.

According to the AER, only 24 per cent of the nearly 450,000 provincially regulated oil and gas wells in Alberta have been certified reclaimed, which means the well has been cleaned and capped, the land has been restored to original condition and the lease given back to the government.