Alberta sees huge spike in abandoned oil and gas wells

It's no secret that Alberta's junior energy sector is struggling. Falling energy prices and tighter rules around the viability of oil and gaswells havemeant many companies are abandoning their operations and turning their wells over to the province to be reclaimed.

In the past year, the number of so-called orphan wells hasmore than quadrupled from 162 to 702. At the current rate of reclamation, it will take 20 years to dismantle just this year's supply.

Marginal companies that don't have the ability to clean up, and abandon a well after they've done operating it, shouldn't really be in the business.Barry Robinson, Eco-Justice

Orphan wells are not new to Alberta. They dot the landscape in the central and southern part of the province. Since 1994, the Alberta Energy Regulator has run a program to take over abandoned wells, pipelines and other facilities and reclaim them.

It's an expensive process, costing a minimum of $10,000 andmillions in special cases. It also takes time. In the first 20 years of the program's operation, it reclaimed a total of 651 wells, around 30 a year.

In the past 12 months alone, 540 wells have been abandoned, almost as many as have been reclaimed in the past 21 years.

Why the huge increase?

"I think some of that is the economic conditions, but there's also a structural shift going on in the industry," says Brad Herald, a director of the Orphan Well Association.

Herald says that the shift to more technical horizontal drilling in Alberta has made it harder for the juniors.

"There was a time when you could raise10, 15,20 million dollarsand have a junior company in theshallow gas business. That's really not the case now, the cost of entry is much higher."

The Alberta Energy Regulatorkeeps a pretty close watch on the active oil and gas wells in the province. Every month it calculates the production value and the cost of abandoning and reclaiming each well.

If the production value is not higher thanthe abandonment costs, there's a problem, and the company has to put down a security deposit. This ratio is called the LLR, or the licensee liability rating, and as energy prices fall, it has become the bane ofjunior oil and gas producers in Alberta, who are often cash-strapped and struggle to make the payments.

Two years ago, the regulator increased its expected or deemed cost to reclaim a well, which threw many companies out of compliance.

That's probably for the best, according to Barry Robinson, a lawyer with Eco-Justice in Calgary.

"I think the [Alberta Energy Regulator]has set some more realistic security requirements. A lot of companies that aren't really financially viable were operating wells, and they didn't have the capability to clean up an abandoned well. Marginal companies that don't have the ability to clean up, and abandon a well after they've done operating it, shouldn't really be in the business."

Some of the wells could be sold

In the past 10months, four companies: Tallgrass Energy, Winter Petroleum, Fairwest Energy and Stealth Ventures have turned over 100 or more wells each to the Orphan Well Association, raising questions about whether at least some of these wells could have been salvaged.

Andrew Basi is a partner at the accounting firm Grant Thornton whodeals with corporate insolvency, and he feels thatthere's probably value in at least some of the wells that are being abandoned.

"We think itwould be beneficial if there was a process in place where some of the productive wells that pay the government a royalty could be sold to solvent companies and those wellscould continue into production," said Basi.

"And only those wellsthat have negative economics with them would be returned to the orphan well program."

Who will pay for the cleanup?

The Orphan Well Association is funded by the energy industry, except for aone-time cash injection of $30 million of provincial money a few years ago.

The association's budget has been doubled for this year to $30 million, which will help make a dent in the inventory of abandoned wells, but it will take more than one year of increased funding to deal with all 702 wells, along with hundreds of pipeline segments and other facilities.

"We have a rule of thumb on trying to retire them in a 10-year time frame," said Herald. "Will we seesome elasticity in that? Potentially."

Herald said there are no plans to ask for public money to clear out the backlog and that the industry sees this as extraordinary circumstances, not the new normal.