CALGARY – Rick Nixon, president and CEO of Midlake Oil and Gas Ltd., has a board meeting scheduled for Monday where directors will decide whether or not to dissolve his company and sell its assets.
Like many of Alberta’s small-cap oil and gas producers, nine-year-old Midlake has struggled amid the dramatic collapse in energy prices over the last eight months. But the existential question of whether Midlake has any future in the province became that much more pressing after a decision Friday by the Alberta Energy Regulator (AER) to stick with its costly levy on small energy producers.
Despite the outrage of Alberta’s small energy entrepreneurs, the charge is being imposed to fund the clean-up cost for any abandoned oil and gas wells — and the province is charging more to the very companies it considers the weakest.
“I don’t need the province of Alberta putting me out of business,” Mr. Nixon said Friday. “This isn’t working. Why can’t we change it?”
Mr. Nixon said his company has paid $800,000 into the fund since October; it has another $90,000 due next month. He said Midlake is losing money right now — but believes it wouldn’t be if he didn’t have to pay into the fund.
The fund isn’t new, but the cost of it has not relented despite the pressures squeezing the industry. Last year, the AER hiked the fund from $12 million to $15 million; it will be $15 million again this year. But many producers expect the levy to rise higher, ironically, as more companies face insolvency and the risk of abandoned wells rises.
Not all companies pay the same rate: the regulator tries to estimate the risk of which companies are likeliest to stick the province with a clean-up tab for an abandoned oil or gas well using a calculation called the licensee liability rating (LLR). The AER demands additional payments from companies with a low LLR score. And, as with the rising recovery levy, the LLR ratings standards have only gotten tougher as the survival picture for small firms becomes more fragile.
Midlake’s LLR score for the month of February is 0.99 — just 0.01 point shy of compliance with the AER, putting it into a high-risk, and high-payment category. The company has abandoned 22 uneconomic wells, and cleaned up eight of them, while the other 14 are still compliant with the regulator’s inactive-well standards.
Mr. Nixon, and a handful of his small-cap peers, have taken issue with the way the provincial regulator calculates the LLR because it measures a company’s production level as a way to assess its strength — the very standard the ratio has gotten tougher on — but only counts production the company owns entirely, and not production from whatever wells a company may have a partnership interest in, making companies look like smaller producers than they may really be.
And the tightening LLR standards have had a ripple effect when it comes to companies’ access to credit, said Kelly Bourassa, a partner at Blake, Cassels & Graydon LLP in Calgary, and the head of the law firm’s insolvency practice. Her firm handled the 2013 insolvency of Tallgrass Energy Corp., which she said could not stay afloat given the costs Tallgrass had to pay for the province’s orphan-well levy.
“What has added additional stress is that the calculation changed and the security that is demanded to be posted has increased,” Ms. Bourassa said. “It’s causing lenders to reconsider what would have been in their enforcement toolbox.”
However, Gary Leach, president of the Explorers and Producers Association of Canada, an oil and gas industry group, said LLR is designed to be an early warning system.
“The LLR parameters have been toughened up in the last number of years; that’s been a good thing,” Mr. Leach said. “This is a volatile industry with some rapid swings in natural gas and oil prices that can dramatically affect the financial picture of licensed oil and gas producers in Alberta.”
He said the recent collapse in energy prices could cause more companies to fall under the acceptable LLR ratio.
AER spokesperson Peter Murchland said Friday there were 600 orphan wells in Alberta that required abandonment and reclamation work at the end of last year.