Houston Oil insolvency adds to threat of orphaned wells in Alberta

Open this photo in gallery:

Alberta faces another spike in unfunded environmental cleanup liabilities after the latest collapse of an oil-and-gas producer.

The insolvency of Houston Oil & Gas Ltd. could push as many as 1,400 more wells onto the province’s inventory of orphan sites – unless they can be sold – after the company’s officers and directors walked away from the assets and let go its employees and contractors.

The assets carry estimated cleanup liabilities of $81.5-million, Lars De Pauw, executive director of the industry-funded Orphan Well Association (OWA) said in an affidavit his organization filed as part of the bankruptcy proceedings. The company does not have the funds to properly abandon the wells and clean up the properties, and on Oct. 29 a judge granted the OWA’s petition to put the company under the responsibility of a receiver.

Privately held Houston collapsed into bankruptcy after months of discussions with the Alberta Energy Regulator (AER), according to the court documents. It folded just six months after natural gas producer Trident Exploration Corp. ceased operations, leaving a $329-million bill to clean up 4,700 wells.

“We believe that appointing a receiver is important to ensure public safety by providing care and custody of these assets with the goal of selling as many assets as possible to a responsible producer,” Mr. De Pauw said in an e-mail. “This process will avoid situations where producing assets are designated as orphans.”

Wells that require proper remediation and have no legal owner are known as orphans. Industry levies fund the association, but a flood of bankruptcies since the oil patch downturn began five years ago has increased the number of such sites to the point where the province had to lend $235-million to the OWA in 2017. At the start of November, the fund had 3,406 wells requiring abandonment, which is the industry practice of shutting down a well, plugging it and rendering it safe.

A Globe and Mail investigation published last year found the numbers of orphan wells swelling across Western Canada because of regulations that allowed companies to idle unprofitable ones indefinitely – or transfer them to thinly financed rivals. The AER has since said it is studying corporate health more stringently before approving well transfers.

At least three oil-and-gas producers have claimed insolvency in recent weeks, putting the fate of thousands of wells in limbo just as the AER undergoes a major restructuring after a scandal involving its former chief executive officer’s efforts to set up a side business, and word of impending layoffs at the agency. Besides Houston, Bellatrix Exploration Ltd. and Accel Energy Canada Ltd. have sought protection from creditors. Bellatrix and Accel appear to be headed for restructuring.

Houston, which is primarily a gas producer, told the AER in late August that it no longer had the funds to keep operating and would close. The regulator ordered it to safely shut down all wells producing gas with high concentrations of dangerous hydrogen sulphide by Sept. 20, AER spokesman Shawn Roth said.

“Houston was in significant arrears with the AER, municipalities and other partners,” Mr. Roth said in an e-mail. “The AER was not confident that Houston had the financial capacity to maintain ongoing care and custody of its assets and issued a closure to the company on Oct. 2.”

It is the responsibility of receiver Hardie & Kelly Inc. to seek other companies to take on the assets.

Randy Ruggles, Houston’s former chief executive officer, blamed several factors for his company’s failure, including Prime Minister Justin Trudeau’s government, which he said impedes Alberta’s oil industry. “Our plans were to expand, and before Trudeau got in there, the value of Houston oil was around $250-million, and that was bank-debt-free," Mr. Ruggles said in an interview. “And then you end up with nothing.”

However, Houston employed a business strategy that has proven risky, and has sunk other gas producers such as now-bankrupt Sequoia Resources Ltd. Houston acquired aging wells to reinvest the cash flow in production and clean up wells as they became tapped out. When natural gas prices tumbled in recent years, the business struggled.

In a positive move, the hit on the province from the Trident case is easing after Ember Resources Inc., a coal-bed methane and natural gas producer owned by Brookfield Asset Management Inc., agreed to acquire more than 1,100 Trident wells and other facilities, taking on environmental liabilities of $115-million. Court documents say Ember paid a “modest” amount for the assets, and as a result, AER and OWA, rather than any creditors, will benefit from the deal.

The assets are in Ember’s main operating area and connected to its infrastructure, so it can run them profitably, said Doug Dafoe, Ember’s CEO. “That has a big impact on those communities that we work in,” he said. “That’s more wells back on stream and producing gas, more people back to work, more services back to work and the municipalities can put that back into their tax base.”

Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.