独家优惠奖金 100% 高达 1 BTC + 180 免费旋转

Allocating Environmental Liability Among Working Interest Participants

By William M. Laurin and Marvin R. Koochin

Originally published on December 21, 2017.

Head Note

This requirement is typically brought to the attention of a working interest owner in the form of a Closure/Abandonment Order (“Order”) from the AER and which typically imposes a 60-day abandonment deadline (“Compliance Deadline”). If there is more than one remaining solvent working interest owner in a well or facility, it is typical that the working interest owner with the largest percentage responsibility for abandonment costs will take the lead in complying with the Order, and coordinate matters with the AER. Such owner then seeks reimbursement from the remaining working interest owners and/or the Orphan Well Association (“OWA”) for the insolvent licensee’s proportionate share of costs incurred.

The solvent working interest owners will initially have to determine if it is possible to satisfy the Compliance Deadline imposed by the AER. Due to the location of the site and seasonality restrictions, it may be impossible to satisfy the terms of the Order and an extension to the Compliance Deadline may be required. Alternatively, if the specific circumstances satisfy the AER’s pre-requisites, a working interest owner may take over the license by submitting a request to the AER for a Regulator Directed Transfer (“RDT”), whereby the AER manually transfers the license from the insolvent entity to the solvent working interest owner.

An Order will provide information, accordingly to the AER’s records, that identify the working interest owners and their respective working interest participation in the wells and facilities subject to the Order. Unfortunately, the records of the AER may not reflect the current ownership interests and in turn the additional proportionate share of suspension, abandonment and reclamation costs each remaining working interest owner will have to ultimately assume of the insolvent licensee. If such is the case, the AER should be notified and provided with supporting materials to substantiate any revisions to the names of the working interest owners and their ownership interests reflected in the Order.

Typically, the AER has amended Orders if it is satisfied with the proposed amendments provided by the working interest owners, but it is far from clear what may occur if the discrepancies as to the owner, ownership percentage or type of interest held cannot be resolved with respect to ongoing suspension, abandonment and reclamation obligations as well as any cost recovery claims to be made from the orphan well fund.

1. The Issue.

In the event working interest owners are unable to substantiate their interests upon receiving an Order, responsibility for suspension, abandonment and reclamation costs as between the AER and the remaining working interest owners could result in conflicting opinions regarding allocation of a defaulting working interest owner’s share of such costs amongst the solvent working interest owners and any potential cost recoveries from the orphan well fund.

2. General Context.

Over the past two decades the Western Canadian oil and gas industry has placed a decreasing emphasis on the formal third-party verification of oil and gas rights ownership, and the maintenance of detailed records regarding working interest participation in inactive wells and facilities (“WIP”), and the co-ownership agreements relating thereto. A growing focus on environmental liability management, and any implementation of anticipated regulations mandating reductions to inventories of inactive wells, and wells that are abandoned but not reclaimed, may signal a shift in the importance to be placed on the institutionalization of WIP verification procedures and a disciplined approach to co-ownership agreement record keeping relating to non-economic assets.

a. Categories of Mineral Interest Ownership.

From a high-level perspective, oil and gas rights can be easily categorized as either “working interests” (i.e. rights to conduct development operations), or “revenue interests” (i.e. rights to a passive share of production only, with no right to conduct development operations). At the more granular level, however, oil and gas interests can be placed on a continuum of varying degrees of “right to conduct development”, “responsibility for development costs”, “right to share in operating revenue”, and “responsibility for operating costs”. Further, these rights often contain imbedded temporal elements whereby the category of the interest may change over time, either automatically or upon an election (eg. an overriding royalty that converts to a working interest upon specific cost recovery thresholds being reached, or the right of an overriding royalty holder to take over wells on abandonment, lease surrender or termination).

i. Working Interests.

For these purposes, a useful definition of “working interest” is perhaps the “right to explore for, drill for, win, take, remove, produce, use and market the hydrocarbon substances granted by the tenure agreement” (i.e. more commonly referred to as the lessee’s estate, or a “profit a prendre”), which upon its initial granting obviously includes the responsibility to bear all of the costs associated with the development of the lease (i.e. drilling, completion and equipping costs), the ongoing costs of operating the wells and facilities for production (i.e. mineral and surface rentals, mineral royalties, and processing, transportation and marketing costs), and finally the end-of-life asset retirement obligation (“ARO”) costs, being those associated with abandonment, remediation and reclamation of the well and associated facilities (a “Full Working Interest”). By way of example, a 10% Full Working Interest would entitle the holder thereof to 10% of the revenues, and they would be responsible for 10% of the development costs, the operating costs and the ARO costs.

Full Working Interests are to be distinguished from working interests where the responsibility among co-owners for costs associated with the lease are not shared in the same proportion as revenues (“Carried Working Interests”). For illustrative purposes we describe three such situations: independent operations, earning arrangements and carried account acquisitions.

· Independent Operations. Owing to differing risk profiles, access to capital and business focus among co-owners in an oil and gas lease, Full Working Interest co-owners will typically include in their operating arrangements “independent operations” or “sole risk” provisions whereby some but not all of the co-owners participate in development operations, and in exchange for bearing the costs associated with those independent operations, the participating working interest owners are entitled to 100% of the production revenue until payout of a specified multiple of the costs incurred (eg. 300% for a development well, 500% for an exploration well), at which point in time the non-participating working interests may elect to either “acquire” an interest in the well, or commence exercising rights in respect of the well that it is already entitled to. If the well does not reach payout, the participating parties are typically responsible for 100% of the ARO costs. By way of example, the participating parties are entitled to 100% of the revenues, and they are responsible for 100% of the development costs, the operating costs (except for mineral rentals) and the ARO costs, until the non-participating parties elect at payout.

