Written By Keely Cameron and Luke Morrison
This is the second in a two-part series on wellsite repurposing projects in the Canadian oilpatch. Part one looked at the background and advantages of repurposing projects.
Challenges and Uncertainties
Notwithstanding the potential benefits of repurposing projects and the increased amount of attention and pilot projects we are seeing in this area, we are still in the early stages of inactive site repurposing. There is still an abundance of inactive wellsites in the oilpatch and we have not seen a widespread adoption of any particular repurposing strategy. This is largely the result of the lack of a clear regulatory framework, and in some cases, a lack of sufficient flexibility in existing regulations and systems, to support such conversions.
Specific examples of the challenges that repurposing project proponents currently face in this regard include the following:
- Municipal Taxes: It is not clear how municipal property taxation rates will apply to repurposing projects, including whether repurposed inactive sites will be treated the same as the existing oil and gas infrastructure or be subject to reduced rates (such as those which have already been applied to certain types of wells). While it has been announced that the Alberta government is currently reviewing options to modernize the municipal property tax assessment system as a whole, the focus has been on better alignment with the underlying value of existing conventional oil and gas properties (and as a consequence not on-site repurposing scenarios). As a result, repurposing proponents are faced with uncertainties in determining how municipal property tax assessments impacts their economic models for particular projects.
- Abandonment and Reclamation Requirements: As provinces move to amend their liability management regimes to increase cleanup of inactive sites, with British Columbia having already implemented timelines, there may be increased hurdles to getting exceptions from full cleanup to support repurposing activities. In many cases, having to fully complete site closure and remediation activities prior to commencing repurposing activities would be contrary to the underlying use case of the repurposing project.
- Liability Management Regimes: Provincial regulators have yet to release details regarding how the existing liability management programs apply to repurposing projects involving use of existing wells. Since the liabilities and the economics associated with new repurposing uses are fundamentally different from those associated with traditional oil and gas wells, regulators will need to formulate novel liability management schemes, or come up with a methodology to accommodate well repurposing projects within existing frameworks.
- Royalties and Rentals: Repurposing project developers do not yet have a comprehensive roadmap for how royalties and surface lease payments will be calculated or split where there are multiple licensed uses. For instance, Alberta and Saskatchewan have set helium-specific royalty rates, but there are no rates set for lithium or hydrogen production. Similarly, for solar, geothermal and storage repurposing projects, proponents would currently need to sublease or piggyback off of existing brownfield surface leases as the surface rental regimes do not contemplate the type of co-tenant relationships that such projects would entail.
- Lack of Standardized Contracts: The contracts used for repurposing projects are currently a mixed bag. In some cases (e.g., helium developments), existing industry standard forms fit the bill with minor modifications or customizations. However, in other cases the repurposing project does not fit squarely within any traditional precedents, and requires a collage of elements from different forms as well as bespoke drafting to address project-specific issues. In other words, many repurposing projects will involve repurposing of underlying standard form contracts as well as the inactive wellsite itself.
- Site Access and Risk Allocation: Another key contractual and regulatory issue is in relation to third parties accessing and performing repurposing work on existing wellsites. With numerous permutations of different relationship scenarios between WIPs/licensees and repurposing proponents, there is no one size fits all approach for site access protocols and risk allocation. Prime contractor relationships, existing site conditions/environmental issues, and facility-specific configurations are just a few of the issues that may drive parties to adopt a specific approach to access and liability/indemnity terms.
- Multiple Regulators: Some repurposing projects will naturally engage different regulators for different aspects of the overall operation. There have been very few test cases so far regarding how the different energy regulators and regulatory regimes will interface during various stages of repurposing projects.
- Access to the Grid: For those eyeing up repurposing projects that involve smaller scale generation and the sale of electricity to the grid, interconnections and access are critical factors, on top of additional hurdles that are specific to such projects located on existing wellsites. In Alberta, the Alberta Utilities Commission and the Alberta Department of Energy have been exploring the restrictions on the ability of on-site generators to export excess power to the grid.
Despite many obstacles and unknowns, repurposing projects present opportunities for collaboration, innovation and reinvigoration in respect of the multitude of inactive wells and related infrastructure in Canada's oilpatch. Repurposing projects offer the potential for redeployment of skilled oilfield works and provide producers a means to flip the script to convert liabilities into income streams while contributing to energy diversification, all of which are key pillars in Alberta’s Recovery Plan and Canada's overall economic recovery strategy.
Our Energy and Regulatory teams have a robust understanding of the potential upsides and challenges associated with wellsite repurposing projects. For more information on how you can evaluate potential repurposing opportunities, please contact us.