March 3, 2016 / 6:33 AM / in 2 years

Clean-up cost issues hamper energy asset sales in Canada

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.

Potential buyers sit through the Ritchie Brothers Auction in Nisku, Alberta on December 11, 2015. REUTERS/Topher Seguin

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.”

Reporting by Euan Rocha and Nia Williams; Editing by Alan Crosby

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