Chinese firm Sequoia Resources exits oil sites in need of environmental cleanup

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A Chinese-controlled company that snapped up distressed oil and gas assets in a series of deals told regulators it plans to cease operations, potentially dumping hefty environmental liabilities on an industry already struggling with a sharp rise in unfunded cleanup.

Sequoia Resources Corp. told Alberta's Energy Regulator (AER) that it is unable to clean up thousands of sites for which it has licences and that it would "cease operations imminently" due to defaults on municipal tax payments, according to regulatory documents.

A notice posted on the website of tax and consultancy firm PricewaterhouseCoopers LLC says Sequoia has filed initial paperwork that typically precedes a court-supervised restructuring.

The company's struggles raise questions about oversight of transactions in cases where purchasers lack the financial wherewithal to clean up assumed liabilities. It also threatens to exacerbate a spike in idle oil and gas wells leftover following a string of corporate bankruptcies across the industry.

The AER issued a compliance order to Sequoia director Wentao Yang, as well as the company's president, Hao Wang, last week.

However, the regulatory process is in its early stages, so it is not yet known how any insolvency might affect, for example, Alberta's orphan well fund, said Bob Curran, the regulator's spokesman. The industry-funded levy is meant to pay for cleanup of wells for which there is no legal owner.

"We have to see what the response will be to the order, and there's also another process that's unfolding that we are not in control of, which is in regard to the company's receivership," Mr. Curran said. "So we don't have enough clarity yet what the outcomes might be."

Sequoia is one of several Chinese-owned companies that has stepped up purchases of aging wells and infrastructure in the province as other sources of foreign capital have retreated from the oil patch.

The company did not respond to messages seeking comment Wednesday. The Globe and Mail has previously reported that one of its affiliates, Shanghai Energy Corp., is partly owned by China's Communist Party.

Deals by the company have tended to fall below the threshold that would trigger a review under the Investment Canada Act. Many involve assets burdened with major liabilities that require costly remediation work or hefty deposits to be posted with the provincial regulator.

For example, Sequoia assumed $133.6-million in future cleanup costs in a 2016 deal with Perpetual Energy Inc. The company and its affiliates have also picked up assets from defunct Waldron Energy and Endurance Energy Ltd., among others.

Data from the AER show Sequoia has licences for more than 2,300 wells, about 200 facilities and nearly 700 pipelines in the province. Most are in exploration regions that produce primarily natural gas, meaning the recent uptick in crude prices above US$60 a barrel has done little to improve their profitability.

The provincial energy regulator has sought to crack down on an increase in companies using insolvency proceeds to shed environmental liabilities. Whether or not provincial environmental regulations trump federal insolvency laws is currently the subject of a Supreme Court appeal led by the AER in the case of defunct Redwater Energy Corp.

In a letter dated March 1, it warned Sequoia against walking away from its commitments.

"While the AER encourages companies to be proactive and engage with their partners and the regulator when ceasing operations, the ceasing of operations does not absolve the licensee from complying with its obligations, including end of life obligations," the regulator said.

However, the regulator has also given companies substantial leeway to complete deals, even as it warns against the risks of unfunded liabilities.

In October, 2016, court documents show Sequoia submitted a "request to the AER to apply discretion" to rules meant to stop financially shaky companies from buying distressed assets. Sequoia later closed the purchase of assets from Waldron Energy.