Financial risk associated with energy transactions. The Alberta Chapter

Résumé

In Alberta there is a growing concern about the large number of abandoned and not reclaimed wells. Current to March 1, 2022, there were over 459,000 oil and gas wells scattered across Alberta. At the end of 2017, there were approximately 167,000 wells inactive or shut in (90,000 inactive wells and 77,000 abandoned wells), neither producing nor permanently abandoned. Many of these wells had been inactive for more than 25 years. The Alberta Energy Resources (AER) estimates that over 16,000 inactive wells have not produced any oil or gas in the last 10 years, but they also have not been permanently decommissioned under the claim that they will be reactivated someday. According to the AER, many of these wells appear to have little economic value and may pose an increasing risk to the public and the environment. Based on the AER data more than half oil and gas wells identified as inactive are a liability, as these inactive wells are no longer producing and not yet cleaned up. A well that is no longer producing but hasn’t been properly abandoned poses a risk to the public from released gas and explosions, risk to the local environment as a potential source for soil and groundwater contamination, leak of greenhouse gasses, as well as it could impose a financial risk to oil and gas operators due to higher cost-scenario associated with expensive cleanup costs and management of atypical or underestimated environmental liabilities. Oil and gas companies (O&G) companies interested in acquiring inactive wells should be aware that regardless of the recompletion opportunities of inactive wells where a company pursues to turn a liability into an asset, most inactive wells carry an asset retirement obligation (ARO) equal to the total abandonment and reclamation cost. Based on surveys completed by environmental practitioners, inactive wells could cost anywhere from $50,000 CAN to millions of dollars to plug, abandon and reclaim. One of the most critical factors that can quickly prevent a potential energy transaction, merger & acquisition (M&A) is the risk associated with acquiring or inheriting unknown costly environmental liabilities. It is extremely important and critical for upstream O&G companies engaged in mergers, asset acquisitions and/or property transfers to identify and understand the potential high risk of encountering unrecognized environmental liabilities. This thesis proposes the development of a systematic methodology to evaluate specific environmental data for the purposes of identifying and valuating significant atypical environmental liabilities associated with a potential energy transaction of upstream O&G assets in the Province of Alberta.