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By Euan Rocha and Nia Williams
TORONTO/CALGARY, March 3 (Reuters) - RedWater Energy's
bankruptcy last May raised few eyebrows. After all, the C$3.2
million the small Canadian energy company owed creditors was
insignificant in a multibillion-dollar industry.
But questions thrown up by the case are causing issues for
Canadian companies looking to sell oil and gas wells in a bid to
shore up their balance sheets.
Oil and gas companies in Canada, desperate to sell assets
amid tough market conditions, are seeing deals complicated by
buyer concerns over reclamation costs tied to inactive wells,
which are a massive bone of contention between creditors and the
Alberta Energy Regulator (AER) in the RedWater matter.
Companies selling conventional oil and gas assets typically
market vast parcels of land which include a mixed-bag of wells.
These can include wells that are in-production, some not fully
developed or not viable in a low energy-price environment, and
others that are completely tapped out.
When oil prices were booming and assets were in demand,
bidders would gobble up the land packages with little thought
given to inactive wells that can cost a few hundred thousand
dollars each to properly abandon and restore.
But with energy prices in a slump buyers are now keen to
cherry pick assets and leave behind inactive wells, especially
in bankruptcy matters, where sellers have little leverage.
Bankers and lawyers say the trend has irked regulators in
Canada's energy heartland of Alberta, who fear they could be
stuck with hundreds of millions of dollars in clean-up costs.
"Abandonment liability is now a front page issue when you're
talking about M&A. In the past it would have been more of a due
diligence issue," said one Calgary-based banker, who declined to
be named to protect client relationships.
"We think about it a lot more than we ever have," the banker
said, adding their firm had a deal fall apart over the issue.
After a massive onshore drilling boom turned into the most
brutal oil bust in a generation, big basins across North America
are set to log what could be the biggest ever spike in abandoned
or plugged wells.
Moreover, with prices in a protracted slump, and older wells
rapidly depleting, producers are now more likely than ever to
shut the most marginal wells, exacerbating the problem. And with
company default cases rising amid the slump, concerns around who
will have to foot the clean-up bill are spiraling.
Over a dozen bankers and lawyers, who also spoke on
condition of anonymity, said the issue is making a challenging
deal environment even tougher. Energy companies hit by the
global oil price plunge are also grappling with market access
challenges in Canada and uncertainty around carbon taxes, among
other issues.
"The reality unfortunately is that Canada's not a favorable
investment region for a lot of international energy players now.
Everyone's actually exiting just because of all the uncertainty
and we're a higher cost basin," said another energy banker.
REDWATER DILEMMA
RedWater's attempt to carve out and sell the company's
producing assets to payback creditors, while leaving old idled
wells stranded was blocked by the AER.
A ruling on the case in Alberta is expected soon, but is
widely expected to be appealed to Canada's Supreme Court,
meaning there may be years of uncertainty around the reclamation
cost issue.
The two bankers said potential bidders for the large land
packages Husky Energy HSE.TO has on sale in Western Canada are
among many closely watching the issue, as some of Husky's assets
are more mature, potentially denting valuations and interest in
parts of that package.
Husky declined to comment.
In order to circumvent the issue while RedWater works its
way through court, industry insiders are exploring some creative
options.
Parties involved in the Spyglass Resources bankruptcy have
struck a deal with the AER that will allow the sale of some
producing assets as long as a portion of the proceeds are being
set aside for clean-up of inactive sites.
Still, bankers and lawyers say the lack of clarity on this
issue is exacerbating the concerns of potential bidders that are
already dealing with challenges like weak energy prices and some
uncertainty around the long-term royalty regime in Alberta.
"Nobody thought about this issue seriously for 30 years, but
it's now become a big concern," said a Calgary-based lawyer. "We
have now got a situation where capital is on the fence."
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FACTBOX-Canadian court cases that could impact energy asset
sales
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