Alberta Energy Regulator blocks sale of Shell assets over clean-up concerns
The Canadian Press Thu., May 14, 2020
CALGARY - Alberta’s energy regulator has cited clean-up concerns in blocking the sale of sour gas wells, pipelines and other facilities from an energy giant to a much smaller company.
In a decision released Thursday, the regulator said Calgary-based Pieridae Energy’s attempted purchase of the southern Alberta assets from Shell Canada goes against the intent of environmental laws.
The issue was seen as a test case of the regulator’s determination to avoid clean-up costs for energy facilities falling to the taxpayer.
In its written decision, the Alberta Energy Regulator said it wasn’t happy with how the deal would have split the liability for cleaning up the sites, especially at a pair of gas processing plants. The terms of the sale would have had Shell responsible for existing contamination and Pieridae on the hook for future problems.
“The scope and extent of the contamination at the site is not well known and is not well described in the applications,” the decision said. “To date, the contamination at the sites has not been fully understood.”
Without knowing that, the regulator said, it would be impossible to know which company would have been responsible for what.
The decision also said the company that made the mess should clean it up.
“Shell is the polluter,” said the decision. “The ... applications appear to request that the AER, by way of approval, override or at least significantly dilute Shell’s obligations.
The two companies agreed to the deal last summer. It involves 284 wells, 66 facilities and 82 pipelines in the southern Alberta foothills.
It came shortly after the regulator had promised a closer eye on such licence transfers to ensure purchasers are able to cover reclamation costs. At the time, Pieridae’s market value was less than the price of the Shell assets and its stock value was less than a dollar.
The number of energy facilities left unreclaimed by struggling producers has boomed in recent years. As of May 14, Alberta alone had more than 10,000 unreclaimed wells, pipelines, facilities and sites.
In April, the federal government pledged $1.7 billion for such so-called orphan wells in Saskatchewan, Alberta and British Columbia, although they are supposed to be reclaimed by an industry-funded group.
The energy regulator said the two companies were free to restructure their deal and try again to get the licence transfers approved.
Pieridae Energy: Shell, Pieridae to try again after energy regulator blocks licence transfers
The Canadian Press Bob Weber May 15, 2020
Two energy companies whose controversial deal over aging assets in southern Alberta failed to win approval from Alberta's energy regulator say they will try again.
The regulator refused Thursday to allow licences for wells, pipelines and other facilities to be transferred to Pieridae Energy, a small Calgary company, from Shell Canada.
The regulator said it wasn't happy with how the deal would have allowed the companies to divide cleanup liabilities.
It added the deal appeared to reduce Shell's responsibility for cleaning up two gas processing sites.
But Shell says in a statement that it will look for a way to transfer the licences to Pieridae and keep the cleanup liabilities.
Pieridae also says the hundreds of wells, pipelines and processing plants can be brought into its operations in a way that satisfies the regulator.
The company says the decision has nothing to do with its financial position nor its cleanup ability.
The regulator's ruling on the deal is seen as a test case of its determination to prevent more cleanup costs for energy facilities falling to the taxpayer.
Shell, Pieridae to try again after energy regulator blocks licence transfers
The Canadian Press Bob Weber May 15, 2020
Two energy companies whose deal over aging assets in Alberta failed to win approval from the province's energy regulator over environmental concerns say they will try again.
"We're trying to find the right mechanism," Michael Crothers, president of Shell Canada, said Friday.
"We'll be seeking to understand from the (Alberta Energy Regulator) what would be acceptable to them."
On Thursday, the regulator refused to transfer licences for 284 wells, 66 facilities and 82 pipelines in the southern Alberta foothills — most involving toxic sour gas — from Shell to Pieridae Energy. Pieridae is a small Calgary company that plans to pipe the gas to the East Coast, liquefy it in an as-yet-unbuilt plant and ship it to Germany.
The sale has closed and Pieridae owns and operates the assets.
The regulator said it didn't like how the application to transfer the licences would have split liabilities for cleaning up the sites, especially two gas-processing plants. The terms of the sale would have had Shell responsible for existing contamination and Pieridae on the hook for future problems.
