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Fewer oilpatch companies going bust could spell relief for Alberta’s orphan well woes

It’s yet another sign of the times for Alberta’s thriving oil and gas sector. 

After several years of persistently low commodity prices driving a wave of corporate insolvencies, bankruptcy professionals in the province say it’s become increasingly rare to see these companies fail. 

The financial rebound is providing relief for the province’s orphaned-well problem. Fewer companies becoming insolvent means fewer companies abandoning their assets, which can become environmental and safety hazards. 

When a single company fails, it can result in thousands of oil and gas wells, in addition to hundreds of facilities and pipelines, that no longer have an owner. If those wells and other assets can’t be sold, they need to be cleaned up.

“If we’re not having receiverships, the number of orphans go down dramatically,” said Lars DePauw, executive director of the Orphan Well Association, an industry-funded organization.

It costs around $35,000 on average to decommission a well and $24,000 on average to reclaim a site, it says, with costs varying depending on the size, age and complexity of the well.

The organization currently has an inventory of 1,987 orphan wells for decommissioning.

High commodity prices

The trend is a tricky one to quantify. The federal Office of the Superintendent of Bankruptcy tracks bankruptcies and proposals, but these are often less common in the oil and gas sector than receiverships and filings under the Companies’ Creditors Arrangement Act.

a prairie field is pictured at fall time, with an oil pumbjack in the middle and mountains in the horizon
A decommissioned pumpjack is shown at a well head on an oil and gas installation near Cremona, Alta., in 2016. (Jeff McIntosh/The Canadian Press)

Multiple insolvency lawyers and professionals who spoke to CBC News all pointed to the same trend: a decline in oil and gas insolvencies, largely driven by high commodity prices.

It’s a significant change from an era that began in 2014, when a downturn in the oilpatch drove a wave of insolvencies and a rise in orphaned wells. The situation peaked in 2018, DePauw said, but even in subsequent years, many companies were struggling.

“Before this turn of fortune for the oil and gas companies, we were babysitting a number of oil and gas companies trying to stave off foreclosure,” said Josef Kruger, a longtime Calgary insolvency lawyer with the firm Borden Ladner Gervais LLP.

“A lot of these companies were not going to survive. Then came the Ukraine war and things changed completely.”

The resulting uptick in commodity prices has led to recent record-breaking profits, which companies have used to return money to shareholders and pay down debts at a breakneck pace.

“There’s a real mind shift with a lot of the executives we talk to … ‘We do not want to employ nearly as much debt as we … once had,'” said Jeremy McCrea, managing director of energy research with the firm Raymond James. 

Fewer junior players

Beyond the financial factors in the decline in insolvencies, another driver is that there are simply fewer companies out there to become insolvent, period. 

In tough times, it tends to be the smaller companies that go belly up first. But in recent history, many junior oil and gas companies have either gone under or been scooped up by bigger players, with no new wave of juniors arriving on the scene to take their place.

“So another reason why we see less oil and gas insolvencies at this time is there just aren’t as many oil and gas companies,” said Kelsey Meyer, a partner with Bennett Jones LLP. 

The end result is a leaner industry where the remaining companies are enjoying healthy profits and keeping a close eye on their spending. 

“They are laughing all the way to the bank,” said Kruger. 

WATCH | How orphaned wells in northern B.C. are cleaned and dismantled:

How to kill an oil and gas well

3 years ago

Duration 2:34

Featured VideoThis is how inactive and orphaned oil and gas wells in northern B.C. are cleaned and dismantled.

The decline in insolvencies is helping the Orphan Well Association pick away at the glut of orphaned wells that emerged following the 2014 downturn, and the subsequent wave of insolvencies.

“Going into this year, we’ve seen the tail end of those insolvency proceedings and the number of orphans as a result of those new insolvencies has been going down,” said DePauw.

Regulatory changes

DePauw expects recent regulatory changes will also help with the orphaned-well problem. 

The industry is now required to spend a minimum amount every year on the cleanup and remediation of old wells — a figure that started at $422 million and has since grown to $700 million.

The new framework also means oil and gas producers who want licences for new wells are being looked at much more closely to ensure they can meet their cleanup and closure responsibilities. And if one company wants to transfer a well licence to another, it will trigger an assessment to ensure the receiving company can safely operate the infrastructure and do the reclamation when it’s no longer in use.

Still, DePauw said, there are companies out there who would’ve bought assets under the previous rules “that I think under the new framework they wouldn’t have been allowed to buy.”

An abandoned oil well awaiting removal.
An abandoned oil well awaiting removal. (Orphan Well Association)

“So I wouldn’t say that there’s not going to be another insolvency, but we’re optimistic that the new framework is going to have some positive results,” he said.

For now, at least, some insolvency lawyers have been left with a bit more time on their hands. They’re practising in other areas, writing articles and — in some cases — enjoying a bit of downtime. 

“When things go slow … suddenly you see insolvency lawyers attending conferences where you would never have seen them in busy times,” said Kruger. 

“They take the licensed insolvency trustees and the bankers to lunches, they play golf … you just have to swing with the punches.”

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