3rd edition
Authors:	Duncan Kenyon, Nikki Way, Andrew Read, Barend Dronkers, Benjamin Israel, Binnu Jeyakumar, Nina Lothian
Publisher:	Pembina Institute
Publish Date:	October 2016
PDF Download:	[Landowners' Guide]              [Landowners' Primer]
Initiation Phase
Exploration Phase
Development Phase
Pipelines and Other Infrastructure
Environmental Impacts
Abandonment and Reclamation                 Closing Down and Reclaiming Wells                 Well and Pipeline Abandonment and Related                  Questions                 Reclamation of Well and Other Sites                 Operator Insolvency and Orphan Wells
Compensation, Rights, and Hearings
Appendices

When a Company Becomes Insolvent

Basics of bankruptcy and receivership If a company is no longer financially capable of operating its wells, a complicated process begins. This is a brief overview of the various stages and states of financial duress taken from the Farmer’s Advocate Office publication The language of insolvency: what does this letter mean? Insolvency: This occurs when a company can no longer pay for its debts. Receivership: When a company moves into receivership, a receiver is appointed who is responsible for selling assets held as collateral on behalf of secured creditors. A privately appointed receiver will act only on behalf of the creditor with which it has an agreement while a court-appointed receiver will act on behalf of all creditors. The receiver will decide if operations should continue. Bankruptcy: The goal of this process, led by an insolvency trustee, is to pay back as many secured and unsecured creditors as possible from money earned by selling assets once operations have ceased. Creditors can apply to have the company considered bankrupt, or a company can declare itself bankrupt. While they have similar features, receivership and bankruptcy are fundamentally different. In receivership, assets put up as collateral against a particular debt are sold to satisfy a given creditor, with the possibility this might stabilize a company’s finances and it can continue operations. In bankruptcy, operations have ceased, all assets are sold, and profits are used to repay creditors.

At any stage of a well’s life cycle — planning and exploration, drilling, production, abandonment or reclamation — a company could become insolvent. The wells they operate then face a number of possibilities:

Licences are sold: If the well is still producing or considered to be an asset, the lease for the well site may be sold. The landowner’s consent is not required, but you will normally be given notice ahead of a lease sale. It’s important to watch for this notice, which may come through the mail shortly before the sale. However, some landowners find they are not notified at all. If you know the well identifier of the lease (found on the signage) you can look up the AER’s monthly ST37 List of Wells in Alberta to see the most recent owner.

When a lease title is changed, as a landowner you should immediately contact the new company, introduce yourself, and remind them of the terms of the lease agreement with the previous company. This is so the company knows you’re engaged and attentive to the activity on your land, and also to ensure the information on file is correct so you continue to receive rental payments without any issues.

Working interest participant takes on responsibility: If there is a working interest participant (WIP) — another oil and gas producer who has a stake in the lease and production lease — they will be responsible for the well and site including closure and reclamation. If there are multiple WIPs, they will share responsibility of the site. The well will not go to the Orphan Well Association.

When a lease is signed or updated, make sure to get the names and contact information for all WIPs. As with the initial operator, the WIPs can be contacted any time you have a question or concern.

Management is transferred to the Orphan Well Association (OWA): The OWA only receives wells from bankrupt operators that had a 100 per cent working interest. This means that if another company is a WIP, they’re responsible for the site, and the well is not declared orphaned. You can check whether your well is orphaned on the list of wells in OWA’s inventory on their website. If the well on your land is designated an orphan, the OWA will notify you. You will also be contacted before any field work starts.

The OWA is subject to the same suspension, abandonment, reclamation and remediation directives as any solvent company. The OWA has a lot of sites in its inventory. In order to increase efficiency and lower costs, it’s participating in area-based closure programs, which encourage operators to work together to close oil and gas infrastructure in a given geographic location. However, the OWA will still prioritize decommissioning and reclamation of well sites if there are safety or environmental concerns.