The regulator said it would be impossible to know which company would be responsible for what part of remediation. It also said the company that made the mess should be the one to clean it up.
Crothers acknowledged the application was unusual, but said Shell stands by its plans.
"Shell is holding fast to its intent to step up and own the obligations related to the historic environmental liability at the two gas plants," he said. "We think that's the right thing to do."
The regulator pointed out that allowing a company to sell an asset while holding on to its liability reduces incentives to clean it up. It would also nullify some enforcement measures.
Crothers said Shell stands on its record.
"We have an exemplary record of environmental performance and regulatory compliance. We are a leader in our peer group in terms of commitment to environmental action."
At the time of the sale, Pieridae's market value was less than the price of the assets. Several groups expressed concern about the deal, including other energy companies, as well as the Orphan Well Association, an industry-funded group responsible for abandoned sites.
The sale was viewed as a litmus test of the regulator's determination to prevent more energy cleanups from being shuffled off to taxpayers. Those observers welcomed Thursday's announcement.
"We've moved into a new era," said Shaun Fluker, a University of Calgary professor of resource and environmental law.
"If you are going to take on assets, you have to demonstrate that you can meet those obligations and have the financial ability to meet them.
"You can't structure a proposal where the resulting approvals will be a workaround of the statutory regime, which is really what this was."
Pieridae, which said its finances are healthy, says that's not so.
"The decision has nothing to do with Pieridae’s financial position nor its ability to clean up certain assets," said a statement from president Alf Sorensen. "The company is confident that the Shell asset acquisition ... can be aligned to address the concerns of the (regulator)."
Until the licences are transferred, the liabilities remain with Shell, Crothers said.
He said the companies are examining their options. They may take the ruling to the regulator's internal appeal board or submit a rejigged application.
"We will continue to work with the (regulator) on a solution that satisfies them."
Shell, Pieridae Applications for Sour Gas Plant Transfers Rejected By AER
Daily Oil Bulletin Elsie Ross Friday, May 15, 2020, 11:15 AM MDT
The Alberta Energy Regulator (AER) has refused applications from Shell Canada Limited and Pieridae Alberta Production Ltd. that proposed to split existing environmental approvals at the Waterton and Jumping Pound sour gas plants, saying that would be contrary to the legislation.
With the sale of its southern Alberta upstream and midstream assets to Pieridae for $190 million, Shell was to retain liability and responsibility for certain operational and remedial aspects of the sites in relation to historical proprietary Sulfinol contamination while Pieridae would retain other operational rights as well as regulatory responsibility for all other closure, remediation, and reclamation activities.
The applications proposed to amend the existing EPEA (Environment Enhancement and Protection Act) approvals which would be transferred to Pieridae and the issuance of new EPEA approvals to Shell.
“The AER is of the view that it cannot, by way of approval, carve up and re-distribute fundamental regulatory obligations in a manner that is contrary to or inconsistent with the EPEA,” the regulator said in a decision. “It would also be irresponsible for the AER to create a situation where the parties might rely on the terms and scope of their approvals to try to avoid responsibilities under the EPEA and any future orders.”
Alfred Sorensen, Pieridae chief executive officer, in a statement this morning said the company is confident that the Shell asset acquisition, having previously closed and been successfully integrated into Pieridae's operations, can be aligned to address the concerns of the AER.
“Both companies are moving swiftly to evaluate options on the transfer applications and will continue to attempt to seek clarity from the regulator to define an appropriate path forward,” he said. Pieridae plans to export the gas from the properties through its Goldboro, Nova Scotia LNG project.
In its decision, the AER said that one of the issues in the approvals is that the contamination at the sites has not been fully understood. Based on its review of the most recent Site Specific Liability Assessments (SSLAs) for the sites, “there are significant gaps in the information that Shell possesses about the contamination and associated liabilities at the sites,” said the AER.
“Operationally, it is unclear how Shell will be able to identify, and subsequently remediate only historic Sulfinol, ™ and how all other substances on the same site, including subsequent Sulfinol™ contamination, will be identified and remediated by Pieridae.”