· Earning Arrangements. Conceptually similar to independent operations, farmins and other earning agreements are arrangements between Full Working Interest owners and third-parties seeking to acquire a working interest in the lease by conducting development operations in respect of the lease (eg. drilling, completing and often equipping a well). In a typical earning arrangement, a farmee would be responsible for 100% of the drilling and completion costs to earn a 50% working interest in the lease, and if proven productive the farmor would share 50% of the equipping costs, and all go-forward operating costs and ARO costs. If the well is not productive the farmee nonetheless still earns a 50% working interest, however they remain responsible for 100% of the ARO costs associated with the earning well. A key observation is that the third party farmee has complete control and management of the development operations, but does not hold a working interest until earning has occurred.

· Carried Account Acquisitions. If, rather than a third party wishing to acquire a working interest by conducting development operations under an earning arrangement, the third party negotiates to purchase the 50% working interest, the purchase price may, instead of being paid immediately to the vending Full Working Interest owner, be held in a “carried account” to be used to fund the vendor’s working interest share of development costs going forward. Both the vendor and the third-party purchaser hold working interests; however, the third-party purchaser has complete control and management of the development operations conducted from the funds in the carried account, and the vending working interest owner cannot propose development activities.

Carried Working Interests would also capture oil and gas interests commonly referred to as “carried working interests” or “net revenue interests”, which are very similar in character to the “net profits interests” discussed below, and generally refer to any interest in the lease where a recipient of revenue does not have any responsibility, or a reduced responsibility, for certain or all of the cost categories associated with that revenue.

ii. Revenue Interests.

For these purposes, a useful definition of a “revenue interest” is perhaps the “right to share in the proceeds from, or measured or calculated by reference to, the value or quantity of hydrocarbon substances granted by the tenure agreement, without bearing any share of the development costs and the ARO costs, and only a portion or none of the operating costs”. Typically, the revenue interest holder has no responsibility for “lifting costs” (i.e. the costs incurred in moving subsurface hydrocarbons from the reservoir to the wellhead), and their responsibility for “processing and transportation”, if any, are negotiated (i.e. no deductions, full deductions or partial deductions).

· No-Deductions GOR. The purest form of revenue interest is illustrated by a “no deductions” lessor royalty whereby the lessor reserves out of the grant of the leasehold estate 20% of the in situ hydrocarbons, the lessee is responsible for 100% of the development costs, 100% of the operating costs (including lifting costs, processing and transportation) and 100% of the ARO costs. The lessee is obligated to sell the lessor’s share of production along with their own share and account to the lessor for 20% of revenue realized at the sales point, without any deductions whatsoever.

· Deductions GOR. Most revenue interests contemplate the deduction of some or all of the costs associated with processing and transporting the produced hydrocarbons from the wellhead to the sales point, however no development costs, lifting costs or ARO costs are included.

· Net Profits Interest. While in many respects similar to a Carried Working Interest, a net profits interest, rather than being an “interest in land” associated with the hydrocarbon substances in situ, is a contractual obligation on the working interest holder to pay a share of the net profits attributable from a production entity to the revenue interest holder. The nature and extent of the allowable costs can vary greatly, potentially including land acquisition costs, seismic costs, and a levy for contribution to a fund for ARO costs. The key distinction between a net profits interest and a royalty interest is that the net profits interest is not a share of the proceeds from the sale of production, less allowable costs; it is the net profit returned to the operator from the well, lease or project from all the revenue sources, less the identified, allowable costs (i.e. essentially a financial interest).

· Handling & Marketing Fees. While rarely characterized as such, product handling fees and marketing fees expressed as dollars/volume would, for these purposes, also qualify as revenue interests.

iii. Hybrid Interests.

As demonstrated above, the three key elements to distinguishing oil and gas interests can be described as follows: control over development, responsibility for costs, and entitlement to revenue. Normally working interest owners have control over development, and bear a share of costs equivalent to the share of revenue. Revenue interests, on the other hand, have no control over development, and bear none or very little of the associated costs. There are, however, certain hybrid interests which should be flagged for discussion below; namely, revenue interests whereby the holder thereof directs and controls development through an earning agreement or the terms of the tenure (eg. earning programs, right to conduct independent testing, and offset well obligations), or has an option to convert its revenue interest to a working interest (eg. convertible overriding royalty, or well take over provisions) which amounts to a conditional or beneficial interest in that working interest.

b. Ownership of Wells and Facilities.

In its simplest manifestation, the ownership of the underlying mineral interests can be used as a proxy for the WIP of the well, the wellsite equipment, the wellsite surface lease, the pipeline and associated right-of-way, and any facilities and surface lease dedicated solely to that well. Ideally any facilities serving multiple wells with varying WIPs are subject to a separate co-ownership agreement setting out the WIP of that facility, its surface lease, and any pipelines and associated rights-of-way to the third party product sales point. A number of circumstances and contractual arrangements, however, give rise to a divergence between mineral ownership and WIP, including:

· Independent equipping operations.

· Casing point elections.

· Well abandonment notices.

· Multiple wellbores of differing WIPs on a single surface lease.

· Multiple pipelines of differing WIPs within a single right-of-way.

· Pipeline and facility ownership by mid-streamers (i.e. entities without any mineral ownership interests).

· Leased (as opposed to owned) equipment and facilities.

· Differential ownership within large facilities of separate functional units.

· Differential ownership within large facilities from the entitlement to firm capacity and/or the responsibility for capital costs associated therewith.

· Control as a function of large facility operating committee voting, as distinct from mineral ownership under common law co-tenancy.

To the extent that certain elements comprising “wells and facilities” are interests in land (eg. surface leases, pipeline rights-of-ways, foundations and buildings), the analysis of ownership of those “land based” elements very much parallels the analysis of the underlying mineral interests. From a legal perspective, however, ownership verification in respect of the “non-land based” elements (i.e. personalty, as distinct from realty) requires a somewhat more nuanced approach.

c. Legal vs. Beneficial Interests.

