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Latest Fossil Bankruptcy Could Add 1,400 Orphan Wells, Pipelines to Alberta Cleanup Backlog

Alberta is on the hook for as many as 1,400 more abandoned oil and gas wells and associated infrastructure after the officers and directors of Calgary-based Houston Oil & Gas Ltd. laid off their staff and contractors, shut down the company, and walked away from their responsibility to clean up after themselves.

“Privately held Houston collapsed into bankruptcy after months of discussions with the Alberta Energy Regulator (AER),” the Globe and Mail reports [1], citing court documents. “It folded just six months after natural gas producer Trident Exploration Corporation ceased operations [2], leaving a C$329-million bill to clean up 4,700 wells.”

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CBC says Houston owned [4] 1,264 wells, 41 facilities, and 251 pipelines.

In an affidavit filed as part of the bankruptcy proceedings, the province’s Orphan Well Association put the cost of cleaning up the Houston sites, most of them in southeast Alberta, at C$81.5 million. “The company does not have the funds to properly abandon the wells and clean up the properties, and on October 29 a judge granted the OWA’s petition to put the company under the responsibility of a receiver,” the Globe writes.

“If all of Houston’s wells are ultimately designated as orphans, the orphan inventory of wells requiring [decommissioning] will increase by nearly 30%,” the association said.

“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,” said OWA Executive Director Lars De Pauw in an e-mail to the Globe. “This process will avoid situations where producing assets are designated as orphans.”

The Globe cites its own investigation last year that pointed to “swelling” numbers of orphan wells across western Canada. In the last few weeks, the paper adds, at least three more fossils have filed for bankruptcy, throwing thousands more wells into an expanding pool of environmental liabilities that could take 2,800 years [5] to clean up.

“Houston, which is primarily a gas producer, told the [Alberta Energy Regulator] in late August that it no longer had the funds to keep operating and would close,” the Globe adds, citing AER spokesperson Shawn Roth. “The regulator ordered it to safely shut down all wells producing gas with high concentrations of dangerous hydrogen sulphide by September 20.”

“Houston was in significant arrears with the AER, municipalities and other partners,” Roth explained. “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 October 2.”

While former Houston CEO Randy Ruggles was happy to lay the blame for his business failure on the federal government, the Globe points to the company’s vulnerability to the same low gas prices that are also threatening to topple at least one industry giant [6] in the United States.

“Houston employed a business strategy that has proven risky, and has sunk other gas producers such as now-bankrupt Sequoia Resources Ltd [7].,” writes mergers and acquisitions reporter Jeffrey Jones. “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 fairness, they’re not alone. “While there is no official list of how many firms have declared bankruptcy since the oil price crash in late 2014, many others have declared bankruptcy or entered creditor protection,” CBC reports. And “companies primarily focused just on natural gas seem to struggle the most.”

“Everybody is facing headwinds here on a number of fronts,” said AltaCorp Capital analyst Patrick O’Rourke. “Gas prices have been extremely challenging, specifically in Alberta.”

Alan Tambosso, president of Calgary-based Sayer Energy Advisors, told [8] The Canadian Press that 10 Canadian fossils have declared insolvency so far this year.

“Although the numbers are all over the map, we generally state that in a typical year there are roughly eight to 10 oil and natural gas producers which become insolvent,” he said. “We don’t necessarily catch the ones which quietly slip away, so the numbers could be higher for any particular year.”

Sayer’s data “show that insolvencies jumped to 20 in 2015 as global oil prices fell, then spiked to 28 in 2016 as American benchmark oil prices tumbled as low as US$27 per barrel,” CP states. “They moderated to 17 in 2017 and six in 2018.”On Friday, Calgary-based Perpetual Energy announced [9] it was cutting its work force 25% and reducing salaries for its surviving employees, citing low commodity prices. The company, which CBC describes as “gas-weighted”, said it lost $20 million between July and September this year, compared to a $12-million loss in the same quarter last year.