The proposed EPEA approvals also are contrary to fundamental principles and provisions in EPEA, said the AER in its decision. “Shell is the polluter and person responsible for Sulfinol as well as other substances at the sites. It is also an operator under the reclamation provisions of EPEA, and is therefore required to conserve and reclaim the sites.”
The applications, said the regulator, “appear to request that the AER, by way of approval, override or at least significantly dilute Shell’s obligations under EPEA in order to mirror or give effect to a business arrangement between two parties.”
The approval also would be contrary to its mandate under the Responsible Energy Development Act, said the AER. “It is not efficient or orderly for the AER to administer two approvals setting out separate partial regulatory obligations when one single approval already exists and covers all operational and reclamation aspects for each site,” said the AER in a written decision. “Nor is it orderly or efficient to split EPEA rights and obligations amongst separate operators for the same site and activity.”
It would be “inefficient, disorderly and extremely burdensome” to manage and enforce different reclamation obligations among different approval holders, according to the AER. “This would unnecessarily complicate the administration of licences and approvals down the road and could create challenges in the enforcement of obligations under EPEA and the various approvals.”
The regulator also refused to consent to the transfers and assignments of a number of other licences. It said the applications were submitted as a bundle with the EPEA and other Oil and Gas Conservation Act (OGCA) applications which have now been refused, and were contingent on the ability to distinguish historical Sulfinol contamination liability from future liability.
However, the AER noted that under the Oil and Gas Conservation Act (OGCA) the licensee and the operator can be different persons and that based on the information provided by Shell on the commercial arrangement between the parties, Pieridae is the operator at the sites.
Shell and Pieridae still have the right to submit further applications independently of the refused applications and the AER decision can be appealed.
The company, which plans to export the gas from the properties through its Goldboro, Nova Scotia LNG project, “is confident” that the Shell asset acquisition, having previously closed and been successfully integrated into Pieridae's operations, can be aligned to address the concerns of the AER. Pieridae added that it appreciates the continued support and collaboration of Shell Canada in the matter.
The AER decision has nothing to do with Pieridae’s financial position nor its ability to clean up certain assets, Sorensen emphasized. “The issue for denial was the fact that there is no precedent for splitting a licence or no ability under the current legislation to do so.”
The senior leadership team at Pieridae has experience in acquiring, developing and decommissioning sour gas resources-related infrastructure in the Alberta Foothills and Northern British Columbia regions, he said.
The team, he said, also is supported by more than 200 experienced people who previously worked for Shell on these assets, including a strong technical team of asset integrity personnel. “The ongoing employment of these individuals will ensure the continued responsible operation, maintenance, and timely replacement and decommissioning of all resource infrastructure in accordance with applicable laws and regulations and with a focus on health, safety and environmental responsibility.”
The Foothills assets are high quality operating gas wells and gas processing plants with long term potential and remain attractive as the anchor production for the Goldboro project, said the company.
Pieridae announced the acquisition in June 2019 and the deal closed in October.
Pieridae's Alberta Woes
AllNovaScotia.com May 15, 2020 Dan Walsh
Pieridae Energy's massive gas field in the heart of the badlands - the company's future supply for its proposed Goldboro LNG plant - has run afoul of Alberta's energy regulator.
Pieridae, the Calgary-headquartered gas producer and developer led by CEO Alfred Sorensen, paid $190 million in late-2019 to acquire Shell Canada's midstream and upstream assets in the Alberta foothills as feedstock for Goldboro (see 2019-12-13).
On Friday, the Alberta Energy Regulator denied Shell's application to transfer licences to Pieridae, citing potential concerns over environmental clean-up.
"We are disappointed by the AER's decision," Sorensen said in a release.
"The decision has nothing to do with Pieridae's financial position nor its ability to clean up certain assets."
The ruling doesn't kill the deal, but it does send Shell and Pieridae back to the drawing board to present a new clean-up plan to the regulator.
Both companies "are moving swiftly to evaluate options...and will continue to attempt to seek clarity from the regulator to define an appropriate path forward."
Sorensen said Pieridae is confident the acquisition "can be aligned to address the concerns of the AER."