In order to give context to the statutory analysis that follows, it is helpful to distinguish between and expand upon the concept of legal versus beneficial ownership. In its simplest formulation, a “beneficial owner” describes a person who in equity has an interest in property, even though the “legal title” of that property belongs to another person. The relationship between the legal owner and the beneficial owner often is described as importing “trust duties” for the benefit of the beneficial owner. Put another way, a beneficial owner is “one who enjoys the benefit of a property of which another is the legal owner”. In the oil and gas context in Western Canada, some examples of the legal vs. beneficial ownership are as follows:

· The registered interest holders of Crown mineral tenure are the legal owners, however specific zones and/or substances may be beneficially owned by others.

· Freehold mineral tenure is often taken in the name of the operator, and caveated in the name of the operator, as legal owner, however each of the working interest owners are the beneficial owners.

· Crown and freehold surface tenure is taken in the name of the operator, and in the case of freehold lands caveated in the name of the operator, as legal owner, however each of the WIPs are beneficial owners.

· Well, facility and pipeline licences and regulatory approvals are taken in the name of the operator, as legal owner, however each of the WIPS are beneficial owners.

· Participation in larger pipelines and facilities can be done in the name of an operator, particularly in the case of unit operations, however each of the WIPs are beneficial owners.

· Long term firm capacity arrangements in third party facilities are often entered into by the operator for the benefit of the mineral owners.

Finally, whether they are characterized as a “beneficial interest” or a “control mechanism”, private equity and debt financing arrangements may contain any number of covenants whereby a third-party providing capital is able to actively manage development of an oil and gas property, notwithstanding that the capital provider would otherwise traditionally be characterized as a shareholder, or lender.

d. Verification of Mineral Ownership and WIP.

The world of oil and gas “title work” for solicitors in Calgary is typically a brief stop on the whirlwind tour that is the articling experience. Admittedly, it appears as a mysterious world of missing sale agreements and unexecuted declarations of trust, earning confirmation letters and exotic sounding convertible overrides. There are those fragile and fickle freehold leases, high maintenance relationships that can continue only with constant attention (i.e. continuous operations or production in paying quantities) but that nonetheless can cease to exist upon a single missed anniversary date (be it a delay rental or shut-in payment). There are Crown grants with undecipherable reservations, Soldiers’ Settlement minerals that were mistakenly given, mineral taxation forfeitures where rights were mistakenly taken, and tax recovery acts where they were given back again. There are mysterious family trees, complex lineages with deep, dark secrets that can only be understood with dusty, old code books — ghosts that will forever haunt us with names like Dome Petroleum, Hudson’s Bay Oil and Gas, and Maligne Resources.

From the mid-1990s through to the present, cost conscious Western Canadian based oil and gas exploration and production companies have increasingly neglected third-party oil and gas rights verification and WIP confirmation (i.e. legal title opinions) as a key component of asset management and maintenance. Consistent with a philosophy of “self-insurance”, industry participants are typically prepared, on a business level, to accept the negative consequences of “title failure” and ownership disputes as they occur, rather than pre-emptively adopt and maintain comprehensive oil and gas rights verification and WIP confirmation procedures. A lack of tangible or immediate benefit, combined with successive generations of operational or accounting focussed management teams, have reduced consistent mineral ownership verification and WIP confirmation to the exception, rather than the norm that it once was. In addition, the sheer number of corporate and asset transactions that have occurred in the past 25 years, combined with the ease with which digital land systems can be combined and merged, have moved “title due diligence” far down the list of critical business considerations.

The bulk of oil and gas rights verification and WIP confirmation, when undertaken at all, is done to varying degrees of completeness and success by administrative personnel with minimal legal training and guidance. While perhaps sufficient for the specific purpose of the transaction at hand, the lack of structure and consistency, and the inability to store and access verification products, limits the effectiveness of these verification processes. Changes in today’s business climate, including an increased focus on unconventional resources in Central Alberta and SE Saskatchewan, and an imposed compulsory environmental management framework may signal a change in direction for the verification and confirmation pendulum. Best practices may require, at a minimum, the exercise of consistent professional judgement in respect of the internal verification of oil and gas rights entitlement and confirmation of WIP, and standardized documentation for audit purposes. In many circumstances an independent third-party verification or confirmation may also be prudent, or required for regulatory compliance, and to form the basis for an adequate due diligence defence.

e. Categories of Verification Opinions.

As context for discussing appropriate and standardized WIP verification processes a brief review of “ownership verification” is in order. There are essentially three broad classes of mineral rights verification opinions issued by law firms in Western Canada: tenure issuance opinions, tenure subsistence opinions and beneficial ownership opinions.

i. Tenure Issuance Opinions.

Tenure issuance opinions, or indefeasibility opinions, are issued by law firms in respect of whether an oil and gas tenure was validly issued. For most purposes, all lands in Alberta can be classified as either unpatented lands (i.e. lands in respect of which the Crown has never issued a grant for any mines and minerals), or patented lands (i.e. lands in respect of which the Crown has issued a grant for some or all of the mines and minerals). The Alberta Crown holds the fee simple interest in most mines and minerals underlying unpatented lands. As such, tenure issuance opinions in respect of unpatented lands address the Alberta Crown’s ability to issue valid tenure (i.e. subject to the claims of Indigenous peoples, Provincial-Federal Crown disputes, legislative authority limitations, accreted lands to natural watercourse boundaries, etc.). In respect of patented lands, the registered fee simple owner holds a Certificate of Title pursuant to the Alberta Land Titles Act and indefeasible interests can be taken from this fee simple owner subject to specific exceptions. Tenure issuance opinions in respect of patented lands confirm the registered fee simple owner’s ability to grant an indefeasible interest, and the valid creation at law of the relevant leasehold tenure.

ii. Tenure Subsistence Opinions.

A tenure subsistence opinion, or lease integrity opinion, is issued by a law firm in respect of whether a validly issued oil and gas tenure is subsisting as of the date of review. In general, oil and gas tenures continue for a primary term of five or fewer years, and for a continuing period of time after such primary term if certain economic or factual circumstances exist. In the case of Crown tenure, subsistence is largely discretionary and governed by regulation, while in respect of freehold tenure, tenure subsistence is a complicated question of mixed fact and law (i.e. so long thereafter as leased substances are capable of being produced in paying quantities from the leased lands).

iii. Beneficial Ownership Opinions.