Once the well is in the care of the OWA, the lease can still be transferred to another, solvent, operator. Through a process called Regulator Directed Transfer, the AER (not the OWA) transfers the well licence from the name of the insolvent operator to the new operator, after the new purchaser has acquired both mineral and surface leases.

Once the well on your land is under the care of the OWA, you as the landowner must submit applications for recovery of rental to the Surface Rights Board (SRB). The OWA is responsible only for the care and management of the site, not rental payments.

Warning

If the well is in the care of the OWA, restricting access to the well site may cause further delays in the reclamation process. It could also cause your Surface Rights Board (SRB) rental recovery payment to be lowered or not paid out.

Landowner Story

“It was revealed that the company that owned the well on my property was no longer in business.” The well was transferred to the OWA so it could get a reclamation certificate. However, during initial construction, the topsoil was not preserved and conserved. The company never made a plan outlining how topsoil for future reclamation would be dealt with.

Operator Insolvency & Your Land: What Might Happen?

There are about 90,000 inactive wells in Alberta. The vast majority of these will be closed by operators and not become orphaned. However, inactive wells can represent a couple of risks.

First, when a company ceases operations at a well site, they’re supposed to suspend the well after one year of inactivity. In recent years, however, an increasing number of wells remain un-suspended and un-reclaimed after this one-year mark. This is an increased safety and financial risk. In 2015, the AER introduced the Inactive Well Compliance Program to force wells that have been inactive for more than 12 months to either be suspended or have activity resumed.

Second, the 2014 downturn in oil prices, coupled with years of low natural gas prices have put a strain on Alberta’s oil and gas producers, especially smaller ones with less financial capacity. This has contributed to an increase in the number of companies declaring bankruptcy, and subsequently more inactive wells that are sold or orphaned.

Suspended Licences (Lexin Resources) The AER may choose to suspend an operator’s well licences even if a company is not insolvent or bankrupt. For example, in 2017 all licences of Lexin Resources were suspended after the company failed to properly and safely manage its sour gas sites. The AER took this action to “ensure public safey and limit environmental and financial risks”.

Dealing with infrastructure on your property that is neglected

Whether inactive past the legal timeframe or orphaned, well infrastructure that’s not maintained can cause issues on your property. Corrosion, rust, weeds and leaks can damage your property, harm animals, or potentially place your family’s health at risk. You can read more about the potential issues in Chapter 7, 8, and 9 of the Landowners’ Guide to Oil and Gas Development.

Who to contact about neglected infrastructure:

• If there is a working interest participant (WIP) for the site, they’re also responsible for managing the issue. If the lease has been sold, the new owner is responsible for all site care and management. If the well has recently been sold, transferred to a WIP, or orphaned, the signage may not provide up to date info. You may need to call the AER to determine the new owners.
• If there is no WIP and the well is being cared for by the OWA, you can contact them about care and custody of the site.
• For damage or environmental concerns at the wellsite, contact the AER.
• If the damage spreads off the lease site and onto your property, contact Alberta Environment & Parks immediately.

It’s not uncommon for the operator of a wellsite to hire the landowner as a contract or to manage weeds on the site. However, once the site is under management of the OWA, they’re responsible for the care. All contracts that the operator held prior to insolvency, including with you, become void. See OWA website for a list of contractors OWA will hire to care for the well site on your property.

Orphan Well Association general inquiries / emergency: 1-403-297-6416

AER 24-hour emergency number: 1-800-222-6514

Alberta Environment and Parks general line: 1-780-944-0313

Should you attempt to care for the site on your land?

If you want to care for the site, exercise extreme caution, as tampering with the site may have unintended consequences and you may be liable for any damage. The Farmers’ Advocate Office (FAO), part of Alberta Agriculture and Forestry, provides advice and resources to landowners and advises that landowners not spray weeds on well sites for this reason. Contact the FAO for specific advice around caring for the site. (See Other Resources at the back of this primer.) If the well is an orphan you should contact the OWA.