"The senior leadership team at Pieridae has experience in acquiring, developing and decommissioning sour gas resources-related infrastructure in the Alberta Foothills and Northern B.C. regions and is supported by more than two hundred experienced people who previously worked for Shell on these assets, including a strong technical team of asset integrity personnel," he said.
Pieridae pushed back its final investment decision on its proposed $8 billion Goldboro LNG operation, citing extreme market uncertainty stirred up by COVID-19 (see 2020-04-17).
The company was going to make its project decision this fall; now it's June 2021.
Pieridae got a significant cash injection from its Shell pick-up, in its most recent quarter ending Dec. 31.
Net operating income swung to a profit of $24.42 million in the fourth quarter, up from a loss of $2.7 million in the same period a year prior.
Revenue increased nearly five-fold to $60.45 million and Pieridae dramatically improved its working capital from a deficit of $76 million in 2018 to a surplus of $19.1 million 2019 after repaying debt.
Pieridae shares traded Friday afternoon at 27 cents, down eight cents (52-week high/low: $1.60/12 cents).
Shell Canada, Pieridae working on new sale agreement
Kallanish Energy May 19, 2020
Shell Canada Energy and Pieridae Energy are trying to rework a deal for natural gas assets in Alberta, after the provincial regulatory agency had rejected the agreement, Kallanish Energy reports.
The Alberta Energy Regulator last week refused to approve the transfer of 284 wells, 66 facilities and 82 pipelines in the sour gas region from Shell to Pieridae.
The regulator said it was not satisfied with the way the two companies were splitting up liabilities for potential environmental cleanups from the gas operations.
Terms of the sale made Shell liable for existing problems and Pieridae for future problems.
The company that created the problem should be held liable for any cleanups, the AER said.
The two companies have pledged to develop a new plan that will meet AER approval.
Last year, Pieridae Energy closed on its $190 million acquisition of all of Shell’s midstream and upstream assets in the southern Alberta Foothills.
The deal will provide natural gas needed for Pieridae’s planned $10 billion Goldboro liquefied natural gas (LNG) export facility in eastern Canada.
The Alberta natural gas would be shipped east via pipelines.
Pieridae has agreements with German utility Uniper to purchase 50% of the LNG.
The liquefaction/export facility at Goldboro, Nova Scotia, is designed to produce 10 million tons per year of LNG. It would process about 1.3 billion cubic feet of natural gas per day, starting in 2025-2026.
It is fully permitted. About 3,500 workers would be involved in the construction. A final investment decision is expected by July 1, 2021.
Alberta’s Energy Regulator looks to be reining in its leniency
Jeffrey Jones MERGERS AND ACQUISITIONS REPORTER PUBLISHED MAY 15, 2020
The Alberta Energy Regulator has been burned badly by approving transfers of oil and gas assets it should have turned down.
Its decision to reject an unusual application to split the environmental liabilities between the buyer and seller in a $190-million asset sale shows it may have finally reined in its tendency to be overly lenient with the industry.
The timing is certainty interesting: With Canadian taxpayers now footing the bill for decommissioning and reclaiming orphaned and inactive well sites in the form of a $1.7-billion rescue package for the industry, the AER now has a much larger constituency. And not all members of it are thrilled with having to pay for cleanup that the oil industry is responsible for.
This week the AER refused to bless the transfer of operating licences for natural gas assets from Royal Dutch Shell PLC to much-smaller Pieridae Energy Ltd. stemming from a deal the two struck last year.
Pieridae, led by Calgary businessman Alfred Sorensen, has been amassing Alberta gas production to feed a $10-billion liquefied natural gas plant the company has planned for Nova Scotia. The two companies closed the deal last October, and Pieridae has already integrated the southern Alberta wells, gas plants and pipelines, along with the operating staff, into its business.
The companies wanted Shell to remain responsible for the cleanup of contamination from a solvent compound called Sulfinol at the Waterton and Jumping Pound sour gas plants. Pieridae would assume the liability for the eventual decommissioning and reclamation of the rest of the operations.
In its decision, the AER said that the extent of the Sulfinol contamination is not well detailed in the applications. In addition, carving up the liabilities would contravene provisions in two provincial environmental and energy acts.
