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Crazy Days in Alberta: The Poison Wells File

The province let oil and gas firms create a $100-billion disaster. They expect you to foot the bill.

Andrew Nikiforuk 16 Dec

Andrew Nikiforuk is an award-winning journalist who has been writing about the energy industry for two decades and is a contributing editor to The Tyee. Find his previous stories here.

Every day something crazy happens in Alberta to illustrate how thoroughly oil politics have eroded the province’s grip on reality.

Judy Aldous, who hosts a province-wide CBC Radio noon show, recently devoted an hour to one particularly crazy item — orphaned and unreclaimed wells in Alberta.

Guest Gary Mar, CEO of the Petroleum Services Association of Canada, argued that federal taxpayers fund tax credits for the oilpatch worth $700 million over three years to help pay for the cleanup.

“All Canadians benefited from this industry and all Canadians should be part of the solution,” he said.

An average listener unaware of the history of the province’s derelict well, pipeline and gas plant liability problem might have concluded Mar was being reasonable.

But Mar, a former provincial Conservative cabinet minister, was really asking for taxpayer’s money to make up for 43 years of misrule by Tory governments. They created the current crisis by failing to require oil and gas companies to provide security deposits to cover their cleanup responsibilities, and by allowing them to put off remediation of inactive wells indefinitely.

That’s how crazy the situation has become in Alberta. Taxpayers are being asked to pay for the failures of government and oil and gas companies by a former politician whose party was responsible for the problem.

(For the record, companies can’t get away with that kind of irresponsible nonsense in some other jurisdictions. New Mexico and North Dakota both require upfront deposits and timely reclamation for inactive wells. )

It’s a massive problem.  

The province has 107,000 wells that produce less than 10 barrels a day and are depleted beyond profitability. It has another 93,000 inactive wells — not producing at this time — and another 77,000 abandoned ones that have been plugged but not reclaimed. All need to be cleaned up.  

Bankrupt energy companies have already walked away from 3,500 orphan wells.

More than 40 per cent of the oil and gas wells in the province are not pumping hydrocarbons or generating revenue. Many are leaking methane, CO2, radon or hydrogen sulphide into the air, ground or water table.

The cost of cleaning up the sites and decommissioning the wells can range from tens of thousands of dollars to hundreds of thousands, depending on their age and type.

In a 2018 presentation, Robert Wadsworth, vice-president of closure and liability for the scandal-plagued Alberta Energy Regulator, estimated that the cleanup liability for the province’s 400,000 oil and gas wells was likely at least $100 billion. Pipelines, he added, represented another $30 billion unfunded liability.

But the Alberta Energy Regulator has only collected $226 million in security deposits to pay for cleanup if companies declare bankruptcy and won’t pay.

That’s bad news for taxpayers — and for oil and gas investors.

The $100-billion unfunded liability, combined with low commodity prices and the high costs of hydraulic fracking in shale formations, has already scared investors away from the oil patch.

In the last four years more than 200 North American oil and gas companies (at least 30 in Alberta) have declared bankruptcy.

Laws in most Canadian and U.S. jurisdictions require bankrupt or insolvent firms to cover cleanup costs before they pay unsecured creditors. As the cleanup liabilities increase, investors and some creditors face the risk they’ll get nothing.

That principle was affirmed in a Supreme Court of Canada ruling in January. Even Alberta Premier Jason Kenney has acknowledged that the ruling “has done so much to restrict access to both capital and credit, equity and credit, for this industry.”

The government-industry revolving door

Mar, who became president of the Petroleum Services Association of Canada in 2018, glossed over this reality in his CBC appearance.

Mar served as a cabinet minister in five different ministries in Ralph Klein’s Conservative government between 1993 and 2007. He was also the province’s representative in Washington, D.C., lobbying for oil sands projects and pipelines.

Now he has a comfortable oilpatch job. (In the petro state of Alberta, revolving doors connect government and the oil and gas industry.)

During the show Mar joked in an aw-shucks sort of way that he was a “recovering politician.” But politicians rarely recover.

In fact Mar’s industry group now pumps out overtly political press releases that read as though they had been composed by Kenney or the government’s new energy propaganda wing.

A recent release thundered that the “Oil patch braces for continued uncertainty with new federal minority government.”  

It blamed forecasts of low drilling by oil and gas companies on Liberal policies — not on low methane prices or industry debt or the high cost and low returns from fracking.