Beneficial ownership opinions, or leasehold entitlement opinions, are issued by law firms in respect of the identity of the parties beneficially entitled to the estate created by a validly issued and currently subsisting oil and gas tenure. Beneficial ownership opinions can confirm the interests of working interest owners, and those of revenue interest holders and identify potential tenure terminating defaults (i.e. issued and unissued), potential areal, depth and substance severance ambiguities (i.e. CBM, oil sands), and potential regulatory non-compliance issues (i.e. incomplete spacing units, unauthorized commingling, and incidentally produced non-owned substances).

3. Allocating Environmental Liability among WIPs.

a. Conservation Act.

“1(1)(fff) In this Act … “working interest participant” means a person who owns a beneficial or legal undivided interest in a well or facility under agreements that pertain to the ownership of that well or facility …”

A summary of various instances where the Conservation Act references WIPs is included for ease of reference in Appendix “A”. In short, the Conservation Act has the potential to impose significant liability on WIPs and accordingly every potential WIP should keep a detailed inventory of those “wells and facilities” in respect of which it is or was a WIP, its past and present co-owners in those “wells and facilities”, and the co-ownership agreements governing the relationship among those co-owners.

b. Environment Act.

“134 In this [Part 6 Conservation and Reclamation] …
(j) “working interest participant” means a person who owns or controls all or part of a beneficial or legal undivided interest in an activity described in clause (b)(iv) under an agreement that pertains to the ownership of that activity.
(b)(iv) “operator” means … a working interest participant in (A) a well, … or (E) a plant or facility that is subject to the Large Facility Liability Management Program administered by the Alberta Energy Regulator on, in or under specified land …
(vi) a successor, assignee, executor, administrator, receiver, receiver‑manager or trustee of a person referred to in any of subclauses (i) to (v), and
(vii) a person who acts as principal or agent of a person referred to in any of subclauses (i) to (vi) …”

Broader still are the provisions respecting “owners” in the context of “Release of Substances” and “Contaminated Sites”:

“107(1) In this [Part 5 Release of Substances] …
(a) “owner of a substance” means the owner of the substance immediately before or during the release of the substance;
(b) “person having control of a substance” means the person having charge, management or control of the substance;
© “person responsible for the contaminated site” means
(i) a person responsible for the substance that is in, on or under the contaminated site,
(ii) any other person who the Director considers caused or contributed to the release of the substance into the environment,
(iii) the owner of the contaminated site,
(iv) any previous owner of the contaminated site who was the owner at any time when the substance was in, on or under the contaminated site,
(v) a successor, assignee, executor, administrator, receiver, receiver‑manager or trustee of a person referred to in any of subclauses (ii) to (iv), and
(vi) a person who acts as the principal or agent of a person referred to in any of subclauses (ii) to (v) …”

A sampling of the provisions of the Environment Act where liability could be imposed on a WIP is included for ease of reference in Appendix “B”. Significantly broader than the Conservation Act, the provisions of the Environment Act have even more potential to capture entities, and their directors and officers, as WIPs subject to liability. As with the Conservation Act, every potential WIP should keep a detailed inventory of those “wells and facilities” in respect of which it is or was a WIP, its past and present co-owners in those “wells and facilities”, and the co-ownership agreements governing the relationship among those co-owners.

c. Statutory Allocation of Liability.

Under the Conservation Act, and in particular pursuant to section 30 thereof, the suspension costs, abandonment costs and reclamation costs must be paid by the WIPs in accordance with their proportionate share in the well or facility. Pursuant to Section 1(1)(ss) of the Conservation Act, proportionate share means, “with respect to a working interest participant, the percentage share equal to the participant’s undivided interest in the well or facility”. In a circumstance where all owners hold Full Working Interests there is little room for dispute with regard to which entities should be responsible; however, as soon as any ownership interests are introduced where there is differential responsibility for ARO costs, any of the hybrid interests, or even revenue interests where ARO costs impact the amount received by the holder thereof, the clarity of what “proportionate share” might mean among the “current owners” quickly slips away. In other words, where all potentially responsible persons are of the same “class”, allocation on the basis of “proportionate share” makes sense and is straightforward (i.e. it is on an undivided interest basis). As circumstances become increasingly more complicated, proportionality has no inherent meaning (i.e. as between working interest owners and revenue interest owners, and between legal owners and beneficial owners). Further, section 31 of the Conservation Act provides the AER with a mechanism to allocate a current WIP’s “proportionate share of the suspension, abandonment or reclamation costs” of a well or facility to persons who are no longer WIPs in the well or facility, but without more clarification, the phrase “undivided interest in a well or facility” becomes ambiguous other than for Full Working Interests.

The Environment Act, with attempts to equate all classes of potentially responsible parties, intentionally or otherwise creates a much more difficult exercise. It is not just “owners” of wells and facilities, but also those who “control” wells and facilities, as well as any successor or assignee of a WIP and any person who acts as principal or agent of a WIP. Further by capturing “owners of substances”, “persons having control of substances” and “persons responsible for the contaminated sites”, identifying the potential classes of responsible persons becomes orders of magnitude more complex as would the equitable allocation of ARO costs among those classes of responsible persons. Also, we note that the Environment Act does not have “proportionate” language similar to the Conservation Act, leading to the conclusion that any one of the potential responsible persons may become liable for the full amount, and then be expected to collect from the other WIPs. Section 129 of the Environment Act provides a form of apportionment mechanism, where section 129(4) provides that an environmental protection order in respect of a contaminated site may “contain provisions providing for the apportionment of the cost of doing any of the work or carrying out any of the measures”.

