Why pay people to stay at home?

Wall pitches well cleanup program

Regina– With the Saskatchewan oilpatch reeling from oil prices that have dropped at times below US$30 for a barrel of West Texas Intermediate, Premier Brad Wall has asked the federal government for a targeted assistance program that would help out take some of the pressure off of oil companies’ well abandonment obligations, but more importantly, keep at least some oilfield service companies working.

Wall called it an Accelerated Well Cleanup Program (AWCP), although at this point, it is still an unfunded proposal.

Matt and Dan Cugnet, president and chair of Weyburn-based Valleyview Petroleums Ltd., had passed along the idea through their MLA, Minister of Health Dustin Duncan. In making the announcement, Wall thanked the pair, who were alongside at the Feb. 8 press scrum in the Legislature. He said the proposal would “help the energy services sector in this incredibly difficult time and also have an environmental upside.”

In January Wall informed Prime Minister Justin Trudeau in a “formal ask” that the federal government consider an investment in a well cleanup program.

“There are, across western Canada, a number of wells that are basically completed, but not cleaned up. There is an abandoned well program, of course, and companies are required to help makes investments into that fund to be dealt with. But there are literally thousands of wells that have not been cleaned up,” Wall said to reporters in Regina on Feb. 8 while making the announcement of the proposal.

“These are environmental issues, of course. There’s fugitive GHG (greenhouse gases) that come from there wells that are completed but not yet sealed, not cleaned up. There is other habitat land issues with these wells as well.

“It was pointed out by Dan that the same employees who are not working where they would like to be working, in the energy sector, are best qualified to do these cleanups and do these cleanups on a regular basis,” Wall said.

“We would be able to clean up around 1,000 wells. There are many more to be done, but we could do about 1,000 wells with this investment, and about 1,200 jobs created directly and indirectly, and that’s probably a conservative estimate. These would be jobs directly in a sector that’s been affected by $30 oil.”

Wall said he appreciated the federal governments’ intentions to accelerate infrastructure dollars and extend Employment Insurance benefits.

He added, “But these are probably not quite right in terms of the solutions. They may be partial solutions, but they have their own problems. In the energy sector, superficially, you have a lot of independent contractors who have been putting away money for a bad time, but maybe didn’t put enough away for this period of time. I’ve got neighbours I’ve chatted to about this very thing. Independent contractors are not eligible for Employment Insurance.”

He added that companies have been implementing measures to avoid layoffs, but that has often meant reduced hours. “This particular initiative we think would have a more direct impact on those affected and put employees to work through a transition time, and we obviously hope this is a transition time,” Wall said.

Wall noted 7,000 to 8,000 wells (and possibly more) are in need of cleanup. Some are orphaned wells from insolvent companies.

“If the downturn lasts much longer, the number of orphan wells is going to increase, because these companies won’t be around. There’s bankruptcies happening today, in the sector,” he told reporters. “We think this has an environmental upside. It could even be more aggressive. When I chatted with the prime minister, I said might be just a start. You might want to work on a longer-term plan, where as the price recovers, there’s more of matching dollars from the companies themselves that are still in operation.”

To that end, Wall explained to Pipeline News that this proposal, if it goes ahead, would be entirely federal dollars, and not provincial. Oil companies normally pay for this sort of work, and there is an orphan well fund to look after wells that were “orphaned” by companies that no longer exist.

“Here’s a chance for us to actually put people back to work in the energy services sector and continue with the cleanup, perhaps at an accelerated rate,” Wall said.

He added Prime Minister Trudeau was “open-minded” about the proposal, as was Minister of Public Safety Ralph Goodale, Trudeau’s Saskatchewan lieutenant.

When asked about fairness of having the federal government pay for some wells now, but not previous ones, Wall noted the program is not perfect, adding, “Thirty dollar oil is not perfect. We weighed those things. We contacted industry.”

A potential benefit would be to reduce liabilities and “stave off elimination” for some companies, he added, but that’s not the point of the program.

Small oil company perspective

Dan Cugnet told reporters that while it is oil companies’ responsibility to pay to clean up these wells, “Hopefully the program will help more companies from becoming insolvent and then it won’t be a burden on the government.”

Matt Cugnet said that in the last couple years, “Valleyview had eliminated a significant portion of its liabilities. We’re just a small, family company, but we spent in excess of $5 million ourselves to clean up liability. It’s really about what’s the best results or resolution to the province. A program like this gets people working. It does eliminate problem wells before they become a liability. In the province of Alberta, their orphan wells have gone from under 200 to, the last tally, over 700. There’s talk of another 1,800 from insolvent companies. This is attempting to correct the problem before insolvencies occur.

“In regards to manpower, on our average abandonment, we have an average between 20 and 45 people working, upwards of 90 eight-hour days. Of course, it can change with the activity level, but all told we had 972 employable hours, on average, for a typical, straightforward abandonment in the last three years.”

