Alberta 'orphan' wells needing cleanup proliferate after court ruling

(Reuters) - The number of ownerless oil and gas wells awaiting cleanup in Canada’s energy heartland of Alberta rose by a quarter within a three-month period following a May court ruling that prioritized creditors over cleanup costs in company bankruptcies, official data showed.

By the end of the fiscal second quarter on Sept. 30, Alberta had 1,423 “orphan” wells without legal owners that needed cleanup. That was an increase of more than 300 from the previous quarter, according to data from Alberta’s Orphan Well Association (OWA).

Just 4-1/2 years ago, there were only 26, and the explosion in orphan wells has put added pressure on the OWA.

The government-backed nonprofit, which takes responsibility for orphan wells, compiles numbers four times every fiscal year ending March 31.

Alberta has more than 79,000 inactive wells. Such wells become orphans when their operators go out of business; they can potentially leak contaminants if not properly decommissioned.

In May, toward the end of the first quarter, an Alberta judge ruled proceeds from asset sales of insolvent junior producer Redwater Energy Corp should go first to secured creditors, rather than cleanup. The company had 19 producing wells and 70 nonproducing wells as of May.

Uncertainty over distribution of funds after bankruptcy proceedings has hampered energy asset sales in Alberta. But the court decision, while providing clarity, also increased the chance that more wells from insolvent companies will be left for the OWA to clean up.

OWA Chairman Brad Herald, also the vice president of Western Canada operations of the Canadian Association of Petroleum Producers, said the rising number of orphans caused by operators going out of business has stretched the nonprofit’s resources.

“Certainly, there is pressure on the system right now from those failures,” he said on Monday.

But the association is still able to cope and has adapted by shifting resources away from the reclamation part of the cleanup process, a 10-year second step that returns the ground to its previous state, Herald said. The association can still meet that reclamation target if it devotes more resources years later, when it is in a position to do so.

OWA’s parent agency, the Alberta Energy Regulator, which instituted stricter rules for asset sales after the May court decision, said it has appealed and is awaiting a decision.

“AER continues to assert that companies must not be allowed to walk away from their financial responsibilities,” spokesman Ryan Bartlett said in an email.

Reporting by Ethan Lou in Toronto; Editing by Matthew Lewis