4. Establishing a Principled Hierarchy for Allocating Environmental Liability Among WIPs.

So at long last we arrive at the key question underlying this Commentary — who “should” be responsible for ensuring proper abandonment and reclamation of wells and facilities when a company becomes insolvent? Should it only be the current licensee and current WIPs, or should responsibility extend further back to capture anyone who may have benefitted from the well?

In the late 1980’s through the early 1990’s a joint task force composed of representatives from industry (Canadian Petroleum Association, Independent Producers Association of Canada, Small Explorers and Producers Association of Canada), government (Energy Resources Conservation Board “ERCB”, Alberta Environment, Alberta Energy) and the financial community had been reviewing the question of responsibility for wells with a view to reducing the number of orphan wells and the associated cost to Albertans. In an ERCB paper titled “Recommendations to Limit the Public Risk from Corporate Insolvencies Involving Inactive Wells” dated December 1989, the ERCB was proposing certain legislative changes to address the then current and future problem of responsibility for orphan wells. The proposed changes reflected the ERCB’s view that the responsibility for proper abandonment of a well should fall to the “primary beneficiaries” of the well; and when the “current beneficiaries” were unable to meet their responsibilities, the ERCB would look to “previous beneficiaries”. At the time, the ERCB was proposing to establish in law, a descending order of responsibility for ensuring a well was properly abandoned, as follows:

(a) the licensee of a well;

(b) a receiver of other representative of the licensee who has assumed control and management of the licensee’s business;

© other working interest owners;

(d) previous licensees of the well;

(e) a lessee of the mineral rights;

(f) previous holders of the lease; and

(g) the mineral rights owners.

(Note: e. f. and g above were intended to give the Board access to the leaseholder. For Crown lands this required changes to the then Mines and Minerals Act).

The paper further detailed:

“The recommendations incorporate a philosophy that, in general terms, sees the responsibility for proper abandonment falling to the primary beneficiaries of the well. Normally, responsibility should fall first on the entity that holds the Board’s license, then on any or all working interest owners. Most problems would likely be resolved at this stage. But in the event that no working interest owners exist, the Board should be able to look at previous licensees. This is a logical extension, intended partly to ensure that those who sell low-productivity wells do so to viable, responsible operators who can be relied upon to abandon the wells properly as and when necessary. If these steps fail to uncover a responsible party, the Board would look to the owner of the mineral rights in order to fix responsibility on the lessee of the mineral rights, as even where the lessee is not a working interest owner he will be receiving overriding royalties or other benefits in most instances.”

In a paper subsequently presented at the CADE/CAODC Spring Drilling Conference in April 1991 entitled “Orphan Wells: Who is Responsible-For How Long and At What Cost?” by John Nicol (who appeared to be closely involved and aware of the ERCB’s then current thinking and position on matters related to orphan wells), it appears the above noted lengthy chain was carved back at the request of industry to merely include the current licensee, WIPs and their respective receivers and that an industry sponsored fund was to be established to pay for the share of abandonment costs of bankrupt owners. Consistent with what was happening at that time in Western Canada (i.e. the large scale disposition programs by established legacy companies such as Imperial, Shell, Chevron and Amoco, to junior and immediate acquirers such as Renaissance, CNRL and Penn West), in essence it appears that industry’s main concern was that it did not want to be responsible for a property once it had been sold to a third party.

Notwithstanding the above perspectives, the Conservation Act and Environment Act provide broad provisions for holding various persons in the current and historical ownership chain to be held accountable for abandonment and reclamation obligations and in different proportions. The Conservation Act defines a WIP as any person who owns a beneficial or legal undivided interest in a well or facility under agreements that pertain to the ownership of that well or facility.

· Section 27 provides a licensee shall suspend or abandon a well or facility, unless the Regulator otherwise orders or permits a WIP, other than the licensee to do so.

· Section 29 provides abandonment of a well or facility does not relieve a licensee or WIP from responsibility for the control or further abandonment of a well or facility or from the responsibility for costs of doing that work.

· Section 30 provides well or facility suspension, abandonment or reclamation costs must be paid by WIPs in accordance with their proportionate share.

· Section 31 provides a mechanism whereby the Regulator may deem a predecessor WIP, a current WIP, if its successor WIP is unable to pay its proportionate share of suspension, abandonment or reclamation costs rendering the predecessor WIP a current WIP for purposes of sections 27–30 and Part 11 (sic, Orphan Fund) if Subsection 31(2) applies.

“31(2) The Regulator may deem as provided in subsection (1) if (a) in the case of a well, the transaction occurred after the well ceased to meet the economic limit test set out in the regulations or rules, or (b) in the case of a facility, the transaction occurred after the facility ceased operation or after the facility has throughput that is less than the rate prescribed in the regulations as sufficient to warrant deeming the facility to be active.”

Whether or not the “look back” provision contained in Section 31 has yet been utilized or is fully implemented is unknown at this juncture, but it is a potential tool available for the AER under the Conservation Act to go after prior WIP’s for outstanding suspension, abandonment and reclamation costs of its successor notwithstanding the prior WIP may have disposed of its interests in the well or facility many years prior. Section 31.1 of the Conservation Act also provides a separate look back provision for licensees of large facilities.

Under the Environment Act, a WIP is any person who owns or controls all or part of a beneficial or legal undivided interest in an activity (ie. a well) described in clause (b)(iv) under an agreement that pertains to the ownership of that activity. And the term “operator” is defined to include “a working interest participant in (A) a well, … or (E) a plant or facility that is subject to the Large Facility Liability Management Program administered by the Alberta Energy Regulator on, in or under specified land … (vi) a successor, assignee, executor, administrator, receiver, receiver‑manager or trustee of a person referred to in any of subclauses (i) to (v), and (vii) a person who acts as principal or agent of a person referred to in any of subclauses (i) to (vi).

