As Alberta energy companies struggle to pay their bills, farmers, ranchers and counties feel the pinch
Geriatric orphan wells, boomtowns going bust and the fate of coal-mining towns in the age of renewables. In a four-part series, FP visits Alberta’s forgotten small communities to see how they are struggling with changes in the broader economy.
CALGARY – Andy Hofer and members of his Hutterite colony in northwestern Alberta have been embroiled in an increasingly common dispute in recent years. So common that the Hutterian Brethren Church of Grandview, where Hofer is the field manager, has been in at least eight such disputes in the past year.
Like many farms in the province, the religious agricultural commune, in an attempt to supplement its income, has signed lease agreements with oil and gas companies that want to drill their land for hydrocarbons.
But as commodity prices have tumbled for both oil and natural gas, those rental payments have either dried up or, in some cases, disappeared. In the past year alone, the Hutterite colony has won eight cases at the Alberta Surface Rights Board against energy companies that either weren’t paying rent or tried to unilaterally reduce their rental payments.
“It was a fight at the start,” said Hofer, adding that his colony near Grande Prairie has 80 such lease agreements. “They tried to reduce (the rent) and it was difficult getting more money.”
What was once a mutually profitable relationship between oil companies and the farmers, ranchers and counties who own the land they work on has become increasingly strained in recent years. Landowners and county reeves say they’ve had to fight for both rent and even municipal tax payments from a growing number of energy producers.
Those fights have resulted in drawn-out legal battles with companies farmers and ranchers once considered partners, while counties with massive municipal property tax arrears are being forced to dip into savings to balance their budgets or pass additional costs onto residents, who are sometimes the same farmers dealing with unpaid oil and gas rents.
The problem has become so widespread that applications to the Surface Rights Board, the provincial tribunal that assists landowners, occupants and operators resolve disputes about surface access and compensation, to recover unpaid rents have soared.
More than 2,500 applications were made in the first nine months of 2019 compared to 505 motions in all of 2014. The number of applications so far in 2019 has already surpassed the entire 2018 total of 2,410.
“The board is swamped,” said Daryl Bennett, a farmer and advocate for landowners in the Municipal District of Taber, just east of Lethbridge.
He said landowners are forced to wait years for payment decisions as a result of the glut of applications and some long-awaited decisions are rendered with “lots of mistakes” since the board does not have the staff required to properly deal with the volume of complaints.
One thing is clear: the delinquent payments are exposing fissures in Alberta’s rural communities.
Farmers and ranchers own the surface rights to the land, while oil and gas companies own the mineral rights beneath the surface. Contracts in years past were negotiated to allow both sides to profit as farmers and ranchers could earn rental income by allowing exploration and production companies to put drilling rigs and pump jacks on their lands and exploit any reserves.
When the lease payments stop — either due to bankruptcy or companies looking to reduce their rent — landowners don’t have the luxury of handing out an eviction notice. Once a well is drilled and encased in cement, it’s a permanent fixture on the land until its fully remediated and that process takes years.
Increasingly, landowners are angry about having to chase oil companies for payments and, sometimes being forced to wait years for the Surface Rights Board to settle the disputes. At the same time, Canadian agricultural exports have been shut out of critical markets such as China, further handicapping already cash-strapped farms and ranches.
The agriculture sector is also competing for space on railway lines to move their grain to ports, because oil companies are shipping more of their product on rail cars due to the shortage of pipelines.
Oil-by-rail exports hit 319,594 barrels per day in September, which is approaching the record high of 337,260 bpd set in December 2018 and double the five-year average of 159,584 bpd, according to the Canada Energy Regulator.
Canadian National Railway Co. data show it has moved 8.8 million tonnes of Western Canadian bulk grain this year through the end of November, which is a six per cent decrease relative to last year and a two per cent decrease relative to the three-year average.
But more than just farmers and ranchers are affected by energy companies looking to reduce their expenses.
County reeves and representatives for rural districts report that companies, particularly natural gas producers that have struggled with low commodity prices in recent years, are either late or delinquent in paying their municipal taxes.
Rural Municipalities of Alberta (RMA) president Al Kemmere said counties and rural municipalities “are seeing an increase in the number of taxes not being able to be collected compared with last year.”
Last year, the association reported communities were unable to collect $81 million in municipal taxes, with most of the arrears coming from energy sector companies.
The strain is exposing financial weaknesses in different pockets of Alberta, because oil and gas exploration and production has moved from conventional formations in the south to more lucrative, deeper-lying unconventional formations such as the Montney, Duvernay and oilsands in the north.
A review of the balance sheets of every rural municipality and county in the province finds a large division in the financial fortunes of Alberta’s counties in the deep south and those sitting on hot plays in the north.
The financial statements show that counties and rural municipalities in active oil and gas hotspots have accumulated large surpluses. For example, Wood Buffalo is home to the oilsands and reported a $5-billion surplus in 2018. The County of Grande Prairie, at the heart of the Montney and Duvernay formations, has a surplus of $543 million.
The 10 richest counties and rural municipal districts in the province have accumulated surpluses totalling $9.5 billion, about half as large as Alberta’s $18.1-billion Heritage Fund, which was established by former premier Peter Lougheed as the province’s long-term savings plan.
By contrast, the richest county in the province’s southeast, Cypress County, has an accumulated surplus of $244 million, only good enough for the 18th-highest reserves in the province.
