Saskatchewan, B.C., toughen deposit requirements for cleanup of oil and gas wells

Companies buying energy assets in Saskatchewan and British Columbia are facing higher deposit costs for environmental remediation after a precedent-setting court case in Alberta that dealt with abandoned oil and gas wells.

In a letter sent last month to operators of wells, pipelines and other energy assets in Saskatchewan, the provincial Ministry of Economy (ECON) warns that all applications to transfer government licences for wells as part of sales transactions will be treated as "non-routine" from now on.

"All licence transfer applications will be reviewed in detail and ECON will consider all relevant factors in calculating transfer deposit requirements," it says. "In addition to increased deposit requirements, ECON may incorporate additional conditions with licence transfer approvals which may impact the decision to proceed with certain transactions.

"In particular, licence transfers involving a high percentage of potentially uneconomic infrastructure will be very closely reviewed and deposit requirements set accordingly."

Ruling on case-by-case basis

In an email, spokesman Phil Rygg of the B.C. Oil and Gas Commission said it, too, is requiring security deposits for certain assets being sold in cases where deposits would not have previously been required.

"This decision is applied on a case-by-case basis," he wrote.

Regulators in Western Canada are watching closely after a ruling from the Alberta Court of Queen's Bench in May granted the receiver for bankrupt producer Redwater Energy the right to sell the private company's best assets, thus gaining the best payback for its creditors, and disclaim or abandon inactive assets for which estimated environmental cleanup costs were higher than resale value.

The receiver had advised the Alberta Energy Regulator that of the 127 wells, pipelines or other infrastructure for which Redwater Energy held licences, it would only take possession of about 20.

In response, the regulator issued a directive for companies trying to sell assets before licence transfers would be allowed. According to the directive, a company's asset value has to be twice as much as the costs of environmental remediation of orphan wells.

Abandoned well numbers keep growing

The regulator later softened its stance, saying companies can apply for special consideration or make a deposit to allow transactions to go ahead.

Over the summer, the number of orphan wells in Alberta has ballooned by 500 to more than 1,280, said Brad Herald, chairman of the Alberta Orphan Well Association, which is administered by government and industry associations.

He said the Redwater decision has added to the rising count of orphan wells, but it's unclear by how much, given general industry hardship caused by more than two years of low oil prices.

He said the higher number of orphan wells is bound to put "upward pressure" on the $30 million per year currently paid by the province's energy industry to secure and clean up abandoned oil and gas wells.

Brad Wagner, director of liability management for Saskatchewan's Ministry of Economy, said the decision to send a warning letter to operators was made after his department saw a report this summer from the receiver assigned to sell the assets of bankrupt oil and gas producer Tuscany Energy.

The report suggested Tuscany Energy's assets including dozens of heavy oil wells in Saskatchewan might be sold in pieces, a process that could result in the best assets finding buyers and the worst being abandoned, Wagner said.

Licence transfers scrutinized

He said the Alberta decision has the potential to affect Saskatchewan because many energy companies operate in both provinces.

"We're putting each (licence) transfer under a microscope," said Wagner.

He said no licence transfers have been denied as yet but the size of deposits has been steadily rising. The deposits are held as a guarantee for environmental remediation and refunded to the company once it has proven it has the financial ability to clean up oil and gas wells.

An appeal of the Redwater decision launched by the Alberta government, the AER and the Alberta Orphan Well Association is to be heard in October.

Both B.C. and Saskatchewan have applied to intervene in the case to present evidence of its potential impact in their jurisdictions.

"If the decision is upheld, I think we would look to more permanent policy change, regulation change," said Wagner.