Under the Environment Act, it would appear that any person who currently owns or controls, or previously owned or controlled, all or any part of a beneficial or legal undivided interest in a well pursuant to an agreement that pertains to the ownership of the well could be labelled a WIP. Section 137 of the Environment Act also imposes a duty on an operator to conserve and reclaim specified land. This likely would extend to any obligations to abandon a well or facility located on the lands. Regarding conservation of specified lands, Section 140 of the Environment Act allows an inspector to issue an environmental protection order to an operator regarding conservation and reclamation directing the performance of any work or the suspension of any work if in the inspector’s opinion the performance or suspension of the work is necessary in order to conserve and reclaim the specified land. Section 215 also imposes joint and several liability against any person (ie. any operator) named in an enforcement order.

The OWA was created to manage orphan wells and facilities (ie. those wells and facilities which have no financially viable party able to take over care and custody of the well and ensure it is properly abandoned and reclaimed). Section 70 of the Conservation Act sets out the purposes of the orphan fund. One purpose is to pay for suspension, abandonment and related reclamation costs in respect of orphan wells, facilities, facility sites and well sites where the work is carried out by the AER, a person authorized by the AER or by a Director or person authorized by a Director pursuant to the Environment Act. Another purpose is to pay for a defaulting WIP’s share of suspension, abandonment and reclamation costs incurred by a WIP if the person who carried out the work has taken all reasonable steps necessary to collect that share and has been unable to do so (i.e. section 70(1)© of the Conservation Act). Pursuant to Section 70 of the Conservation Act and the related rules, a WIP may request reimbursement from the orphan fund of a defaulting WIP’s share of suspension costs, abandonment costs and related reclamation costs it incurred. As part of the application process, the AER must designate the well or facility as an orphan and deem a WIP to be a defaulting WIP in accordance with section 70(2)(b)(iii) of the Conservation Act, which requires that in the opinion of the AER, the WIP does not exist, cannot be located or does not have the financial means to contribute to the suspension, abandonment or related reclamation costs.

For a solvent WIP that is left behind following the bankruptcy or receivership of a licensee or other WIP who may hold an interest in a well or facility, this reimbursement process does provide some comfort in that it may eventually receive reimbursement from the fund. However, the reimbursement process takes time, may not cover all costs incurred and is ultimately at the discretion of the AER.

For the past 3 years the OWA has been funded by a $30 million annual levy collected from licensees. From this fund, a solvent WIP could apply for reimbursement of an insolvent WIPs share of suspension, abandonment and reclamation costs. Seeing how there is a cost recovery mechanism available for solvent WIPs, it appears industry was amenable to spreading insolvency risk from just those contracting parties to a specific agreement to industry at large via cost reimbursement from the orphan well fund. Based on information contained in the OWA 2016/17 annual report, there was approximately a 39% increase in reimbursed working interest claims from the prior year ($3.8 million compared to $2.7 million).

Additionally, in May 2017 the Alberta government announced it would provide a loan of $235 million to the OWA to help pay for additional costs of administering and dealing more quickly with the growing OWA inventory. It was announced the loan was to be paid back by industry with the interest covered by a separate $30 million dollar federal grant. Whether reimbursement from the orphan fund for sharing of this commercial risk is appropriate or justifiable in light of additional funding from the provincial and federal governments and the growing number of disclaimed licences being added to the OWA inventory may need to be revisited considering there are solvent WIP’s who currently hold or held an interest in the related well or facility, benefitted financially from the assets and have the funds available to pay for its insolvent WIP’s share of such costs.

Is it fair for government funding to be used for reimbursing solvent industry players who took on some commercial risk with a partner who unfortunately went insolvent instead of redirecting that government funding towards the building of infrastructure, such as roads, schools and hospitals, for use of all Albertans. Alternatively, perhaps it is justifiable as the government has collected billions in royalties from the oil and gas industry which has been used for the benefit of Albertans. In any event, it may be that the AER should deny cost recovery claims in those situations where there is another WIP or responsible party within the chain of title capable of paying for the suspension, abandonment and reclamation costs and direct moneys within the orphan fund only towards those true orphan sites where there is no longer a solvent WIP or responsible party in existence.

For purposes of determining who are the responsible parties or which category of WIPs should be responsible, we would suggest that perhaps the hierarchy of liability arises from who had the contractual or legal right to conduct both operations and the obligation to abandon and reclaim. In this regard, the descending hierarchy could look as follows:

(a) Current licensee.

(b) Current beneficially entitled WIP (BEWIPs) who are contractually obligated to contribute to abandonment costs (i.e. not pure revenue interest holders).

© Prior licensees.

(d) Prior BEWIPs.

(e) Current beneficially entitled revenue interest participants (BERIPs), including GOR owners and LOR owners (i.e. not because they are the mineral rights owners, but because they were a prime beneficiary of the well), which would include the Alberta Crown and the successors to the Canadian Pacific Railway minerals, and the Hudson’s Bay Company mineral rights (i.e. with a politically motivated exception for individual freeholders).

(f) Prior BERIPs.

(g) Legal interest participants (LIPs, i.e. trustees, caveators, etc.), as well as entities that have a contingent, suspended or electable working interest such as entities in a penalty position.

(h) Orphan fund contributors.

Note that surface owners and municipalities (who also benefit from wells) are purposely excluded because they are compelled to permit development, for example, by way of right of entry order.

If we accept as an underlying premise for the Western Canadian oil and gas industry that parties should pay for the abandonment and reclamation of a well or facility in the relative proportions of their benefit received, we would submit that it is critical for industry to accurately record and describe the nature of their current and historical working interests and revenue interests. Recovery from the orphan fund could then sustainably be allocated on a principled basis, with recovery from the orphan fund limited only for those “true orphans” (eg. a well drilled 100% by Lexin, with no BEWIPS, BERIPs or LIPs).

Appendix “A”
Conservation Act

AER Designated Facility Licensees
13 Where, by virtue of the operation of section 12, on June 30, 2000 a licence is required in respect of an existing unlicensed facility, the Regulator shall (a) designate a working interest participant who meets the requirements of this Act for a licensee as the person to whom a licence will be granted, and (b) subject to section 14, grant a licence to that person, and for that purpose this Act applies in respect of the granting of the licence as if the working interest participant had applied for a licence.

