Alberta regulator cracks down on violators

6 March 2017
02 March 2017, Week 08, Issue 447

The Alberta Energy Regulator has suspended Lexin Resources’ operations and seized its assets on safety concerns in a move that suggests a broader enforcement crackdown, writes Kent Ploegman

 What: The AER has taken the unprecedented step of suspending Lexin Resources for infractions.

Why: After years of cutbacks authorities are taking an aggressive new stance to punish offenders.

What next: The regulator is cracking down on pipeline safety, leaving smaller operators concerned.

It is not often that the Alberta Energy Regulator (AER) takes matters into its own hands when it comes to enforcing the province’s oil and gas rules. In fact, critics more often complain that the regulator is more of a rubber stamp for industry when it comes to granting permits for wells and pipelines than a true enforcer.

This is why the AER’s move on February 15 – when it seized 1,600 wells, facilities and pipelines belonging to Lexin Resources, a small-sized Calgary oil producer, and suspended all its outstanding drilling permits – came as a surprise. It also issued an environmental protection order and threatened criminal charges for failing to clean up a sour gas plant in the southern part of the province.

Sour gas is extremely toxic to humans and animals in very tiny amounts. Lexin informed the agency in June 2016 that leak detection systems at its Mazeppa gas plant – located just off the main Highway 2 thoroughfare south of Calgary – were inoperable and that it was unable to respond to any potential emergency, thus setting off a chain of events that led to the unprecedented decision to take over the company’s producing assets.

Enforcement

In a statement, the AER said Lexin had failed to comply with multiple enforcement orders to correct deficiencies, that it lacked sufficient staff to safely operate its facilities and owed C$1 million (US$747,000) in orphan well administrative fees. In addition, it owes another C$70 million (US$53 million) in security deposits to clean up existing wells and facilities at the end of their producing lives. 

“Repeated attempts by the AER to bring the company into compliance have failed. As a result, the AER has little confidence in Lexin’s ability to conduct its operations safely and is taking measures to prevent increasing public safety, environmental and financial risk,” the regulator said.

In addition, the AER sought a court order to prevent the company from removing third-party owned equipment at its well sites in violation of provincial law. It also sent orders to joint venture partners to shut down any wells the company has minority interests in. Lexin may only resume operations if the AER provides written approval, subject to any terms and conditions the agency deems necessary.

In the meantime, all of its wells have been handed over to the Alberta Orphan Well Association (OWA), a non-profit group funded by AER levies, tasked with maintaining them and cleaning contaminated sites until they are shut down or sold.

In its own defence, Lexin blamed the AER for “adversely” limiting its operations and ability to raise capital, essentially pushing it into insolvency. “Because of the dispute and your actions, we are not sure that we will be able to continue to provide proper health and safety overview and measures for the sour wells particularly beyond February 15,” Lexin’s director, Michael Smith, wrote in a letter to the AER dated January 31.

It is now clear the agency felt it had no other alternative but to act.

Implications

The AER actions sent shockwaves through industry circles, especially among third-party service and equipment providers that have not been paid by Lexin for work performed. Likewise, landowners have complained they have not received lease payments for wells on their farms and acreages, many of which are leaking oil and need to be cleaned up. The final tally could run into billions of dollars.

It is new territory for an organisation that was created nearly a century ago to combat reckless oil development during Alberta’s first oil boom. The AER is the successor to the Energy Resources Conservation Board (ERCB), formed in 1938, in response to rampant flaring at the Turner Valley oilfield, which was dubbed “Hell’s Half Acre” because the fires could be seen 60 km away in Calgary. 

Then, its primary mandate was conservation to prevent waste of a potentially valuable resource. Over the years it evolved into a quasi-judicial body that operates at arm’s length from the government, including having the authority to enforce environmental laws that were formerly the mandate of the Alberta Environment department.

However, years of government cutbacks have prompted critics to complain that the regulator is toothless, leaving oil companies to regulate themselves. That changed in 2014, though, when the provincial government undertook a reorganisation to streamline approvals in a “one-stop shop” approach to make it easier for the industry to apply for permits while vowing tougher enforcement of the rules.

The Lexin case is the first real test of that mandate. And there is every indication the AER is planning to be even tougher in the future. 

On February 28 the regulator fined Murphy Oil C$172,500 (US$128,773) in relation to a pipeline spill that occurred in the Peace River area in January 2015. The AER determined that the leak had gone undetected for over six weeks, causing 1.4 million litres of condensate – a lighter NGL used to dilute heavy oil – to contaminate a 1.3-hectare (13,000-square metre) area. The pipeline has since been repaired but clean-up is ongoing.

What next?

Even though the AER is not a political body, pipeline safety has become a charged political issue as Alberta seeks new transport routes to the east and west coasts of Canada for its oil. The provincial government has indicated that it will no longer tolerate negligence or human error after an embarrassing string of mishaps threatened the perception in other parts of the country that pipelines are safe.

The AER also has plans to publicly shame offenders. On February 21 it went live with a website that makes it easier for the public to see which companies are lagging behind on safety using charts, graphs and rankings on a variety of performance measure, including pipeline spills.

Barely a week into the programme, companies are crying foul – especially smaller ones that claim the data are misleading. Chinook Energy, a small Calgary-based producer, was identified as the AER’s top offender with 52.4 incidents per 1,000 km of pipeline even though it only has 19.5 km of pipelines under licence in Alberta. A single incident deemed to be of “low consequence” by the AER was extrapolated to come up with the higher figure. 

“Chinook’s board of directors, management and staff would like to reaffirm to its shareholders that the company’s commitment to all safety and environmental matters is a top priority,” the company said in a rebuttal.

Other critics claim the tighter rules and financial burden of compliance will make it more difficult for smaller companies to raise capital and compete in a crowded marketplace. Larger companies can generally afford to devote more resources to regulatory compliance and safety.

Although the overarching mandate of the AER is to promote resource development in Alberta, regulators are making it clear that this will not necessarily come at any price.

Edited by

Anna Kachkova

Editor

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