Alberta sounds alarm
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Collapse of 282 producers in 5 years, 53,200 direct job losses, tax boondoggle
Gary Park for Petroleum News
The number of companies exploring for and producing oil and natural gas in Western Canada slumped from 1,616 four years ago to 1,334 at the end of 2018, down 17.5%.
Direct employment in the sector is forecast to drop 23% to 173,300 from 226,500 in 2014.
The upshot is that municipal governments are having to raise tax rates to make up for an expected C$81 million in unpaid bills by the energy sector last year, while the Alberta government watched spending climb to C$57 billion in the last fiscal year, outpacing revenues by C$7.4 billion.
The situation is so dire that Premier Jason Kenney named a blue-ribbon panel to examine ways to end the province’s record of nine deficits and only one small surplus in the last decade and report back on Aug. 15.
The panel will also devise a long-term plan to retire debt, which now stands above C$55 billion, without considering tax hikes to stabilize revenues.
For now, all the government has been able to do is blame the trends on the slump in global commodity prices, Canada’s inability to build new pipelines that provide access to markets beyond North America, a lack of certainty in the regulatory regime and the gloomy outlook on stock markets, which has driven billions of investment dollars to more receptive environments.
The overall impact can be easily measured by empty office towers in downtown Calgary, where vacancies are estimated at 25%.
Canary in the coal mine But it has taken the failure of Trident Exploration, a privately held small company - the canary in the coal-mine - to capture the public attention and focus on the scope of the industry’s woes.
What Trident also blames for its downfall was a Supreme Court of Canada ruling in January affecting insolvent Redwater Energy that ensures environmental cleanup costs faced by taxpayers must get priority over creditors when companies go bankrupt.
That adds to a tsunami of orphaned oil and gas wells in the past five years, with the latest numbers estimating 3,127 wells need to be plugged or abandoned and a further 1,553 that have been abandoned and need to be reclaimed.
At the time it ceased operations on April 30, Trident was producing 67.5 million cubic feet equivalent per day of gas from proved reserves of 458 billion cfe.
The company announced it was terminating 33 employees and contracts with 61 companies after failing to secure approval of the Alberta Energy Regulator (a provincial government agency) “for a restructuring in a timely fashion.”
As a result, 3,358 operating wells, 294 abandoned wells, 502 pipeline licenses, 211 operating facilities and 27 abandoned facilities carrying remediation costs of C$259 million have been turned over by Trident to the AER.
CAPP view Brad Herald, a vice-president with the Canadian Association of Petroleum Producers, said many if not most of the wells are likely to be sold, adding “there may be somebody who is better financed or has a longer view to overcome some of the short-term tumult.”
Looking at the bigger picture, he said the credit industry is “evolving the way it looks at risk,” adding that CAPP was expecting an increase in defaults because of that evolving assessment.
“Ultimately, the Redwater decision, regulatory uncertainty and a lack of egress has created a treacherous environment for energy investors that dare to risk their capital in Canada,” Trident said.
“As many have speculated and we have now unfortunately proven, the Redwater decision has had the unintended consequences of intensifying Trident’s financial distress and accelerating unfunded abandoned well obligations.
“We fear that many other companies may falter without clear, sound policy-making post-Redwater. In the face of this extended uncertainty, lenders and investors may flee Canada and further job losses will occur,” the company warned.
Orphan wells The Alberta Orphan Well Association, OWA, an industry-funded organization which pays for cleanup costs from a levy paid by all energy companies, faces the daunting if not impossible task of grappling with Alberta’s 90,000 idle wells, most of whose owners are no longer solvent.
Since the industry downturn five years ago, the number of oil and gas sites that no longer have solvent owners has soared to 4,349.
The only shred of hope is to transfer as many wells as possible to other companies to keep them working and contributing royalties to the provincial government.
The AER estimated the cost of reclaiming land disturbed by oil sands mines will cost C$27 billion, although internal AER documents have pegged the bill at closer to C$100 billion, compared with the mere C$900 million the province holds in security.
Although many view oil sands companies as the most responsible element of the industry, the fate of smaller conventional operators is less comforting.
A spokesman for surface rights organizations which work with small energy companies said the situation is “going to get a lot worse. There are close to 31 companies right now that are close to going insolvent.”
The OWA took the “unprecedented” step earlier in May of having a receiver appointed to manage Trident’s assets.
“Normally, the company or its creditors would clean up its sites or appoint an insolvency professional to help transition the licensed assets, where possible, to other parties,” the OWA said.
“In this case, the OWA had no other choice but to take this step to ensure that Trident’s assets are managed and maintained safely for the benefit of the public and where possible, placed in the hands of responsible operators.”
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