University of Calgary law professors Shaun Fluker and Nigel Bankes wrote that approving the application would have introduced regulatory uncertainty to the operations. It would have meant two approvals setting out partial, and potentially conflicting, obligations when just one exists now.
The companies expressed disappointment with the ruling, but stressed that it will not mean the deal will have to be unwound. It is acceptable for one company (in this case, Shell) to hold all the licences and another (Pieridae) to operate the assets while the two companies search for a solution and reapply.
In the meantime, Mr. Sorensen stressed that the AER’s rejection had nothing to do with his company’s financial wherewithal and its ability to take on the eventual abandonment and reclamation obligations attached to all the wells and other facilities it bought.
And that is where the AER has been caught before – approving licence transfers to companies with big dreams and weak financial positions.
For instance, Sequoia Resources Corp. was able to buy natural gas assets in several deals between 2016 and 2018 even though it failed to meet the regulator’s own minimum assets-to-liabilities standard. Sequoia promised the regulator that if it applied discretion and approved the deals the business plan would carry it through.
It didn’t, and Sequioa went bankrupt. The AER found itself on the hook for more than $225-million in cleanup obligations just as the downturn in the energy industry was generating more corporate insolvencies and putting the fate of thousands of aging and inactive wells in limbo.
At the time, the regulator said it was wary of slowing down commerce during a time when companies required asset sales to improve their financial positions.
Since then, the issue of underfunded environmental liabilities in the oil patch and growing number of orphan wells has been elevated in the public consciousness, especially as taxpayers have been asked to step up and help pay for cleanup that companies agreed to take on when they bought the assets.
In January, the province’s Auditor-General launched an investigation into the issue, saying environmental liability represents a huge financial risk for the government.
Given the financial carnage that the COVID-19 crisis has wrought in Canada’s energy sector, there will be requests for the regulator to allow transfers of assets to proceed when the financial metrics fall a bit short of the standards.
The AER rejected Shell-Pieridae application for a different reason, but let’s hope the ruling shows the regulator is now intent on going by the book.
Goldboro LNG Hits Regulatory Snag in Alberta Related to Supply Acquisition
Natural Gas Intelligence Gordon Jaremko May 20, 2020
A second attempt is under way to fulfill environmental rules for a supply deal for the Goldboro liquefied natural gas export facility proposed for Canada’s east coast after the Alberta Energy Regulator (AER) rejected the first transaction plan.
Project sponsor Pieridae Energy Ltd. said action would be launched “swiftly” to adapt to AER requirements for its C$190 million ($142 million) takeover of southern Alberta midstream and upstream natural gas assets from Royal Dutch Shell plc that it acquired last year. The assets would provide the majority of natural gas needed to supply Goldboro’s first liquefaction train.
The AER denied regulatory approval for a proposed transfer of provincial licenses for the gas properties to Pieridae from Shell. The companies sought a split of conservation and reclamation liabilities that was unclear and conflicted with Alberta law, according to AER.
The regulator said the firms are welcome to apply again for approval of a revised license transfer formula. Meanwhile, the asset deal is acceptable in its present incomplete form, AER added.
Pieridae runs the gas wells, pipelines and processing plants. Shell retains the provincial licenses and associated environmental liabilities. In Alberta, “the licensee and the operator can be different,” said AER’s decision. “This current arrangement between Shell and Pieridae accords with the AER’s regulatory framework.”
Pieridae said, “Both companies are moving swiftly to evaluate options on the transfer applications and will continue to attempt to seek clarity from the regulator to define an appropriate path forward.”
The company said in April that it would delay a final investment decision on the eight-year-old Goldboro project on the Atlantic coast of Nova Scotia until next year due to the Covid-19 pandemic. The facility would export up to 10 million metric tons/year.
Pieridae Still Confident of AER Approval of Shell Licence Transfers
Daily Oil Bulletin Elsie Ross Thursday, May 28, 2020, 2:45 PM MDT
Pieridae Energy Limited’s chief executive says Shell Canada Limited remains committed to the transfer of its South Foothills licences to Pieridae and that Shell will be working with the Alberta Energy Regulator (AER) to complete the process.