“The conventional play is dying out. It’s never going to come back the way it was,” Bennett said, adding that landowners in the south are looking at ways to repurpose the unremediated land left behind by bankrupt oil and gas companies because they no longer believe the wells in those areas will be bought by new operators.
Cypress County is home to older natural gas infrastructure around Medicine Hat, but areas in the south, which are no longer beehives of oil and gas activity, have average cash reserves of $143 million.
Some counties in the area have watched multiple bankrupt oil and gas companies such as Trident Exploration Corp. and Houston Oil & Gas Ltd. hand responsibility for cleaning up their aging wells to the Orphan Well Association, an independent non‐profit organization under the Alberta Energy Regulator.
“What it does create now more than anything is a situation where some have and some don’t have. We’re going to have to work with the provincial government on the distribution of the (municipalities grant) that we have from the province,” Kemmere said.
But as poorer counties struggle with a preponderance of orphan wells, the rich counties face a different frustration.
Kemmere said some energy companies that are still active are citing the accumulated surpluses of well-to-do counties as a pretext to ask for municipal tax reductions.
The RMA in November released a report defending the existence of cash reserves, arguing there are restrictions on how those reserves can be spent.
“I can understand how (the companies) say it’s unfair that we’re sitting on reserves, but that’s been 30 years of good financial management so we do have money to fix the bridges, so we do have money to put up a public works building and so we do have money to buy fire equipment,” Clearwater County Reeve Tim Hoven said.
Clearwater County accumulated a surplus of $439 million during its 2018 fiscal year, the last year for which data is available.
“It’s not like we have a pile of cash down in the basement that we’re using for a slush fund,” Hoven said. “It’s all designated for a purpose for the good of our residents.”
As 2019 drew to a close, Hoven said his county, which sits atop the Deep Basin natural gas formation, has about $6 million in tax arrears, or about 10 per cent of its annual $60 million in tax revenues.
“It’s primarily gas producers who are either unwilling or unable to pay,” he said, adding the county is looking at dipping into its reserves as it sets a budget for 2020. “We realize it’s a tough time for these companies in the current business climate, but the municipal taxes are not the reason they’re going broke.”
Hoven said Clearwater County still wants oil and gas activity within its boundaries since the energy sector provides more than half of the county’s tax base. The challenge is trying to make the budget work while the county chases companies for tax payments.
“This (situation) is not a happy place for Albertans or the industry,” said Ben Brunnen, vice-president, oilsands, at the Canadian Association of Petroleum Producers (CAPP), adding the industry has been talking with municipalities about reducing taxes since the oil price collapse in 2014.
Wood Buffalo, Cypress County and Newell County have all reduced their business property tax rates as a result, which has helped improve the economics of operating new and existing oil and gas infrastructure in those areas, but doesn’t help it collect unpaid taxes.
Brunnen said oil and gas companies currently pay $2 billion annually in municipal taxes, making it the industry’s second-largest government-related cost in Alberta, behind only provincial royalty payments. He acknowledged this is partly because corporate income, and taxes as a result, have sharply fallen along with commodity prices.
In addition, Brunnen said CAPP is concerned that municipal taxes for oil and gas properties are assessed differently in Alberta than they are in Saskatchewan or British Columbia, where equipment on the land does not factor into assessments.
As frustrating as the situation is for landowners, some fear the fight with oil and gas companies for back rents will only escalate due to a court decision earlier this year.
On May 1, Court of Queen’s Bench of Alberta Justice Nancy Dilts ruled that privately held Karve Energy Ltd. is legally able to use a rent-reduction clause in its 25-year-old lease with Drylander Ranch Ltd. to drop its payments to the central Alberta ranch.
The decision overturned a previous ruling by the Surface Rights Board, which had sided with Drylander Ranch and said Karve Energy acted unilaterally in reducing its rent payments. Justice Dilts ruled that was an error because the existence of the rental reduction clause in the lease was the result of bilateral negotiations and, therefore, not evidence of a unilateral decision.
The decision is “absolutely” precedent setting and is likely to be the precursor for many energy companies re-reading their lease agreements and testing their abilities to reduce rent payments, Grande Prairie-based KMSC Law LLP lawyer Erik Compton said.
“More operators will start dusting off those old leases and saying, ‘Do I have a rent reduction clause in here?” he said. “We’ve had a number of operators come to us prior to that decision and say, ‘We have a rent review clause and we’re going to act on it.’”
Still, Compton said farmers and ranchers have some defences at their disposal when negotiating with oil and gas companies. First of all, the law in Alberta does not allow an oil and gas company to reduce rents to landowners because of either low commodity prices or a lack of pipeline space.
Second, the type of clause contained in the Karve v Drylander case is more common in older leases than in new ones. However, given the decision from earlier this year, Compton said he expects to see more energy companies that want leases including the rent-reduction agreement that Karve was able to use.
But that’s in the future. For now, Compton, whose firm works primarily in the more active oil and gas regions of the province, has seen a large uptick in landowners looking for unpaid rent from oil and gas companies. And the number of claims before the Surface Rights Board shows just how prevalent the problem has become.
While landowners pursue those claims, they face a prolonged period of operating their farm or ranch with less income. “They accept low rents or no rents until the matter is solved,” Compton said.