Clean-up cost issues hamper energy asset sales in Canada
By Euan Rocha and Nia Williams
TORONTO/CALGARY (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. Continued...