AER backing off orphan well rule

Alberta Energy Regulator had required companies selling, buying to prove financial capability to clean up abandoned, orphan wells

GARY PARK

For Petroleum News

An uproar over a plan by the Alberta Energy Regulator to tighten the sale of oil and natural gas assets in the province has forced the government agency to rethink its rules.

Swamped with angry calls from industry executives and banks, the AER has indicated that it will at least ease a new threshold that requires companies selling or buying assets to prove they are financially capable of cleaning up abandoned or orphan wells.

Carolyn Wright, a lawyer with the firm of Burnet, Duckworth & Palmer, said in an article that the “sudden and dramatic regulatory change ... is expected to have a chilling effect on the rise in transaction activity in a province struggling to get back on its feet following a two-year long rut in commodity prices.”

She said that as a result of the new regulatory requirements, 207 well licensees would fall short of the threshold.

Dave Roberts, chief executive officer of Penn West Petroleum - which is trying to unload up to C$200 million of projects to further buffer its balance sheet - said the new financial stress test would hamper the company’s ability to sell assets, although it would not affect a negotiated C$975 million sale in Saskatchewan.

A spokeswoman for the AER said the intent was to stop any kind of sale that would increase the risk of environmental liabilities being left on the table.

She said the message to any companies that have a “good faith” transaction underway was to “come talk to us and we’ll look at it o a case-by-case basis.”

Gary Leach, president of the Explorers and Producers Association of Canada, said he was relieved the AER had listened to suggestions made by his association.

He said that the rules might be necessary to avoid increasing liabilities for a fund set up under the Orphan Well Association to pay for the cleanup of old well sites that the owners were either unable or refused to deal with.

Initially, the AER acknowledged its new regulations might “inconvenience some stakeholders,” but pointed out it wants to work with industry and the Alberta government to develop broader regulatory measures.

The Alberta Court of Queen’s Bench ruled in May in the case of bankrupt producer Redwater Energy that the rights of lenders to be paid back ranked above the right of the AER to require reclamation of oil and gas wells.

The AER launched an appeal of that decision, arguing it would encourage more companies to enter receivership and bankruptcy to avoid their obligations to clean up around wells.

While awaiting the outcome that precedent-setting case, the AER decided to take independent action.