A protracted downturn in natural gas prices has battered the balance sheets of some oil and gas producers in Western Canada, driving insolvencies in the sector to their highest level in three years.

The number of producer bankruptcies, receiverships, creditor proposals and filings under the Companies’ Creditors Arrangement Act (CCAA) was greater in 2024 than in the previous two years combined, according to an analysis by the Financial Post of court filings and data compiled by Insolvency Insider Canada.

Insolvent oil and gas companies in Western Canada collectively owed more than $1.2 billion in debt in 2024, a more than 700 per cent increase over the sector’s distressed filings in the prior year.

There have been at least a dozen bankruptcies, receiverships, creditor proposals so far this year, compared to about five in 2023 and three in 2022.

The largest of these, Calgary-based Long Run Exploration Ltd., is currently attempting to restructure, with a long list of creditors unlikely to get any money since it will be substantially eaten up by the company’s $308.5 million in environmental obligations.

Should the restructuring fail, it’s feared that Long Run’s 4,856 licensed wells and 523 facilities could become the responsibility of Alberta’s industry-funded Orphan Well Association.

Environmental liabilities were a key driver in a number of insolvencies in the oilpatch in 2024 as new regulatory changes disrupted the sector.

“Under the old regime, if you had a bunch of inactive wells, it wasn’t as much of a problem, but now your inactive inventory is resulting in increased spend requirements annually (on decommissioning and reclamation),” Keely Cameron, a partner at Bennett Jones LLP who specializes in oil and gas regulatory issues, said.

“What we’re seeing as a result of some of these new regulatory changes is that they are pushing some companies that were struggling over the edge; they simply can’t proceed any further … and there is a risk that these regulatory amendments, at least in the short term, will result in more orphans as companies struggle with historical liabilities.”

An unlikely buyer

Another company that slid into insolvency this year under the weight of environmental obligations — which exceeded $54 million to clean up inactive wells — was junior oil and gas firm Erikson National Energy Inc.

The Calgary-based company blamed depressed natural gas prices and wildfires near its operations in Northern British Columbia for driving its insolvency. Circumstances were exacerbated, the company said in court filings, by mounting requests from BC Energy Regulator to clean up dormant sites and post additional security.

Erikson realized it would be unable to repay its debts to its primary lender in 2023 and was hemorrhaging around $250,000 per month earlier this year when it shut-in operations and cut staff in a bid to focus on finding a buyer for its assets.

Eventually, the regulator cancelled Erikson’s leases for failing to comply with several orders and the company filed a notice of its intention to make a proposal to creditors under Canada’s Bankruptcy and Insolvency Act on Oct. 1.

However, Erikson may have finally found a path out of its troubles and a buyer for its properties, albeit an unusual one.

Court documents show the company recently struck a $2-million deal with Las Vegas-based cryptocurrency miner Gryphon Digital Mining Inc. for all its oil and gas assets  — encompassing reserves previously valued at $105.2 million by Deloitte Touche Tohmatsu Ltd. — under an agreement that could mean the cryptocurrency miner takes responsibility for all of Erikson’s environmental liabilities.

If the sale proceeds, it would prevent Erikson’s assets from being orphaned while also securing a fuel source and a gas plant to power Gryphon’s cryptocurrency mining operations, according to sources familiar with the proposed purchase.

The unusual transaction corresponds with a surge in the price of bitcoin and weakening demand for natural gas in Western Canada that has made gas-to-power generation cheaper and more attractive.

There is also a growing political desire in Alberta to court investments from artificial intelligence-focused data centres with the promise of plentiful natural gas for power generation and a cold climate favourable for keeping a lid on cooling costs at the energy-intensive facilities.

But while Erikson’s solution — at least temporarily — could divert its wells and assets from landing on the orphan inventory, a broader challenge remains.

Erikson was one of at least four oil and gas companies to enter insolvency proceedings in 2024 after being hit with demands from regulators to decommission and clean up its wells and facilities or post security, resulting in lease cancellations or orders to suspend or abandon operations when the companies were unable to pay. AlphaBow Energy Ltd., Tallahassee Exploration Inc. and Pismo Energy Ltd. faced similar orders.

A tighter regulatory framework surrounding environmental liabilities is challenging junior oil and gas producers to access capital and weather swings in commodity prices.