In a conference call to discuss first quarter 2020 results, Alfred Sorensen, president and chief executive officer, said that as the acquisition closed last year and had been successfully integrated into its operations, his company is confident that the transfer “can be aligned” to address the concerns of the AER. “We continue to own the assets, we continue to operate the assets and for Pieridae it’s business as usual.”
The AER recently refused applications from Shell and Pieridae Alberta Production Ltd. that proposed to split existing environmental approvals at the Waterton and Jumping Pound sour gas plants, saying that would be contrary to the legislation as there is no provision within it to do so. Because Shell had submitted one application for the transfer of 70 facilities, 82 pipelines, and 284 wells, the entire application was denied, said Sorensen.
“Our number one parameter is that Pieridae would be no worse off [after the transfer].”
Pieridae which began active operations in the fourth quarter of 2019, posted net operating income of $19.24 million in the first quarter of 2020, up from $5.16 million in the comparable 2019 quarter.
Adjusted funds flow from operations was $12.64 million compared to $342,000 in the previous period.
Total revenue increased to $73.97 million from $22.98 million a year earlier due to three full months of operations from the combined natural gas and midstream assets purchased in 2018 and 2019. Third-party processing fees along with expanded NGL and condensate production also contributed to the increase.
Petroleum and natural gas revenue increased by $41.4 million, including additional revenues as well as new revenue streams brought on due to the capabilities of the new assets acquired in the acquisition of Shell Canada Energy’s Foothills assets in 2019.
The net loss attributable to equity holders was $11.48 million versus a loss of $13 million in the first quarter of 2019.
Production averaged 41,211 boe/d in the 2020 quarter, up from 17,236 boe/d in 2019, primarily due to the Foothills asset acquisition, partially offset by unplanned outages in the first two months of 2020 at two gas processing facilities during the coldest weeks of the year, which was rectified during the quarter. A significant growth in condensate and natural gas liquids production in the quarter reflects the deep cut capacity of the acquired processing facilities, said Pieridae.
The company continues to have a strong hedging program and realized natural gas prices were $2.23/mcf compared to benchmark prices of $1.94/mcf during the quarter.
“We continue to see the benefits of last fall’s Foothills asset acquisition, with Pieridae recording strong financial results in spite of very challenging market conditions,” Sorensen said. “Once again, our strong operational performance and positive hedging strategy helped insulate us from the current harsh realities, as realized natural gas prices were 15 per cent higher than the benchmark price for the quarter.”
Pieridae said it anticipates capital expenditures of $28 million in 2020, mainly for a plant turnaround, and a Goldboro LNG development expense of $16 million.
Capital spending as well as the development budget for the Goldboro LNG project remains intact, said Pieridae. “With a number of global LNG projects either being cancelled or delayed, now is the time for Canada to seize the opportunity to enter into this industry at a time when others are exiting.”
Pieridae also is committed to dealing with environmental liabilities and in Alberta where it has roughly 332 non-producing or suspended wells and through its partners as submitted 80 applications under the federally-funded well site reclamation program administered by the Alberta government, said Sorensen. “We’re not saying we are going to get funding for all of them but we have made a significant effort to take some of the responsibility for the wells that had been suspended and to retire them over the next year.”
Sorensen in the conference call also reiterated the need for federal and provincial government financial support for the Goldboro project. “This is the time to be brave and hopefully they will get their wartime spirit and stick with us.”
Subsequent to the first quarter, Pieridae announced that it and energy company Uniper Global Commodities agreed to extend key deadlines under their joint 20-year agreement. The deadline extensions included expected commercial deliveries of gas to Uniper to start between Aug. 31, 2025 and Feb 28, 2026 and the extension to June 30, 2021 of the deadline to make a positive final investment decision on the company’s proposed Goldboro LNG facility. The 20-year agreement with Uniper is for all of the liquefied natural gas produced at Goldboro Train 1 or 4.8 million tonnes per annum.
Pieridae also has begun to contract for services outside the primary engineering, procurement, construction and commissioning contract with the intent to begin the site preparation work as soon as possible. Some of these main activities include building the wharf and jetty, road reconstruction and constructing the work camp.