What if lease payments are reduced or cease?

As a landowner, you are owed rent until a reclamation certificate is issued.

If a company begins to have financial trouble, it may approach the landowner of a well lease and ask to reduce rental payments. While it’s within your rights to agree to reduced payments, the FAO advises against this. Agreeing to temporarily lower rental payments might lead the company to offer landowners lower long-term payments.

There have also been instances of a company “imposing” lower rental payments without the consent or agreement of the landowner. Payments may also stop completely. A company does not have the right to do this, and it is a breach of their obligations and contract. Your first step should be to write the company to assert your rights to the amount you are entitled to (the FAO provides letter templates for this; see Other Resources at the back of this primer). If you’re not satisfied with the response, you can go to the Surface Rights Board (SRB) for compensation. (The SRB website, has the procedure for new applications, repeat applications and the Recovery of Rentals form.)

Once the SRB rules that you’re eligible for recovery of rentals, it will contact the operator to demand full payment. If the company doesn’t comply, the board can suspend the operator’s right to access the well site. If this does not compel payment, the SRB can then compensate you. The payment you receive from the SRB will come from provincial tax dollars, not from the operator.

This process may take years and landowners must reapply every year for compensation. However, there is no retroactive limit — you can apply for compensation regardless of how much time has passed since a company has stopped payments. You must have documentation to show that payments have ceased.

Warning

Farming part of a wellsite if the site is inactive or orphaned may result in lower lease payments. If you chose to farm on the leased area, when you apply for a recovery of rentals the SRB might refuse full rental payment, as rentals are meant to compensate a landowner for loss of use and general nuisance, and the board might consider this “unjust enrichment.”

Orphan wells – a problem that affects thousands

• 

  Data source: Orphan Well Association

The orphan well problem has exploded in recent years. Between 2012 and 2019, OWA’s inventory of orphan wells has increased more than eleven times. As of April 2019, OWA had 5,279 orphan wells due to be suspended, abandoned, or reclaimed. It also had 242 oil and gas facilities for suspension or decommissioning and 3,283 pipeline segments for abandonment or suspension. More companies are orphaning thousands of wells at a time, which is unprecedented.

The OWA has dramatically increased its efforts with financial support from both the federal and provincial governments and an increased levy on industry. In 2018, about 800 orphan sites were abandoned.

Orphan pipelines Pipeline abandonment involves emptying the pipeline, purging the pipeline of debris and residue and then, usually, leaving it in place underground. Pipelines too may be orphaned by a defunct company. Pipelines that lie entirely within Alberta borders are under the jurisdiction of the AER. The majority of these are smaller pipelines used to connect wells to processing facilities. Pipelines that cross provincial borders lie under the jurisdiction of the National Energy Board and are not eligible for inclusion in the OWA.

Landowner Story

“With time, more and more people in the province are touched by this. People initially thought I was over the top with how I described having oil and gas infrastructure on my land, but once it affected them, they said I didn’t tell them enough.”

The Redwater decision and environmental cleanup In Orphan Well Association v. Grant Thornton Ltd., also known as the Redwater Decision, the Supreme Court ruled in January 2019 that energy companies must fulfill their environmental obligations before paying back creditors when the company becomes insolvent. The decision overturned a previous 2015 lower court ruling that stated bankruptcy laws trumped environmental responsibilities laid out by the province. The 2015 decision led to a spike in the number of orphaned wells. Although many may hope this Supreme Court decision will ensure environmental cleanup, the bankrupt company may not have enough assets to cover the costs. Some of the wells or infrastructure may remain abandoned and un-reclaimed. A notable example saw Trident Exploration turn over 4,400 wells to the AER in April 2019, many of which are likely to be taken under the OWA’s care. The company estimated it had over $329 million in reclamation and abandonment costs by the time it declared bankruptcy.

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