The Entire OilPatch is Watching This Court Case on Wednesday

The Entire OilPatch is Watching This Court Case on Wednesday

Here is an energy issue I thought would have been resolved years ago--but it's going to court this week in Alberta. The central question is simple--what takes priority if a producer goes bankrupt--environmental liabilities to plug & abandon (P&A) wells, or creditors.

What's happening is that the Alberta Energy Regulator (AER) is asking receiver Grant Thornton to set aside enough money in the receivership of bankrupt Redwater Energy Corp. to pay for the abandonment costs of any wells they have.

If the AER wins, creditors will get less. If Grant Thornton wins, either the taxpayer will pay or the government will possibly get the energy industry to pay more into a general liability fund--at a time when the energy industry is scraping for every penny.

Nobody wanted to speak with me as this issue is before the courts. My understanding is that the case is Dec 16-17. The best website to review is http://grantthornton.ca/services/reorg/creditor_updates/redwaterenergy. Here's an excerpt that appears to be the core issue for the AER

I'm not an expert on P&A costs and laws. But as a bit of background, the province of Alberta operates a "Licensee Liability Rating Program" (“LLR”). The program is designed to ensure that energy companies or the Province has funds to pay for abandoned wells. Under the program, each company is required to pay a security deposit to the AER, if their Liability Management Rating (“LMR”) is below 1.

This LMR is calculated as the ratio of a company’s "eligible deemed" assets under certain programs (i.e. LRR, facilities, oilfield waste) to the "deemed liabilities" in these programs. Assets over liabilities.

In the Redwater case, the AER is claiming that the Receiver (Grant Thornton) must pay the province to ensure the LMR of Redwaters assets is above 1. On the other side the Alberta Treasury Branch (ATB) and Grant Thornton is saying the money has to stay put to fulfill the Receivership fees and debts of the Company--just like it says in the Bankruptcy and Insolvency Act.

This could be a big issue in Canada if energy prices stay really low. The precedent set in this case will decide whether the province can claim priority for closure/abandonment orders in receivership situations.

Alberta has had an “orphan well fund” for some time. The LLR program was set up so the province wouldn't have to rely completely on the orphan well fund, and make sure oil and gas companies were paying their liabilities.

P&A liability is becoming more of an issue in a couple other areas of the oil patch. As the junior market moved to sustainability and away from growth in 2014, many companies started buying older, more mature assets (properties with A LOT of wells with very small production, but with very low decline rates). But now with low energy prices, many of these wells may no longer be economic at such small production rates.

I was speaking with one CEO last week who enjoys a premium-valuation, i.e. he still has a rich enough value in his stock he can do accretive acquisitions. But they are only completing one acquisition a year because most of the others have too big a P&A liability.

Because the bottom line is--somebody has to pay to properly P&A a well. And if the AER loses, more of this liability will be put on either taxpayers or an industry already reeling from low prices and a pending royalty review.

I have not read all of the materials of the ATB-Grant Thornton/Redwater case, but you can bet a lot of eyes will be on this case this Wednesday and Thursday.

And this is law, so while the Application is being heard December 16 and 17, several different things could happen those days. There could be a decision, a decision could come shortly after, there could be procedural issues that delays the application or the hearing could be adjourned.

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