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Oil lease defaults hit new record

Landowner compensation claims more than doubled last year and have already doubled again this year

For the second year in a row, the number of claims against oil companies defaulting on rental agreements has smashed records.

Under Section 36 of the Surface Rights Act, landowners can apply for compensation from the provincial government if an oil company hasn’t paid their surface rental lease. From 2003 to 2014, the board has received an average of 360 applications and paid out $550,000 to landowners — even during the 2007 downturn.

Last year, “that changed,” said Gerald Hawranik, chair of the Surface Rights Board, which handles the claims.

“In 2015, we received a total of 764 applications under Section 36, which is more than double what we’d normally get — and we recommended about $1.7 million for payment, which is about three times as much as we normally would,” said Hawranik.

And in the first eight months of 2016, the number of claims “accelerated even further.”

“From Jan. 1 to Aug. 31, we’ve opened 1,051 files under Section 36, and we’ve received an additional 450 applications that are in the queue for file opening,” he said, adding that in August alone, the board received 320 applications.

“In eight months, we’ve received a grand total of 1,501 applications. The amount recommended for payment to Aug. 31 was $1.5 million so far, and we expect that that will probably balloon.”

The Surface Rights Board has changed its processes to deal with the huge influx of new applications it has received so far this year, added Hawranik.

“We’ve taken staff from other areas, and a little more than half our staff are processing Section 36 applications to try to keep up,” he said. “For repeat applications, we’ve streamlined the process to try to keep up, and our time has come down from about six months on average to about three months average processing time.

“In terms of new applications, we’ve brought that down from about eight months to about six months.”

The board is bracing itself for even more claims.

“It’s really accelerated,” said Hawranik. “If we were to process all 1,501 applications just from the first eight months, that would roughly come out to $2.5 million to $3 million.

“When you think about the total budget of the province at this point, it’s not a lot, but it’s escalating.”

‘Economic capitulation’

The recent influx of claims shows just how hard oil companies are being hit by this most recent economic downturn, said Brad Herald, vice-president of western Canadian operations for the Canadian Association of Petroleum Producers.

“We’re really in the depths of one of the most substantive downturns in several decades, not just for our sector but the whole Alberta economy,” said Herald. “We’re really seeing a lot of indicators that are trumpeting how significant this downturn is compared to others. It is one of the worst of the past century.”

The impacts are “reverberating across the province,” he said, and oil companies of all sizes are struggling to adjust their business models to make it work.

“For any business that’s had more than half of its revenue evaporate, that creates a lot of struggle,” said Herald. “In some instances, those companies can’t adjust quick enough and they’re having trouble meeting their obligations.”

And for many companies, “there’s not a lot of choice.”

“This is really economic capitulation,” said Herald. “You’re seeing companies unable to fulfil their obligations, not unwilling to.

“They’re making calls about paying their people and paying their light bill and paying their obligations. And for any business owner, that’s a terribly difficult place to be in.”

But it’s having a trickle-down effect on municipalities across Alberta, said Al Kemmere, president of the Alberta Association of Municipal Districts and Counties.

“With the infrastructure that’s there from oil and gas, there is a tax base for municipalities, and we’re seeing an increasing number of challenges with collecting taxes,” said Kemmere.

“There are many counties that have delinquent accounts, either from companies becoming insolvent or companies choosing not to pay their taxes at this time.”

While the association doesn’t yet have an updated number for the amount of outstanding tax payments, “both small and large counties are feeling the pain,” said Kemmere, adding municipalities still have to pay the provincial education property tax, regardless if they’re owed tax money.

“We’ve got one municipality that’s only about 3,500 people, and it’s got a situation where it has about $300,000 to $400,000 from one company alone in taxes that aren’t being paid,” he said.

“That’s a big piece of its budget all of a sudden, and it’s going to be carried by the balance of the municipality one way or the other.”

Some companies have approached their local municipalities for a reduction in their taxes, but for the most part, the municipalities “aren’t willing to go down that road.”

“We have an open heart to the challenges that the industry is facing, but it’s a provincial issue where many people are facing the same challenges,” said Kemmere.

“I hope we can find some kind of resolution for this so we don’t have one sector carry the burden for another sector.”

About the author

Reporter

Jennifer Blair is a Red Deer-based reporter with a post-secondary education in professional writing and nearly 10 years of experience in corporate communications, policy development, and journalism. She's spent half of her career telling stories about an industry she loves for an audience she admires--the farmers who work every day to build a better agriculture industry in Alberta.

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