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File photo shows a campaign worker steaming a large Alberta flag at a United Conservative Party event in Calgary, April 16, 2019. This week the Alberta Energy Regulator rejected the transfer of operating licences for natural gas assets from Royal Dutch Shell to Pieridae Energy stemming from a deal last year.Jeff McIntosh/The Canadian Press

The Alberta Energy Regulator has been burned badly by approving transfers of oil and gas assets it should have turned down.

Its decision to reject an unusual application to split the environmental liabilities between the buyer and seller in a $190-million asset sale shows it may have finally reined in its tendency to be overly lenient with the industry.

The timing is certainty interesting: With Canadian taxpayers now footing the bill for decommissioning and reclaiming orphaned and inactive well sites in the form of a $1.7-billion rescue package for the industry, the AER now has a much larger constituency. And not all members of it are thrilled with having to pay for cleanup that the oil industry is responsible for.

This week the AER refused to bless the transfer of operating licences for natural gas assets from Royal Dutch Shell PLC to much-smaller Pieridae Energy Ltd. stemming from a deal the two struck last year.

Pieridae, led by Calgary businessman Alfred Sorensen, has been amassing Alberta gas production to feed a $10-billion liquefied natural gas plant the company has planned for Nova Scotia. The two companies closed the deal last October, and Pieridae has already integrated the southern Alberta wells, gas plants and pipelines, along with the operating staff, into its business.

The companies wanted Shell to remain responsible for the cleanup of contamination from a solvent compound called Sulfinol at the Waterton and Jumping Pound sour gas plants. Pieridae would assume the liability for the eventual decommissioning and reclamation of the rest of the operations.

In its decision, the AER said that the extent of the Sulfinol contamination is not well detailed in the applications. In addition, carving up the liabilities would contravene provisions in two provincial environmental and energy acts.

University of Calgary law professors Shaun Fluker and Nigel Bankes wrote that approving the application would have introduced regulatory uncertainty to the operations. It would have meant two approvals setting out partial, and potentially conflicting, obligations when just one exists now.

The companies expressed disappointment with the ruling, but stressed that it will not mean the deal will have to be unwound. It is acceptable for one company (in this case, Shell) to hold all the licences and another (Pieridae) to operate the assets while the two companies search for a solution and reapply.

In the meantime, Mr. Sorensen stressed that the AER’s rejection had nothing to do with his company’s financial wherewithal and its ability to take on the eventual abandonment and reclamation obligations attached to all the wells and other facilities it bought.

And that is where the AER has been caught before – approving licence transfers to companies with big dreams and weak financial positions.

For instance, Sequoia Resources Corp. was able to buy natural gas assets in several deals between 2016 and 2018 even though it failed to meet the regulator’s own minimum assets-to-liabilities standard. Sequoia promised the regulator that if it applied discretion and approved the deals the business plan would carry it through.

It didn’t, and Sequioa went bankrupt. The AER found itself on the hook for more than $225-million in cleanup obligations just as the downturn in the energy industry was generating more corporate insolvencies and putting the fate of thousands of aging and inactive wells in limbo.

At the time, the regulator said it was wary of slowing down commerce during a time when companies required asset sales to improve their financial positions.

Since then, the issue of underfunded environmental liabilities in the oil patch and growing number of orphan wells has been elevated in the public consciousness, especially as taxpayers have been asked to step up and help pay for cleanup that companies agreed to take on when they bought the assets.

In January, the province’s Auditor-General launched an investigation into the issue, saying environmental liability represents a huge financial risk for the government.

Given the financial carnage that the COVID-19 crisis has wrought in Canada’s energy sector, there will be requests for the regulator to allow transfers of assets to proceed when the financial metrics fall a bit short of the standards.

The AER rejected Shell-Pieridae application for a different reason, but let’s hope the ruling shows the regulator is now intent on going by the book.

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