He added that industry is typically loathes abandoning wells, because opportunities with different economic situations and new technologies can breathe new life into old wells.

Wall added there’s currently 100 orphan wells left in the province.

After the press conference the Cugnets elaborated that if the federal government was looking to pay people to stay home as a result of Alberta’s request to improve Employment insurance benefits, “The idea is the government can get people working for that money and creating value by eliminating and cleaning up these wells,” according to Matt Cugnet.

They explained that wells that used to be economic and generating revenue for the oil company and government may not be economic at these prices.

“It’s about being proactive and keep people working,” Dan Cugnet said.

Matt Cugnet added, “This is actually to accelerate the abandonment rate when things are slow to keep people working.”

The brothers pointed out that service companies have lowered their prices right now, and that makes it a good time to get the most “bang for the buck” to get this work done.

A typical abandonment, they find, can run $35,000 to $50,000 each, but can go into the hundreds of thousands.

Some details

Ed Dancsok worked on the proposal. His job is assistant deputy minister, senior strategic lead, Petroleum and Natural Gas Development, Ministry of the Economy.

Asked if a large company can scoop up a large portion of the program, should it go ahead, Dancsok replied in order to ensure a large company doesn’t apply for 300 wells, every company would be limited to 10 wells.

The program, if it goes ahead, is intended to run in the 2016-2017 fiscal year.

He explained this proposal is meant to target Saskatchewan workers.

The existing orphan well program sees 60 to 70 wells per year “truly orphaned.”

“This (proposal) is about getting people back to work,” Dancsok said.

Dancsock said a well abandonment can range from $50,000 to $1.5 million. They worked with an average of around $100,000 per well, with lots of variability expected.

“A complex project can require 90 different people, from service rig to environmental monitor, Cat (operator) to grader (operator), to welders and cementing companies,” he said.

Asked what sort of bureaucratic lag exists within the existing orphan well program, he replied that licensee liability ratings (LLRs) are calculated monthly, and there’s a two-month lag within the system. While prices are moving rapidly, it’s still pretty accurate, he noted.

The orphan well program (separate from this proposal) calculates an oil producer’s ability to pay to clean up its fleet of wells. If the company’s When a company’s liabilities exceed their assets is when they are required to submit the security deposit, essentially a bond.

The difficulty is that when oil prices plummet, oil company’s fiscal capabilities go down while more and more of their wells become uneconomic, and they can be required to pay into the fund at a time when they may have difficulty to do so, creating a negative feedback loop.

Dan Cugnet pointed out that in Alberta, whose orphan well program was the inspiration for Saskatchewan’s program, “The LLR has killed a lot of smaller companies.”

“At current economics, no well is economical, so it pushes them all to the LLR and into insolvency,” Matt Cugnet added.

“At some point, you’re basically pushing companies into an insolvent position, and you’re creating issues for the orphan fund. This is about heading it off before it comes something of that nature,” Dan Cugnet said. Wells that are liabilities show up as on oil company’s balance sheet.

Service rig perspective

Mike “Butch” Gering of Diamond Energy Services in Swift Current told Pipeline News, “Anything that puts rigs to work will help us.”

“Every abandonment takes a service rig for a minimum of a couple of days. We do some of them now, but since the downturn, the oil companies have taken all their money and downsized their capital, and there’s no money for abandonments right now,” he said.

According to the Cugnets, the vendors involved with an abandonment include the service rigs, wireline, packers and bridge plugs, cement, fluid hauling, engineers, dirt movers, hydrovac, environmental cleanup, industrial landfills, environmentalists, consultants and administration. Usually the farmer will provide topsoil for remediation.

Indeed, Gering said they were currently looking at doing some orphan wells, and he expected a couple days on each of them. If there are problems with the well, a service rig might be there for a week.

“I’m glad to go out and do some of them,” Gering said, noting they have 24 service rigs, but four are parked due to the current market.

Asked if oil companies should already be doing this, Matt Cugnet said, “They are. Companies like Crescent Point and CNRL and Valleyview are doing this. But it’s a function of accelerating that rate. We can do more of it now.”

When oil was $80 to $100 a barrel, a lot of marginal wells were economic, but at $30, that’s no longer the case, Dan Cutnet noted.

“Guess what? If we’re still at $30 a barrel in three years, there’s going to be a lot of these wells that are going to need to be abandoned, because they’re not productive, they’re not profitable.”

As for Valleyview, they’ve already gotten most of their liabilities off the books beforehand. Matt Cugnet noted they were a mature company with a lot of wells on their books. They recognized they wanted to lower their LLR, so they just went and did it. They’ve reduced the number of wells they have to deal with down to two.

© Copyright Pipeline News

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