Oil Patch Shenanigans

[edslunch]

Stories like this make me rage.

- Perpetual Energy sells a bunch of crap wells to a new company (Sequoia) for $1.

The case has its origins in the reorganization of Perpetual Energy in 2016. That Calgary-based company transferred many of its money-losing properties to an associated company. Then Sequoia, which was founded by a pair of Chinese investors that same year, acquired those assets in a deal for $1.

- Not to the company mind you, to its directors, thereby bypassing AER review of its obligations.

- Perpetual Energy then splits into two companies (Rubellite), run by the same team, with the majority of assets going to the new company, thereby limiting liabilities

In 2021, while the bankruptcy battle was ongoing, Perpetual stored the majority of its assets into a new company called Rubellite Energy, which would have the same employees and office space as Perpetual.

The OWA and PWC opposed the move in court, arguing it would diminish how much money could be recovered if Perpetual lost the bankruptcy case.

Perpetual chief executive Sue Riddell Rose described the move differently, calling it a way for "Perpetual shareholders to benefit through Rubellite to unlock the value of these high-quality assets while at the same time providing a full capital solution, reducing Perpetual's leverage and improving its liquidity to surface value from Perpetual's remaining asset base."

Gag!!

- Sure enough Sequoia goes belly up, leaving ups to $200M of cleanup liabilities

With Sequoia, the OWA is expecting to inherit 1,800 to 2,000 more wells, in addition to the company's other infrastructure, such as pipelines. The estimated clean-up cost of the Sequoia properties is about $200 million.

- Perpetual is sued by the trustee, but the potential length of the trial coupled with the limited amount of recoverable assets left in Perpetual results in a settlement, with no admission of fault

"The settlement offer is approximately equal to the current market capitalization of Perpetual," he said. "Even if the trustee is successful ultimately, the Perpetual defendants are unlikely to be able to pay any significant monetary judgment."

- With that settled, the management recognized amazing synergy to merge Perpetual and Rubellite back together, free of liability

When the merger was announced, Riddell Rose described the deal as providing shareholders with "valuable synergies, both quantitative and qualitative."

Gag!!!

https://www.cbc.ca/news/canada/calga...ells-1.7336635

This kind of BS makes me loath the entire industry, admittedly unfairly, but loath it I do.

[Ozy_Flame]

[Fuzz]

Their must be laws around creating a company to dump all the toxic #### from another company in to, and then walk away, right? Like, this seems like a giant loophole companies in any industry could employ to escape debt and obligations, while boosting the value of the remaining company. Or do I live in a fantasy world where corporations don't just do whatever the #### they want?

[Nyah]

I worked for a company that was 'acquired' by a Chinese parent company. It was interesting to say the least and honestly it shouldn't be allowed, especially when you consider the track record. The above is a great example.

[ThePrince]

Originally Posted by Fuzz

Their must be laws around creating a company to dump all the toxic #### from another company in to, and then walk away, right? Like, this seems like a giant loophole companies in any industry could employ to escape debt and obligations, while boosting the value of the remaining company. Or do I live in a fantasy world where corporations don't just do whatever the #### they want?

Yes, although this loophole was exploited in the past, there are regulations now in place that should prevent this sort of thing (not saying it never happens, but it should).

All companies now have a calculated Licensee Liability Rating (LLR), which, explained very simply, is essentially just a calculation of how much potential ARO (asset retirement obligations) a company may have relative to the potential of their asset base. The Alberta Energy Regulator (AER) monitors these liability ratings, and if a company is selling assets or corporate sales, the regulator will calculate a pro-forma LLR to determine what the company's new LLR would be. If this rating is too low, meaning a company could be left with liabilities outreaching their ability to address their ARO, the AER can kibosh the sale.

Now you can absolutely have arguments about how this works in practice and whether it's a good enough directive to address all potential issues, but wanted to answer your question that there are laws and regulations in place designed to prevent things like this happening.

[edslunch]

Originally Posted by ThePrince

Yes, although this loophole was exploited in the past, there are regulations now in place that should prevent this sort of thing (not saying it never happens, but it should).

