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New Funding for Orphan Well Clean Up To Benefit Oilfield Services – MNP LLP


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As the Alberta oil and gas industry begins its slow recovery, the severity of the downturn has left behind it a growing legacy of “orphan” assets in need of abandonment or reclamation with no one to pick up the tab — along with a growing uneasiness among Albertans about the scale of the problem.

“Orphans” are wells, facilities and pipelines with no legally responsible or financially able party to deal with abandonment and reclamation responsibilities. As of April 17, 2017, the orphan inventory consisted of 1,411 orphan wells for abandonment, 666 orphan sites for reclamation and 1,764 orphan pipeline segments for abandonment.

0136M-17 CORP OFS Newsletter - Infographic Digital

To ensure Alberta taxpayers aren’t left on the hook for those costs, the Alberta Energy Regulator (AER) has delegated the Orphan Well Association (OWA) to abandon and reclaim orphan wells, with industry picking up the cost through an orphan fund levy that has risen sharply in recent years. The OWA’s current business plan imposes a levy of $30 million on the industry for this year and that will rise to $45 million in 2018 and $60 million in 2020.

The AER assesses and collects the levy amount based on the deemed abandonment and reclamation liabilities held by each company and then remits the collected funds to the OWA, which then contracts out the work to service companies.

Service Company Opportunities

The OWA retains companies that have qualified personnel that can perform well inspections, well abandonments, pipeline/facility abandonments, and wellsite remediation and reclamation.

When all considerations are equal (equipment and rates, experience and attention to safety), it will preferentially hire local contractors to put money back into the community where the orphan wells or sites are located. Prospective companies should review the Request for Information, which is available on the OWA <<website>>.

When a well is deemed an orphan, the OWA assesses it and prioritizes it on a number of factors including safety, environmental impact and stakeholder concern, says Brad Herald, chair of the OWA and vice-president for western services at the Canadian

Association of Petroleum Producers (CAPP). The OWA then uses industry funding to contract the work needed to abandon the well and the site is reclaimed.

Work Priorities

Because of the number of new orphans, the priority is on downhole work, so the OWA is doing abandonments first and then slowly will shift the money to wellsite reclamation, according to Herald. Abandoning a well involves having it permanently dismantled (plugged, cut and capped) and leaving it in a secure condition. In reclaiming a site, the soil is replaced and the vegetation re-established so it can support activities similar to those prior to site disturbance.

Saskatchewan and B.C. are also dealing with orphan wells. The Saskatchewan Oil and Gas Orphan Fund (SOGOF), for instance, enables the government of Saskatchewan’s Ministry of the Economy to abandon and reclaim orphaned well and facility sites. (Information on SOGOF can be found here.)

Moving the needle on reclamation 

In an effort to speed up the abandonment and reclamation of orphan wells and help get the oilfield services sector back to work, the Alberta government announced May 18 it will provide a $235 million loan to the OWA.

A $30 million federal injection of stimulus spending in Alberta will be used to pay the interest on the $235-million loan. “By using the money from the federal government to backstop a loan this large, we are able to get much more favourable rates than the

Orphan Well Association [could] access on its own,” said Alberta Premier Rachel Notley.

The loan does not replace the Orphan Well Fund, which is primarily funded by industry and will continue to operate as it has in the past. “What this loan will do is provide a significant injection into our oilfield and environmental services sector where it is needed now, more than ever, to tackle the growing problem of orphan wells and to create jobs,” said the premier.

The loan, which will be paid back over the next 10 years through the existing orphan fund levy, is expected to create 1,650 new jobs over three years.

“This funding would support much needed jobs and retain skill and expertise by accelerating the timelines for the process that the Orphan Well Association undertakes while labour is abundant and available, and costs are down,” said Mark Salkeld, president and CEO of the Petroleum Services Association of Canada.

OWA’s Herald couldn’t say exactly how many wells the association will be able to clean up with the additional funding, although he noted that last year it did 234 wells with an annual budget of $30 million. “With the wells we’ve got in, we’ll be able to pulse through them pretty good,” he said.

The OWA was established in 2001 as a non-profit organization and assumed responsibility from the AER in 2002 for abandonment, decommissioning and reclamation of orphans. Its members include CAPP, the Explorers and Producers Association of

Canada (EPAC), the AER and Alberta Environment and Parks.

Since establishment of the orphan fund, industry has contributed nearly $250 million to successfully abandon nearly 1,000 wells and reclaim more than 600 sites.

RedWater Energy Corp. and Lexin Resources Inc. 

Two high-profile orphan well cases have raised public and industry awareness of the orphan well concerns.

Redwater

In this case, the AER had raised concerns about the actions of a licensed insolvency trustee in a case involving RedWater Energy Corp., which had been forced into bankruptcy by its secured creditor, Alberta Treasury Branches (ATB). The receiver took possession of some RedWater oil and gas properties, rejecting many others as of little or no value. The “renounced” assets included some with outstanding, unfunded environmental and abandonment liability estimated at some $5.2 million.

The AER and OWA appealed the case to Alberta Court of Queen’s Bench, arguing that receiver’s plan to exclude the “renounced” properties from the receivership assets would effectively release the receiver — and the RedWater estate — from having to fund remediation and abandonment costs on the renounced properties, burdening the OWA.

The court, however, ruled in favour of the receiver, finding that federal law — in this case, the Bankruptcy and Insolvency Act — prevailed over provincial laws, including Alberta’s Oil and Gas Conservation Act and the Pipeline Act, if the federal and provincial statutes were in conflict.

The AER appealed the decision to the Alberta Court of Appeal, which in a 2-1 decision rejected the appeal, finding that secured creditor has priority over the obligation to abandon and remediate company wells without value. The AER has sought leave to appeal the case to the Supreme Court of Canada, which has not yet indicated whether it will hear the case.

Lexin

In another case, the AER suspended the licences of all Lexin Resources Ltd. wells, facilities and pipelines and ordered the company to cease all production. The regulator took action after Lexin informed it that as of Feb. 15, 2017, it would no longer be able to provide proper health and safety overview measures at its sour gas wells. Lexin held licences for 1,380 wells, 81 facilities and 201 pipelines.

The AER directed the OWA to shut in the sites and provide care and custody until further notice. A receiver, though, has been appointed and most of those wells likely will be sold, according to OWA’s Herald.

Contact MNP’s Oilfield Services Team​

Tom MinogueMNP understands the oilfield services industry – its drivers, challenges and opportunities. We are proud to provide insight into the latest industry news and trends in our newsletter, issued in association with JuneWarren-Nickle’s Energy Group. ​​

For more information on MNP’s OFS services, contact a member of our team:

​Tom Minogue, CPA, CA, CF,​ ​780.8​32.4298 ​​ or tom.minogue@mnp.ca



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