Zombie Working Interest Partners: A Scary Trend In the Oil Patch

October 31, 2022

Written By Keely Cameron and Luke Morrison

While the popularity of zombies in film and popular culture has grown exponentially in the last decade, participants in the Western Canadian oil patch have increasingly been dealing with a different kind of zombie—"zombie corporations."

The Zombie Label

A "zombie corporation" is a shorthand label that can be used to refer to a company that is insolvent but not in formal proceedings or otherwise lacks the capacity/ability to address their co-ownership obligations. In the context of an oil and gas property with multiple working interest participants (WIPs), the presence of a zombie corporation creates a number of challenges for the operator and other WIPs.

Zombie corporations may arise in a wide array of contexts including:

• where (a) the shareholders and/or management of a corporation become deceased or incapacitated, and (b) control over the corporation has not been assumed by an executor/administrator or otherwise (i.e. rendering the corporation "will-less" for a period of time);
• where a corporation can no longer service its debts but formal insolvency proceedings have not been initiated;
• where the principals of a corporation have moved on to other ventures but not taken steps to wind-up the affairs of the corporation; or
• fraudulent conduct scenarios, including where some or all of the principals of a corporation have "ghosted" in order to avoid creditor obligations and civil and/or criminal proceedings.

Zombie Problems

When faced with a zombie WIP, in the absence of clear contractual terms that enable the operator or other WIPs to make decisions or manage the zombie WIP's interests, there is a risk of such interests becoming stranded in the absence of formal court proceedings. 

A zombie corporation's interests in oil and gas assets may end up vesting in the Crown either through the Mines and Minerals Act upon the expiring of any mineral agreements or through the Unclaimed Personal property and Vest Property Act, provided the Crown values the property at equal or greater than $250 for intangible personal property and $1000 for tangible personal property. 

In the case of abandonment and reclamation liabilities, there is a risk that non-zombie WIPs will be required to assume the zombie WIP's obligations and no guarantee that reimbursement will be available for the zombie WIP's share of the same through the orphan well fund.

Zombie WIP Tips and Tricks

Below are some tips and tricks for mitigating the risks posed by zombies WIPs:

1. Review co-ownership agreements to understand the tools and mechanics available to address Zombie WIP scenarios (for instance under the CAPL Operating Procedure, consider the applicability of terms in zombie WIP scenarios such as: the operator's lien; default criteria and remedies (including the right of the operator to market the Zombie WIP's share of production); the "Delinquent Party" designation; the surrender mechanism; and (where the zombie is the operator) potential recourse to the replacement of operator provisions).
2. Ensure WIP records are current and regularly assess the appropriateness of your insurance policies and coverage limits, including in consideration of cases where stepping in as operator for a zombie WIP on one or more assets may be required.
3. Keep a precise/accurate inventory of existing AFEs regarding abandonment/reclamation work (in order to, among other things, monitor your co-owned properties for potential AER compliance or enforcement orders).
4. Follow any court proceedings commenced in relation to zombie WIPs to mitigate the risk of your claims being barred.
5. Ensure that Alberta Energy Regulator records are updated regarding working interests and that records are accurately maintained to track divestures.
6. Monitor AER bulletins and legislative/regulatory developments affecting WIP risk exposure.

If you have any questions about zombie corporations, please contact the authors.

Authors