The result, according to experts and stakeholders, is that more insolvencies could follow, potentially increasing the volume of orphaned wells, leaving creditors and service companies in the lurch and hurting the economies of many rural communities in the process.

It hits these rural economies in a very slow and painful waltz

Bill Whitelaw

Bill Whitelaw, former publisher of the Canadian Oilfield Services and Supply Directory and Oilweek Magazine, said he’s seen the impact of producer insolvencies rippling through rural communities, squeezing service companies and small businesses and eroding the incomes of landowners, farmers and municipalities.

“It hits these rural economies in a very slow and painful waltz and it translates down to people not being able to make their tax payments on their houses in (places such as) Whitecourt,” he said.

Weight of environmental liabilities

Oil and gas companies go under for a number of reasons, typically due to downturns in commodity prices or poor management decisions.

But the growing urgency to address environmental liabilities in the wake of the Supreme Court of Canada’s 2019 Redwater ruling, which determined that clean-up and reclamation costs have priority over creditors when companies become insolvent, is having a profound impact on insolvencies and the sector more broadly.

The ruling has made it harder to wind down struggling oil and gas companies, insolvency experts say, unless a buyer can be found that is willing to take everything: the good, productive assets along with the bad.

It has also made it more difficult for energy companies to borrow money as lenders become more sensitive to the possibility of increasing regulatory risk.

New rules from the Alberta Energy Regulator (AER) responding to the Redwater decision have taken a proactive approach to at-risk companies, with heightened monitoring and requirements for security deposits.

“The approach they’re taking is to ask for large security deposits from companies they deem to pose a risk, and if the company can’t pay those security deposits, they’re shutting the companies down, which is resulting in insolvencies,” Cameron, who represented the AER in Redwater, said.

And while she said it is a “positive” that regulators are trying to proactively tackle accumulated liabilities in the oilpatch, there is a risk when the regulator goes after companies that don’t have the funds to post security payments.

“If you are going to shutter a company, what are the implications of that? Because in the absence of a robust, holistic system, the outcomes may actually be worse than had the company been able to try to take further steps to address their obligations,” she said.

An Alberta ministerial order barring companies in arrears on their municipal taxes from obtaining or transferring (selling or purchasing) oil well licences was “debilitating” for some distressed producers, according to Cameron, because those companies were suddenly unable to raise money or reduce their liabilities (though recent updates to the order have created some exemptions to the rule).

The AER is currently in the process of overhauling its approach to liability management and has been consulting with the public and finalizing its directives. The new rules could be released next March, though stakeholders in the interim are warning the absence of regulatory certainty may put a chill on oil and gas investment.

Conversely, there was also significant criticism levelled at the AER this year for not going further under the proposed changes to force the industry to fund its liabilities. A recent performance report said $1 billion was spent on closures and cleanups in 2023 to achieve a five per cent reduction in the number of inactive wells.

Last to get paid, first to get burned

One person who predicted this year’s surge in oilpatch insolvencies was Chris Simeniuk, an oilfield contractor and organic grain farmer near the village of Alix, Alta.

He has been tracking the rise in the number of producers delaying or failing to pay their contractors through a crowd-sourcing platform called PayScore.ca that he launched through Prairie Digitech Ltd. three years ago.

In almost every bankruptcy case, Simeniuk said there were signs of distress months and sometimes years earlier when the producer would first delay paying its vendors, dragging out payments that would become increasingly sporadic before the company would finally fold.

“We’ve seen that data go from 16 per cent of companies on the platform that were beyond 90 days (for payment) to over 20 per cent now,” he said. “Vendors are always last to get paid, first to get burned. They are the leading indicator.”

After a producer eventually goes under, Simeniuk said service companies wind up on a long list of unsecured creditors left with little hope of getting anything after a company’s secured debts and environmental liabilities are paid out first.

He said the vast majority of producers are responsible and reliably pay their contractors, but he’s seen firsthand the damage caused by delinquent oil and gas companies.

An oil and gas company strung out payments to his small service company a few years ago, and Simeniuk could do nothing but wait and watch as his receivables and costs ballooned. He and his wife were forced to sell grain from their farm at spot prices to make payroll and keep their oilfield service business afloat.

“It cost us a lot to carry that,” he said, adding that friends of his weren’t so lucky with another producer. “They hung on, put extra trucks on with the producer and that producer ended up going bankrupt. Looking back, we got out lucky. But it could’ve been us.”

• Email: mpotkins@postmedia.com

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