By JEFF LEWIS
Wednesday, June 13, 2018
CALGARY -- Canada's biggest oil and gas producer is pushing regulators to block deals it says expose the energy industry to billions of dollars in new liabilities, in an extraordinary bid to shield itself from a spike in cleanup costs.
Canadian Natural Resources Ltd. has raised objections this year to dozens of asset deals before the Alberta Energy Regulator (AER) and pressed the watchdog to crack down on buyers with shaky finances, according to industry officials and company documents seen by The Globe and Mail.
The company, founded by billionaire financier Murray Edwards, has vast holdings across Western Canada and ranks among the largest contributors to an industry orphan-well fund established to cover costs of cleaning up and sealing old wells with no legal owner.
Payments to the industry fund are proportional to a company's liabilities, meaning companies like Canadian Natural are on the hook for a larger share of reclamation costs.
Canadian Natural's previously unreported interventions, some of which are detailed in confidential filings made to the AER, pit one of the sector's most valuable companies against some of its smallest.
Companies caught up in the sweep include Just Freehold Energy Corp. and Gear Energy Ltd., which had sought to buy assets earlier this year. In some cases, startup companies with no track record of production have been targeted, the documents show, fuelling criticism that Canadian Natural is squelching competition.
A Canadian Natural spokeswoman would not answer detailed questions about the company's actions.
Canadian Natural says the potential failure of buyers flagged in the documents it filed with the AER could saddle the entire industry with $2-billion in abandonment costs. It wants the buyers to post hefty deposits against that risk.
"From a high level you can kind of understand, [with] them being one of the larger companies and having to make larger deposits to the orphan-well fund," said Ingram Gillmore, chief executive officer of Gear Energy, in an interview.
"But is that their role, or is it the role of the AER and other regulators to determine the rules, as opposed to letting [Canadian Natural] sort of push their way around and affect them?" It is unclear whether any deals have been blocked as a result of Canadian Natural's interventions. Gear's acquisition of two facilities has since been approved, and the company has taken care to manage its liabilities, Mr. Gillmore said.
The objections by Canadian Natural nonetheless point to lingering concerns over the financial health of a major slice of Alberta's biggest industry.
Rising crude prices have buoyed large oil sands companies, but producers focused on tapping natural gas deposits at shallow depths have been under extreme duress as prices for the heating fuel have plummeted.
That has sparked fears of further corporate failures in an industry and province already coping with a legacy of unfunded cleanup following a rash of bankruptcies through four years of an economic downturn spurred by plummeting oil prices.
Canadian Natural's objections coincided with the sudden collapse earlier this year of Sequoia Resources Corp., a Chinese-controlled natural-gas producer that left in its wake hundreds of millions of dollars' worth of cleanup costs for which the AER is now on the hook.
Sequoia amassed thousands of wells and other infrastructure in a series of acquisitions over the last year-and-a-half, even though the company appeared to have insufficient financial resources - according to the AER's own gauge for measuring a company's assets against liabilities.
Canadian Natural had already questioned the validity of an October, 2017, deal in which a Sequoia affiliate paid a nominal sum to acquire high-liability assets from debt-saddled Pengrowth Energy Corp.
Now it's suggesting a deeper fix is needed.
The energy regulator had introduced a more stringent solvency test for buyers of oil and gas assets in July, 2016, hoping to stem a rise in deals in which companies offloaded old properties, sometimes for as little as $1. The interim measure doubled the ratio of assets buyers must hold against their liabilities.
In documents filed last month, Canadian Natural says the system "significantly overstates" the financial well-being of the industry.
The AER assigns producers a liability management rating (LMR) that measures a company's assets against the cost of cleaning and abandoning wells and other operations.
The regulator says the LMR ratio for the industry is close to 5.
However, Canadian Natural puts the figure at under 2, based on what it says is a more current measure of industry profitability. It says deposits that companies are required to post against future cleanup costs should reflect their financial health, rather than industry averages.
A spokesperson for the regulator did not dispute Canadian Natural's characterization but insisted the agency is applying closer scrutiny to proposed deals. It is also working with the provincial government on a review of the system, Cara Tobin said.
"We know that the LMR by itself is not a full indicator of a company's financial health," she said.
The industry is aware of Canadian Natural's concerns, said Gary Leach, president of the Explorers and Producers Association of Canada. But he cautioned against overhauling regulations too quickly.
"It's an appropriate time to look at it, but you also shouldn't necessarily take hasty steps based on a moment in time of an industry that's a century old and has many decades out in front of it," he said.
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