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An oilfield drilling rig works on an oil well, belonging to Pengrowth Energy, near Sundre, Alberta in 2014.Larry MacDougal

A small, Chinese-backed energy company's insolvency has drawn Canada's largest oil and gas producer into a growing dispute over hundreds of millions of dollars of environmental liabilities.

Sequoia Resources Corp., a natural gas producer, is seeking creditor protection as it owes millions of dollars in unpaid municipal taxes. Its previously weak financial position has raised questions about whether it should have been allowed to acquire aging oil and gas wells that carried heavy cleanup obligations in the first place.

Canadian Natural Resources Ltd., which has interests in many of the properties, is now questioning the validity of at least one of those purchases.

The energy giant has challenged a large deal by Sequoia Operating Corp., an affiliate of Sequoia Resources that is also among numerous entities listed as creditors of the company. The principals of Sequoia, director Wentao Yang and director and president Hao Wang, have refused repeated requests for comment despite the growing public policy implications of the company's insolvency.

Sequoia Resources' downfall has shone a light on a quiet trade in distressed energy assets, financed largely by private Chinese capital, that flourished as oil and gas prices cratered. It has helped larger companies shed hundreds of millions' worth of environmental liabilities tied to unprofitable wells.

Such properties have changed hands despite toughened rules imposed by Alberta's Energy Regulator (AER) that were designed to stop companies with shaky finances from buying assets burdened with major cleanup costs.

Canadian Natural says it rejects the notion that Sequoia Operating actually completed a purchase of Alberta assets from another firm, Pengrowth Energy Corp., late last year.

In a letter dated March 8 to Pengrowth that was obtained by The Globe and Mail, Canadian Natural's vice-president of land, Betty Yee, said Canadian Natural does not consider Sequoia Operating an owner of the assets it purchased from Pengrowth.

Ms. Yee wrote that Pengrowth "remains contractually and legally responsible" for cleanup obligations tied to properties jointly owned by the companies and that it would hold Pengrowth responsible for any liabilities and costs should it fail to live up to them. Canadian Natural declined further comment.

Canadian Natural's involvement shows the breadth of the fallout from Sequoia's collapse, which potentially leaves thousands of well sites and related infrastructure without a legal owner. Canadian Natural has vast holdings across Western Canada, and ranks as the biggest working-interest partner on Sequoia-owned lands as well as one of the largest contributors to an industry orphan-well cleanup fund.

Pengrowth, under pressure to cut debt, sold a collection of Alberta assets last October to Sequoia Operating in exchange for a "nominal cash consideration and the assumption of abandonment and reclamation liabilities."

Pengrowth touted "material savings" in operating expenses and other costs as a result of the sale, which included 270 facilities and 1,600 wells, with production skewed mostly toward unprofitable natural gas.

A spokesman for Pengrowth would not comment directly on Canadian Natural's complaint, but said: "The transaction was completed in accordance with government ownership regulations and received all necessary regulatory approvals and is deemed complete."

Alberta has struggled to manage billions of dollars in unfunded cleanup liabilities following a string of corporate bankruptcies in the energy sector. Last year, the province offered $235-million in loans to oil companies to help tackle the problem.

Sequoia's collapse stands to add as many as 1,800 wells to the already swollen tally of defunct sites, said Lars De Pauw, executive director of the industry-funded Orphan Well Association, though he said it is too early to say how many the fund will ultimately be responsible for cleaning up.

When companies abandon depleted wells in Alberta, they first submit a plan with the regulator that identifies any problems with the integrity of the wellbore and oil and gas zones or risks to ground water. The wellbore is cleaned to remove oil and gas, porous rock formations are isolated from one another and ground water is separated from the wellbore with cement. Finally, its steel casing is cut to a minimum of one metre below the surface and a vented cap is placed on top. Costs range between $30,000 and $150,000 per well, according to the Orphan Well Association.

The provincial energy regulator had introduced a more stringent solvency test for buyers of oil and gas assets in July, 2016, hoping to stem a rise in deals in which companies offloaded old properties, sometimes for as little as $1. The interim measure doubled the ratio of assets buyers must hold against their liabilities. Transactions that did not meet the threshold could be rejected. In practice, however, the AER turned down only a fraction of proposed asset transfers.

In at least one of its acquisitions, Sequoia was exempted from the rules in exchange for submitting a cleanup plan for aging wells and other infrastructure. It is not yet known how many other companies could be at risk due to environmental obligations.

Investment bankers in Calgary have said the goal of Sequoia's principals had been to bundle the acquired properties and eventually seek a listing on the Hong Kong stock exchange, which is known for offering higher valuations than are afforded public energy companies in Canada.

A large number of Sequoia's wells in eastern Alberta were acquired from Perpetual Energy Corp. in late 2016, for a price that Perpetual describes as nominal. Under that deal, Sequoia bought production of 35.5 million cubic feet of natural gas a day and 353,777 undeveloped acres of land.

Perpetual's news release announcing the deal now reads like a warning. It described the assets as "high-liability," adding that they "operate on a negative cash flow basis as a result of depressed natural gas prices combined with high fixed operating costs which include extremely high municipal property taxes." It pegged future asset retirement obligations at $133.6-million.

For Perpetual, unloading the properties meant an immediate improvement to financial results and the ability to boost its capital spending by fivefold in 2017, chief financial officer Mark Schweitzer said in an e-mail.

Rather than a direct transfer of well licences, the deal was set up as a purchase of the shares in a Perpetual subsidiary, which Sequoia bought, Mr. Schweitzer said.

If Sequoia's executives had banked on an improvement in natural gas prices to turn the shallow-depth gas assets into money makers, they were disappointed. Last summer Alberta gas became even more depressed, at times trading at negative values.

A much larger company, Husky Energy Inc., has said it has offloaded $840-million worth of obligations through numerous asset sales since 2015, less than 5 per cent of that representing properties purchased by Sequoia.

"In the case where Husky was the operator, we transferred the licences and operatorship over to Sequoia. In the cases where another third party was the operator, it is our understanding that the operator will need to assume the [cleanup obligations] and would portion out costs proportionally to the minority partners," Husky spokesman Mel Duvall said.

Documents filed with the insolvency trustee show Sequoia's largest single type of creditor is municipal governments. According to its application for bankruptcy protection, the company owes $6.7-million to 22 Alberta counties, municipalities and towns.

Lamont County, located northeast of Edmonton, says it is owed is more than $1.5-million. The amount represents 71 per cent of all the county's delinquent taxation, communications co-ordinator Heather Atkinson said. The county struck a deal with Sequoia in late 2016 to allow it more time to pay down the arrears, but the company only paid 30 per cent of that, Ms. Atkinson said.

"We had a tax agreement with them, and after they didn't pay anything following that initial little bit, now it's null and void. So we don't have an agreement with them any more," she said.

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