Orphan well program reforms

Times Contributor    

 

Jason Hale, MLA for Strathmore/Brooks, in his role as Wildrose energy critic, put a spotlight in the legislature on the Licensee Liability Ratings (LLR) for small oil and gas company owners. He said program fees are negatively impacting junior producers’ bottom lines.

“The people who own these companies live and work in our communities and have employees; we just want the regulator to work with them and help solve this problem…help them stay in business. Nobody wants to see companies go broke. What they are trying to do is good, but I feel the way they are going about it may cause some difficulties for some of the companies that are trying to stay afloat,” said Hale. “We realize there is an issue with orphaned wells in Alberta. Companies need to be responsible for their wells, I totally agree with that; but we would like to see the regulator work with companies who are trying to get on track and trying to do the right thing.” 

The LLR program was in part established in response to Albertan’s calls for stricter measures on abandoned wells. In the past companies were abandoning wells, not finishing reclamation or cleaning up environmental problems related to orphaned or old well sites. 

A monitoring measure was put in place, after consultations brought direction from landowners and the oil and gas industry. A monthly levy is charged the company which varies according to a formula rating system. The formula weighs the assets and liability of the company and takes into consideration the number of inactive wells and active production. For full details go to www.aer.ca.

“The first Saturday of every month, the Alberta Energy Regulator, looks at the liability ratios, so if you are found a low-risk, non-compliant, which is below one, you are issued a payment you have to make. When the next month rolls around and they (companies) are in non-compliance because the company can’t pay, they are issued a global referral, which means their assets or liabilities cannot be bought or sold unless approved by the regulator,” said Hale.  

“So after 60 days total they get a closure order that means any of their producing wells are ordered to be shut in. If they still can’t pay after that, they get an abandonment order, which means they have to abandon all their wells. One of the companies I talked with is going to have to put up five million dollars.”  

If the company goes bankrupt, it cannot start up under a new name until it pays its past fees. The fees forwarded go into the Orphan Well program, which are used to complete the unfinished reclamation work for orphan wells, facilities and pipelines in the province.

Out of 851 companies doing business in Alberta, there are 350 that have a ratio under one. The industry average rating is 3.8. As of Sept. 2013, the Orphan Well program statistics show 403 abandoned well sites, 103 orphan wells, 14 facilities, and 56 pipelines that need reclamation attention.

Voices in the industry are saying the process is sound and it weeds out producers with poor business plans and enforces responsible ownership. They suggest new operators do their homework before start up and prepare for contingencies when market pressure occurs. The Alberta Energy Regulator statistics show the program has significantly reduced defaults. Others say the system limits the marketplace to large producers. Shutting down producing wells is also a concern. It also has some trickle down effects to service industries.

“The LLR issue is pretty complicated and certainly not easy to solve.  There have been a lot of factors at play that are affecting the industry, such as low natural gas prices and a very tough market to raise money in. The balance sheets of many producers have taken a beating and put them in a situation where they are at risk with the LLR.  Producers with strong balance sheets are not as affected.  There will certainly be an impact in the service sector. It will be one of several factors, as the market as a whole is unpredictable at this time,” said Steve Marshman, President of Rocking Horse Oil Energy Services.

“It looks like the days of companies starting up, drilling a couple shallow gas wells for a million dollars and getting them into production and making some money are gone. It is big business now,” said Hale.

Some suggestions generated for reform are a flat production levy based on the product, reviewing the formula parameters, some kind of credit counselling check or mentoring process that occurs prior to business licensing, or abandonment orders.