The business model for junior oil and gas producers in western Canada has changed dramatically over the last 10 years, with the loss of the royalty trust model the junior industry no longer has a willing buyer ready to snap them up the minute they reach a certain size or discover a promising field where production could be easily ramped up with a large development drilling program. Junior E&P companies were forced to change their models with some companies focusing more on long term growth based on the acquisition of mature noncore assets, including a substantial number of low volume producing and or inactive wells, from larger operators and then developing these assets as a core area and increasing production with the utilization of recent developments in horizontal drilling and completions technology.
“Liability associated with these inactive wells has caused a “millstone effect” for many junior and some intermediate operators,” says Bernie Cabot, President of Western Petroleum Management Ltd. “With time, management has become demoralized and see no positive way forward within the endless cycle of; declining production, low commodity prices, minimal cashflow, lack of access to capital, disgruntled landowners, municipalities demanding tax payments and a regulatory body that is continuously applying pressure for operators to continue funding their LMR deficit or face shut-in of their existing production.” With no viable options available these operators are falling into bankruptcy and management/employees are exiting the industry and probably never to return.
Governments (federal, provincial and municipal) and landowners are demanding that polluters (industry) pay to clean up the massive number of inactive wells and wellsites. Expectations are that industry should pay 100% of cleanup cost even though a large number of these wells never saw payout and investors never realized a return on their investment. Governments and landowners were the only groups to realize a profit from some of these wells through rental fees, bonuses and multiple forms of taxes paid by industry while these same groups continued to champion the drilling of even more wells as long as the money kept rolling in.
“What’s required is for the affected parties to come together and realize we are all responsible for allowing the current situation to unfold and to work together and develop a solution to manage this cleanup without putting the full burden on industry,” says Cabot. “Based on our experience and discussions with industry we believe there are a number of options that should be explored whereby all the responsible parties who received revenue from these wells are involved and bear some of the financial burden to abandon and clean up these inactive wellsites.” Operators and working interest partners could transfer a significant percentage of their inactive wells to this fund for a fee that is based on proportional ownership and thus remove a large financial burden during this low commodity price environment.
Whatever model is implemented it should be fully independent of both the Alberta Energy Regulator and the Orphan Well Association. Private industry would be responsible for reviewing and submitting proposals to acquire wellbores (including mineral rights) for a predetermined fee and or abandon and reclaim on an all-inclusive turnkey contract.
Mark Schumlick, VP Abandonments at Western Petroleum Management (WPM), says “WPM has successfully implemented the turnkey model with a large number of our clients over the past 1 ½ years to abandon their inactive wellbores and clean up the associated wellsites. Our primary abandonment model has been based on an all-inclusive turnkey contract where we were fully responsible for the complete process including; all engineering, environmental, contracting and payments to third party vendors, equipment sales, HSE and regulatory filings to ensure full compliance at all times. We have clients whom Western Petroleum Management successfully abandoned 100% of their wellbores and recovered substantial funds sitting at the AER.”
Schumlick says “two of the critical areas for controlling cost on large scale abandonment projects for multiple clients are preplanning and tight control of field logistics. With WPM’s experienced personnel having abandoned hundreds of wells and our control and ownership of some of the critical abandonment equipment we have been very successful in keeping cost will below industry standards and with the introduction of an innovative tool, currently in development, we are planning to reduce that cost even further.”
Norm McKenzie and William Wylie, two senior Calgary oil and gas executives, said, “It was truly remarkable how the WPM team was so successful in abandoning 100% of our wellbores and recovering substantial funds from the AER without any upfront capital requirements on our behalf.”
WPM realizes there is no quick fix for the current dilemma that our industry faces but with a strong commitment from all parties we can develop and implement a safe and cost effective program whereby the environmental liability associated with wellbore abandonments is substantially reduced over the next few years creating a more sustainable industry for all Albertans.