CALGARY, Alberta (Reuters) - The Alberta Energy Regulator has toughened rules determining if companies are financially strong enough to buy oil and gas assets, a move some energy industry players warned on Tuesday could hamper mergers and acquisition in the province.
The regulator announced that companies seeking to buy oil and gas wells will need to show their deemed assets exceed their deemed liabilities by a ratio of 2.0 or more after the purchase. Previously, deemed assets had to be equal to deemed liabilities.
More than 200 companies that met the prior standard were ruled out as buyers by the stricter financial solvency test announced by the AER late on Monday. Industry representatives said merger and acquisition activity could take a hit because fewer companies will be allowed to buy assets.
"We have a huge market in Canada currently with buying and selling oil and gas properties and this will put limitations on who can participate in that pool," said Gary Leach, President of the Explorers and Producers Association of Canada.
Under the new rules, 569 companies do not meet the AER's criteria, versus 362 previously, including those that failed the prior test too.
The AER is overseer of the province's Orphan Well Association (OWA), which is responsible for cleaning up wells that have no owners, and keen to stop companies buying assets unless they can afford the eventual cost of decommissioning.
That means, said Leach, value of a company's production will need to be twice the cost of cleaning up its wells at the end of their producing lives.
The step comes in response a court decision last month that proceeds from the sale of assets belonging to insolvent junior producer Redwater Energy Corp will go first to secured creditors, rather than toward cleaning up the company's inactive oil and gas wells.
"It's impossible to gauge the impact of this regulatory decision but I think it will be fairly disruptive (to M&A activity)," said Brad Herald of the Canadian Association of Petroleum Producers, adding he understood the AER was trying to mitigate the risk of inheriting more orphan wells.
One Calgary energy lawyer, who asked not be named due to client confidentiality, said he had heard from many angry corporate executives who were concerned it would become much harder for companies struggling with low oil prices to sell assets in order to survive.
"This is a total overreaction – killing a mouse with a shotgun," he said of the AER's move.
Reporting by Nia Williams; Editing by Cynthia Osterman