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Alberta toughens regulations to cope with court ruling on orphan wells

A pair of pumpjacks pump oil from an old well on a farmer's frozen field in a Pembina oil field near Pigeon Lake, Alberta, Canada on Friday, Feb. 17, 2012.

Norm Betts/Bloomberg

The Alberta Energy Regulator is making it tougher to transfer oil and gas well licences in view of a recent court ruling that allowed the buyer of a bankrupt company's assets to avoid acquiring wells with high environmental liabilities.

In an announcement, the AER said licence transfer applications will now be considered "non-routine" under its temporary new measures.

It added that it will refuse to approve the transfer of AER licences, approvals and permits if the transaction results in the buyer's asset value falling below two times the cost of its environmental liabilities. Currently, companies are only required to maintain an equal amount of assets and liabilities.

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AER spokesman Ryan Bartlett said 219 or 28 per cent of the 788 companies registered as licensees with the AER have a liability management ratio or LMR above the newly required 2.0. He said companies can improve their LMR by cleaning up old wellsites, posting security or revamping their proposed well transactions.

The regulator acknowledged its regulations may "inconvenience some stakeholders" but pointed out it wants to work with industry and the province to develop broader permanent regulatory measures.

"They are attempting to put a higher hurdle rate for acquirers of assets. That will have an impact and this is of deep concern to us," said Gary Leach, president of the Explorers and Producers Association of Canada.

He said the new rules will reduce the number of potential buyers for assets his members are trying to sell.

But he added the rules may be necessary to avoid increasing liabilities for the Alberta orphan well fund, an industry financed pool of money that is used to clean up well sites for owners who can't or won't do it themselves.

"This case has shaken up what was the old order and until there's a new order in place, whether it's through legislative fixes or what, what we're seeing is the regulator trying to stabilize the situation," said Leach.

He called on the regulator to use flexibility in interpreting new regulations.

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The Alberta Court of Queen's Bench ruled in May in the case of bankrupt producer Redwater Energy that the rights of lenders to be paid back ranks above the right of the provincial regulator to require the reclamation of oil and gas wells.

The regulator has launched an appeal of the decision because it could encourage more companies to enter receivership and bankruptcy to avoid obligations to clean up around oil and gas wells.

The lawsuit has been closely watched as a precedent-setting case as more bankruptcies loom in the oil and gas industry in the face of chronically low prices.

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