Alberta’s energy regulator is by far the largest creditor of a failed Chinese-backed natural gas producer that has left behind hundreds of millions of dollars worth of environmental liabilities and other claims.
The Alberta Energy Regulator (AER) is owed $225-million of a total $244.5-million of claims on Sequoia Resources Corp. (SRC), which went bankrupt in March. It now acknowledges that its policies that allowed Sequoia to acquire the assets in the first place are not stringent enough.
The regulatory agency signed off on Sequoia’s acquisition of 3,200 gas wells over the past year and a half − even though the company appeared to have insufficient financial resources, according to the AER’s own system for evaluating an operator’s assets versus liabilities. The wells are now chained and locked.
The regulator said on Thursday that it is reviewing processes and decisions that allowed Sequoia to take well licences despite a liability management rating (LMR) that was below the accepted threshold. The rating measures assets versus the cost of cleaning and abandoning wells and other operations, and the standard was toughened before Sequoia made its acquisitions.
“We will make any changes we deem necessary to ensure this type of issue doesn’t occur in the future. It is clear that the LMR by itself is not a good indicator of potential insolvency,” spokesman Ryan Bartlett said in an e-mail.
He said the AER will work with the provincial government to see if any other measures are required to ensure “fully informed decisions.”
Besides the AER, numerous energy producers, oil-field service providers, municipal governments and other service providers are creditors, as are Sequoia’s principals and affiliated companies. The trustee, PricewaterhouseCoopers, held the first meeting of Sequoia creditors in Calgary on Thursday to give an update and explain the process for seeking to recover funds.
Sequoia was one of several buyers in a brisk but quiet trade in distressed energy assets, financed largely by private Chinese capital, that flourished even as oil and gas prices cratered. The little-known company bought oil and gas wells, sometimes for as little as $1, from larger producers such as Husky Energy Inc. that were seeking to offload tens of millions of dollars in future cleanup liabilities on the properties.
Its collapse has exposed major financial and environmental risks as well as regulatory failings. The properties changed hands despite toughened rules imposed by the AER that were designed to stop financially weak companies from buying assets burdened with hefty cleanup costs.
The AER’s claims on Sequoia represent the costs to decommission the sites and reclaim the land. “Should the trustee be unable to move these licences to other responsible energy companies, the licences would be deemed orphans and they would be sent to the Orphan Well Association for abandonment and reclamation,“ Mr. Bartlett said.
Alberta has struggled to manage billions of dollars in unfunded cleanup liabilities after a string of corporate bankruptcies in the energy sector. Last year, the province offered $235-million in loans to the Orphan Well Association, an industry-funded cleanup reserve, meaning that taxpayers could be ultimately responsible for some of the bill.
The principals of Sequoia, director Wentao Yang and director and president Hao Wang, have not responded to requests for comment. Robyn Gurofsky, a lawyer representing the former proprietors, directed inquiries to a letter on Sequoia’s website, explaining the company’s failed business plan.
At the PwC meeting, creditors were also told of how the business was supposed to have flourished. Sequoia went about acquiring aging gas wells from larger producers as commodity prices languished, expecting that the market for the fuel would recover. It bought three quarters of its wells from Perpetual Energy Corp., 11 per cent from Husky, 9 per cent from insolvent Waldron Energy, and 8 per cent in other, smaller deals.
Sequioa believed that by cleaning up old wells and implementing a steady round of abandonments, it could reduce overall operating costs to a level that would make the business profitable. Indeed, industry sources familiar with the managers have said the ultimate goal was to list the business on a Chinese stock exchange. Between October, 2016 and December, 2017, the company abandoned 150 wells and received reclamation certificates from the AER for 90 of them.
However, by the summer of 2017, Alberta gas prices had crashed and Sequoia scrambled to find any way to survive, the letter said.
“[Sequoia’s] management investigated various options to diversify its gas exposure, to sell assets, to recapitalize, to convert vehicle fleets to use compressed natural gas, to purchase generators and convert gas to electricity for sale to the grid,” the company said. “SRC even investigated using gas to generate electricity for cryptocurrency mining. In this environment, both purchasers of dry gas assets and refinancing providers were difficult to find.”
PwC vice-president Paul Darby told creditors that the trustee has received some expressions of interest in buying the assets, and those would be discussed in the coming weeks. In addition, Sequoia sold a gross overriding royalty on some of the assets for about $2-million.
As part of due diligence, the trustee will be reviewing the books and records for any fraudulent preferences or reviewable transactions, he said.
Jeffrey Jones