AER Required Security Deposits for Large Facilities
26.1 Where, on the written request of a licensee of a large facility or one or more working interest participants who have a 50% or greater share in a large facility, the Regulator requires the licensee to provide a security deposit in respect of the large facility, each working interest participant in the large facility is responsible for paying its share of the security deposit to the licensee in proportion to its share in the facility.

AER Directed Suspension and Abandonment
27(2) Notwithstanding subsection (1), (a) if the Regulator so directs, a well or facility must be suspended or abandoned by a working interest participant other than the licensee or approval holder, and (b) with the consent of the Regulator, a well or facility may be suspended by a working interest participant other than the licensee or approval holder.

Continuing Liability for Wells and Facilities
29 Abandonment of a well or facility does not relieve the licensee, approval holder or working interest participant from responsibility for the control or further abandonment of the well or facility or from the responsibility for the costs of doing that work.

Responsibility for Suspension, Abandonment and Reclamation Costs
30(1) Subject to subsection (2), the well or facility suspension costs, abandonment costs and reclamation costs must be paid by the working interest participants in accordance with their proportionate share in the well or facility.
(2) The Regulator may determine the suspension costs, abandonment costs and reclamation costs (a) on the application of the person who conducted the suspension, abandonment or reclamation, in the case of a well or facility that was suspended, abandoned or reclaimed by a licensee, approval holder, working interest participant or agent, or (b) on the Regulator’s own motion, in the case of a well or facility suspended or abandoned by the Regulator or by a person authorized by the Regulator, and the Regulator shall allocate those costs to each working interest participant in accordance with its proportionate share in the well or facility and shall prescribe a time for payment.
(3) A working interest participant that fails to pay its share of costs as determined under subsection (2) within the period of time prescribed by the Regulator must pay, unless the Regulator directs otherwise, a penalty equal to 25% of its share of the costs.

Deemed Working Interest Participants
31(1) Where (a) a transaction occurs that results in a person no longer being a working interest participant in a well or facility, (b) the successor working interest participant is a person other than the licensee of the well or facility, and © the successor working interest participant fails to pay its proportionate share of the suspension, abandonment or reclamation costs, the Regulator may deem the person referred to in clause (a) to continue to be a working interest participant for the purposes of sections 27 to 30 and Part 11 if subsection (2) applies.
(2) The Regulator may deem as provided in subsection (1) if (a) in the case of a well, the transaction occurred after the well ceased to meet the economic limit test set out in the regulations or rules, or (b) in the case of a facility, the transaction occurred after the facility ceased operation or after the facility has throughput that is less than the rate prescribed in the regulations as sufficient to warrant deeming the facility to be active.

Extended obligation
32 Where a provision of this Act or the regulations or rules imposes a responsibility, obligation or liability on a licensee, approval holder or working interest participant in respect of the operation, suspension or abandonment of a well or facility or in respect of any matter arising out of the operation, suspension or abandonment of a well or facility, the responsibility, obligation or liability extends also to associated equipment and non‑licensed facilities that are located on the site or used in connection with the operation, suspension or abandonment of the well or facility, unless such equipment or facilities are exempted from the application of the provision by the regulations or rules.

Payment of Orphan Fund Levy for Large Facilities
74(1.1) Where the Regulator has prescribed an orphan fund levy in respect of a large facility, each working interest participant in the large facility is responsible for paying its share of the levy to the licensee in proportion to its share in the facility.

Responsibility for Control, Completion and Operation Costs
100(1) Without restricting the generality of section 96, if, in the opinion of the Regulator, the control, completion or operation of a well or the operation of any facility is not in accordance with an order, direction or requirement of the Regulator, any person authorized by it is entitled to have access to and may enter on the site or any structures on the site and do whatever the Regulator considers necessary because of the failure to comply with the order, direction or requirement.
(2) The Regulator may (a) determine the costs of or incidental to work carried out under subsection (1), and (b) allocate those costs among any or all of the licensee, approval holder and working interest participants as the Regulator considers appropriate.

Sale of Equipment and Materials by AER
102(1) When the work of control, completion, operation, suspension or abandonment of a well or facility is conducted by the Regulator or a person authorized by it, the Regulator may sell or dispose of in a manner it sees fit any drilling, producing or operating equipment, installation or material found on the site or taken from the well or facility, but the Regulator shall not sell any equipment, installation or material that it knows is owned by someone other than the licensee, approval holder or working interest participant.

Actions re Principals
106(1) Where a licensee, approval holder or working interest participant (a) contravenes or fails to comply with an order of the Regulator, or (b) has an outstanding debt to the Regulator, or to the Regulator to the account of the orphan fund, in respect of suspension, abandonment or reclamation costs, and where the Regulator considers it in the public interest to do so, the Regulator may make a declaration setting out the nature of the contravention, failure to comply or debt and naming one or more directors, officers, agents or other persons who, in the Regulator’s opinion, were directly or indirectly in control of the licensee, approval holder or working interest participant at the time of the contravention, failure to comply or failure to pay.

Appendix “B”
Environment Act

Environmental Protection Order for Release
113(1) Subject to subsection (2), where the Director is of the opinion that (a) a release of a substance into the environment may occur, is occurring or has occurred, and (b) the release may cause, is causing or has caused an adverse effect, the Director may issue an environmental protection order to the person responsible for the substance.
(3) An environmental protection order may order the person to whom it is directed to take any measures that the Director considers necessary, including, but not limited to, any or all of the following: (a) investigate the situation; (b) take any action specified by the Director to prevent the release; © measure the rate of release or the ambient concentration, or both, of the substance; (d) minimize or remedy the effects of the substance on the environment; (e) restore the area affected by the release to a condition satisfactory to the Director; (f) monitor, measure, contain, remove, store, destroy or otherwise dispose of the substance, or lessen or prevent further releases of or control the rate of release of the substance into the environment; (g) install, replace or alter any equipment or thing in order to control or eliminate on an immediate and temporary basis the release of the substance into the environment; (h) construct, improve, extend or enlarge the plant, structure or thing if that is necessary to control or eliminate on an immediate and temporary basis the release of the substance into the environment; (i) report on any matter ordered to be done in accordance with directions set out in the order.

