Alberta Energy Regulator tries to stem tide of orphan wells

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 gaswells in Alberta will need a liabilitymanagement ratio(LMR) of 2.0 or higher.That means the value of a company'sproducing wells must be twice that of the cost ofabandoning and reclaiming the wells at the end of their life.

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It is a double of the existingratio of 1:1 and means that more than 70 per cent of the companies licensed in Alberta canno 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 ruledenergy 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 oldwells 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 BurnetDuckworth and Palmer (BDP), said sheis 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 concernsindustry

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.

Gary Leach, the head of Explorers and Producers of Albertawhich represents junior energy companies,saidthat he is concerned about the rule change.

He says he also understands that the regulator is trying to strike a balance that protects the OrphanWell Fund,but still preserves a functioning marketplace for purchase and saleof 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 havehere 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 onesto be sold off and the bad onesto 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 longrun,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."

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