All companies now have a calculated Licensee Liability Rating (LLR), which, explained very simply, is essentially just a calculation of how much potential ARO (asset retirement obligations) a company may have relative to the potential of their asset base. The Alberta Energy Regulator (AER) monitors these liability ratings, and if a company is selling assets or corporate sales, the regulator will calculate a pro-forma LLR to determine what the company's new LLR would be. If this rating is too low, meaning a company could be left with liabilities outreaching their ability to address their ARO, the AER can kibosh the sale.

Now you can absolutely have arguments about how this works in practice and whether it's a good enough directive to address all potential issues, but wanted to answer your question that there are laws and regulations in place designed to prevent things like this happening.

But the there’s this:

The asset purchase, for which Sequoia paid $1, was the first and largest of several for the ill-fated company. Rather than transferring the assets to the buyer, which would have required the Alberta Energy Regulator to rule on its suitability for taking the liabilities, Perpetual transferred the shares in a subsidiary to Sequoia’s directors, Wentao Yang and Harold Wang. The AER has acknowledged this gap existed.

https://www.theglobeandmail.com/busi...oia-resources/

LLR has been around since 2002. Have the rules been strengthened since this sale?

[edslunch]

It galls me that Calgary’s royalty families get away with this BS and are still treated like kings and queens.

[Fuzz]

Only they can save us, and entertain us. We owe them more arenas, really.

[Robbob]

Originally Posted by edslunch

But the there’s this:


https://www.theglobeandmail.com/busi...oia-resources/

LLR has been around since 2002. Have the rules been strengthened since this sale?

Yes, I believe it even mentioned it in the initial story linked.

Looks like it was updated in 2020 and in 2023 they started to look at companies that haven't paid their municipal taxes and are trying to transfer stuff.

[Barnes]

A lot of Perpetual's shenanigans happened with Directive 006, 011, & 075 were in place though. LLR is a portion of Alberta's LMR program and is different than ARO.

In LMR calculations, 100% of the liability lies with the licensee for operations. It does not include many potential liabilities because it doesn't take into account any obligations not tied to the licensee like working interest or farm-ins. LMR is for Ops and license transfers, ARO is for finance and accounting.

Alberta has vastly undervalued abandonment and reclamation costs in the liability portion of the calculation in most areas of Alberta and Jason Kenny's UCP government removed the ability to view a company's LMR and whether or not a company has been required to and paid a deposit to cover a sub 1.0 LMR.

[Geraldsh]

Only 10 posts in on a story about bad behaviour and we learn that the UCP enabled even worse shenanigans.

[Monahammer]

Originally Posted by Fuzz

Only they can save us, and entertain us. We owe them more arenas, really.

Lol get ready for Spruced up meadows, complete with an outdoor stadium to host Cavalry FC.

[MacDaddy77]

There's more to this story, Sequoia spun off any good assets to Alphabow Energy and they are also bankrupt and in court appointed receivership and sale currently.

Any assets not sold under Alphabow will also hit the OWA soon.

[BlackArcher101]

You are just learning now how corporations across all industries skirt liabilities?

[Robbob]

Bankruptcy rules were also a federal so a lot of the creditors got their share of what was left before Alberta did until recently after they took it to the Supreme Court. I think there is a lot of catch up being done from the shenanigans in the past.

Stronger rules and mandatory spends on abandoned wells is just the start. Since the money that operates the OWA comes from levies from industry, I don't think they are too happy since the levy was increased last year.

[blankall]

For residential properties, the previous owners can be held liable for cleanup costs. I'm sure there must be some similar laws for land used for oil exploration?

[powderjunkie]

Most ethical oil in the world.

[GGG]

Originally Posted by powderjunkie

Most ethical oil in the world.

Still likely is, maybe Norwegian offshore is more ethical.

Industry predominantly funds the OWA. There certainly are issues with the size of the levy and the pace of the abandonments and rules preventing orphan wells in the first place. But these systems do exist and are measured which is better than many.

[Locke]

Had to be done.

NSFW!

[D as in David]

Originally Posted by Fuzz

Their must be laws around creating a company to dump all the toxic #### from another company in to, and then walk away, right? Like, this seems like a giant loophole companies in any industry could employ to escape debt and obligations, while boosting the value of the remaining company. Or do I live in a fantasy world where corporations don't just do whatever the #### they want?

If there is a law against it, rest assured, the UCP government is hard at work figuring out how to remove that hindrance to unfettered capitalism. TBF, they aren't against any fettering that results in financial rewards to themselves or their friends.