Environmental Protection Order for Contaminated Site
129(1) Where the Director designates a contaminated site, the Director may issue an environmental protection order to a person responsible for the contaminated site.
(2) In deciding whether to issue an environmental protection order under subsection (1) to a particular person responsible for the contaminated site, the Director shall give consideration to the following, where the information is available: (a) when the substance became present in, on or under the site; (b) in the case of an owner or previous owner of the site, (i) whether the substance was present in, on or under the site at the time that person became an owner; (ii) whether the person knew or ought reasonably to have known that the substance was present in, on or under the site at the time that person became an owner; (iii) whether the presence of the substance in, on or under the site ought to have been discovered by the owner had the owner exercised due diligence in ascertaining the presence of the substance before the owner became an owner, and whether the owner exercised such due diligence; (iv) whether the presence of the substance in, on or under the site was caused solely by the act or omission of another person, other than an employee, agent or person with whom the owner or previous owner has or had a contractual relationship; (v) the price the owner paid for the site and the relationship between that price and the fair market value of the site had the substance not been present in, on or under it; © in the case of a previous owner, whether that owner disposed of the owner’s interest in the site without disclosing the presence of the substance in, on or under the site to the person who acquired the interest; (d) whether the person took all reasonable care to prevent the presence of the substance in, on or under the site; (e) whether a person dealing with the substance followed accepted industry standards and practice in effect at the time or complied with the requirements of applicable enactments in effect at the time; (f) whether the person contributed to further accumulation or the continued release of the substance on becoming aware of the presence of the substance in, on or under the site; (g) what steps the person took to deal with the site on becoming aware of the presence of the substance in, on or under the site; (h) any other criteria the Director considers to be relevant.
(4) An environmental protection order made under subsection (1) may (a) require the person to whom the order is directed to take any measures that the Director considers are necessary to restore or secure the contaminated site and the environment affected by the contaminated site, including, but not limited to, any or all of the measures specified in section 113, (b) contain provisions providing for the apportionment of the cost of doing any of the work or carrying out any of the measures referred to in clause (a), and © in accordance with the regulations, regulate or prohibit the use of the contaminated site or the use of any product that comes from the contaminated site.

Security by Operator
135(1) If required by the regulations, an operator shall provide financial or other security and carry insurance in respect of the activity carried on by the operator on specified land.

Duty to Reclaim
137(1) An operator must (a) conserve specified land, (b) reclaim specified land, and © unless exempted by the regulations, obtain a reclamation certificate in respect of the conservation and reclamation.

Environmental Protection Order
140 Subject to any applicable approval or code of practice and the regulations, an inspector may (a) at any time before the issuance of a reclamation certificate in a case where the operator is required to obtain a reclamation certificate, or (b) at any time, in a case where the operator is not required to obtain a reclamation certificate, issue an environmental protection order regarding conservation and reclamation to an operator directing the performance of any work or the suspension of any work if in the inspector’s opinion the performance or suspension of the work is necessary in order to conserve and reclaim specified land.

Environmental Protection Order for Off‑site Damage
141 Where an inspector is satisfied that an operator (a) has done or permitted to be done anything that has caused an adverse effect in a location other than the specified land in respect of which the operator is or was carrying on an activity, or (b) has caused or allowed a substance to leave or escape from the specified land in respect of which the operator is or was carrying on an activity, the inspector may issue an environmental protection order regarding conservation and reclamation to the operator in accordance with the regulations.

Liability of Directors and Officers
232 Where a corporation commits an offence under this Act, any officer, director or agent of the corporation who directed, authorized, assented to, acquiesced in or participated in the commission of the offence is guilty of the offence and is liable to the punishment provided for the offence, whether or not the corporation has been prosecuted for or convicted of the offence.

Joint and Several Liability under Environmental Protection Orders
240(1) Where an environmental protection order is directed to more than one person, all persons named in the order are jointly responsible for carrying out the terms of the order and are jointly and severally liable for payment of the costs of doing so, including any costs incurred by the Director under section 245(2).
(2) Subsection (1) does not apply to an environmental protection order under section 129 that provides for apportionment of costs.
(3) Notwithstanding subsection (1), where an environmental protection order is directed to a person who is acting in the capacity of executor, administrator, receiver, receiver‑manager or trustee, that person’s liability is limited to the value of the assets that person is administering unless the situation identified in the order resulted from or was aggravated by the gross negligence or wilful misconduct of the executor, administrator, receiver, receiver‑manager or trustee.

Failure to Comply with Environmental Protection Order
245(1) If the person to whom an environmental protection order is directed fails to comply with the environmental protection order, the Director may take whatever action the Director considers necessary to carry out the terms of the order.
(2) Costs incurred by the Director under this section are recoverable by the Government (a) in an action in debt against the person to whom the environmental protection order was directed, or (b) by order of the Minister directing any person who purchases land to which the environmental protection order relates including, without limitation, a purchase on the sale of the land to realize a security interest, to pay to the Minister instead of to the vendor an amount not exceeding the amount owing in respect of the costs.

Add a comment

What is your view?

Send

Related posts:

5 ways to inject Aussie spirit into Halloween

The best thing about Halloween is meeting your neighbours. Instead of driving to another suburb, make some new friends within walking distance. Halloween can be thirsty work. Set up an esky full of…

Grinning from Ear to Ear

All my life I have strived to find things that make me happy, but more than just happy. I want things that bring me joy. I believe that those things are what make us smile so big our muscles hurt. It…

Birthday cakes to make for your friends during the pandemic.

Many of us have friends who have missed the chance to celebrate their birthdays due to the pandemic. Though we can’t physically be there for our friends, there are many different ways we can show our…