(Repeats story with no changes to text)
By Nia Williams and Euan Rocha
CALGARY, Alberta, April 6 (Reuters) - Regulations aimed at
ensuring tens of thousands of inactive oil and gas wells dotting
the Alberta landscape are properly reclaimed could be a death
knell for some producers already crippled by weak energy prices.
The Alberta Energy Regulator's (AER) updated Licensee
Liability Rating (LLR) program came fully into force last August
just as oil prices CLc1 tumbled below $40 a barrel for the
first time since 2009.
It is already being blamed for helping sink one producer and
more could follow, according to industry insiders.
The "polluter pays" policy makes companies put down a
deposit if their production revenues are deemed insufficient to
cover the estimated cost of cleaning up their oil wells at the
end of their producing life. That cost can range from roughly
C$60,000 to over C$300,000 a site, depending on well depth,
location and other factors.
While the policy is aimed at ensuring the broader energy
industry and tax-payers are not left footing the bill, it has
squeezed small firms, which typically have a higher proportion
of tapped-out wells, to the point where some continue to operate
loss-making assets just to avoid having to pay security deposits
for inactive wells.
"It's devastating, it's the final thing that pulls the rug
right out from all the weak companies. You're forced to produce
wells that are uneconomic just to keep your LLR positive," said
Tim Veenstra, an engineering consultant with privately-held
Crimson Oil & Gas.
Calgary-based Crimson, together with Northpine Energy which
it bought last year, produces just under 500 barrels a day from
around 200 wells, Veenstra said, including several that are
producing at a loss and 39 inactive wells.
The AER said it tries to help companies experiencing
difficulties, but producers have to be able to clean up their
own wells.
"It's the licensee's responsibility to ensure they're in a
position to be able to care for their infrastructure throughout
their entire lifecycle," an AER spokesman said.
CLEAN-UP BILL
A rise in bankruptcies makes it more likely that the sector
could be left with the bill - the very problem the regulator was
trying to avoid.
When companies are insolvent, their idle wells can end up in
the province's orphan well association (OWA) program if no party
is legally responsible for them. The association is funded by an
annual levy on industry totaling C$30 million.
The number of wells in the OWA was 768 in March 2016,
quadrupling from two years ago partly due to rising
bankruptcies.
Consulting firm Deloitte has warned that a third of oil and
gas producers could go bankrupt this year, prompting some
observers to voice concerns the program may not have enough
funds to cover the clean-up costs of the wells currently on the
OWA's books.
"The problem is not getting solved. The OWA has such a
backlog they cannot process wells as fast as they are coming
in," said Wood Mackenzie analyst Paul Pasco, adding that the LLR
system was exacerbating issues.
"Companies are unable to close or complete deals because of
it. In the long-term, companies will be forced to go bankrupt
and then their assets will defer to the OWA."
The OWA operates under the authority of the AER, and
deferred a request for comment to the regulator. An AER
spokesman said abandonment costs varied between wells and he
could not speculate on the total cost.
As well as orphans, there are 79,000 inactive wells -
defined as wells that have not produced for at least six months
- in Alberta, 21,000 of which have been inactive for more than a
decade.
Permanently closing just those 21,000 could cost up to C$6.3
billion, based on estimates from the Petroleum Services
Association of Canada, which last month asked the federal
government for C$500 million to help clean-up wells and support
employment. L2N16O2L4
OUT OF OPTIONS
The catch-22 scenario is leaving the smallest and most
vulnerable oil and gas producers, running out of options.
The clean-up cost issue has already gummed-up asset sales in
the province, as buyers are not keen to buy portfolios that come
with large numbers of inactive assets, and the energy regulator
has balked at letting companies carve out and sell good
assets.
Last month Alberta-based Terra Energy TT.TO ceased
operations after its bank demanded full loan repayments.
Terra said efforts to sell assets in Alberta to pay down
debt had been hampered by having a well liability rating below
1, the level at which liabilities outweigh assets and the AER
can block asset sales.
Terra is one of 63 companies currently in AER's liability
management plan, which essentially is a last-ditch effort at
helping teetering companies with a liability rating close to, or
below 1, by allowing them to make quarterly payments to cover
security deposits.