Trudeau may well be an unlikeable promise-breaker, but he isn’t responsible for low oil and gas prices or the notoriously unsustainable economics of fracking.

The familiar sounding press release groaned on. “It’s time our country had a vision for energy, a vision that could inspire Canadians to join together in support of our responsible energy development that benefits the lives of all Canadians.”

During the radio show Mar offered his vision for a federal bailout. He made a pitch for a $700-million resource environmental tax credit for energy corporations funded by Canadian taxpayers.

What could be more reasonable than privatizing gains — the money the companies made in the good years — and socializing costs?

Experts don’t think Mar’s request for a federal handout is honest or reasonable.

Darryl McMahon, an Ottawa-based expert on oil spill cleanup technologies, said a fund just dumps industry’s and government responsibilities on the public.

“I very much believe the cleanup costs should be paid by the industry and the provinces who collected the oil royalty revenue and should have created a cleanup fund,” he said.

851px version of Oil well
Alberta has a paltry $220 million in deposits to cover an estimated $100-billion liability just for plugging and reclaiming old wells. That’s because the province never required upfront security deposits.

Regan Boychuk is one of the founders of Reclaim Alberta, which advocates for an accountable industry funded cleanup program.

He said the scheme would enrich big companies by subsidizing their cleanup costs without helping small struggling firms that are more likely to abandon their cleanup obligations.

“The little zombie companies going bankrupt don’t do any cleanup,” he said. “So they’d get little of the $700 million subsidy.”

Boychuk said the Alberta government should create an agency to take over insolvent companies and dedicate revenues from their remaining economic wells to pay for reclamation.

“There is still money coming out of the ground, but it should be used to pay down reclamation costs,” he said.  

A government-created problem

During the CBC broadcast Aldous asked Mar a simple question: How much did the Alberta Energy Regulator collect over the years in security deposits for cleanup costs?

Mar said he couldn’t answer the question. He said it wasn’t in his bailiwick.

But the answer is easy to find. Alberta has a paltry $220 million in deposits to cover an estimated $100-billion liability just for plugging and reclaiming old wells. And that’s because Mar’s political party never required upfront security deposits.

The province only collects deposits — tiny ones — when companies are already heading toward failure, with liabilities exceeding their assets.

And the AER’s Wadsworth correctly characterized the system for monitoring liabilities as “deeply flawed.” 

“For security, the problem is we collect or try to collect it when a licensee is already showing declining financial capacity,” he said.

In his presentation Wadsworth also posed a good question. “Why has there been no political will to make changes to the liability programs?”

Mar’s non-answer to Aldous’s question avoided the reality that his political party, largely funded by the industry, authored a colossal public policy failure.

The Tory’s ruinous liability scheme has endangered the province’s credit rating. And now these dirty old wells threaten the wallets of federal taxpayers.

And they’re not the only risk.

The province’s Auditor General warned in 2015 that oil sands cleanup costs represent a $21-billion liability, but the regulator has only required the profitable industry to set aside $1.6 billion. The estimated liability has now grown to $28 billion while security deposits hover at $1.4 billion.

The U.S.-based Institute for Energy Economics and Financial Analysis recently summed up the dire nature of the industry’s cleanup liabilities across North America.

The oil and gas sector, it reported, faced severe financial stresses “stemming from low energy prices, poor financial returns, and massive amounts of outstanding debt.”

“Any additional pressures — such as climate-related legislation or litigation, or lower oil or gas demand stemming from the boom in renewable energy — could force companies to retire some of their assets far sooner than expected,” it noted.

And that would trigger the requirement for cleanup and remediation costs.

Mar was part of a government that ignored the problem for decades.

Now, as an employee of the industry, he wants taxpayers to foot the bill.

It is all rather convenient — and crazy.

But here’s what should be the incontestable reality:

Polluters must pay to clean up their messes before they go bankrupt. 

It is irresponsible for Mar and the Kenney government to not address the failures of the province’s liability programs.   

It is irresponsible to make Canadians pay for the incompetence of Alberta governments.

It is irresponsible to let zombie oil and gas companies with few assets — the corporate walking dead — endanger the province’s economic security and credit rating.

And it is irresponsible for the Alberta government to not establish a transparent cleanup fund and an independent inquiry into the extent of the oil and gas sector’s underfunded environmental liabilities, as recommended by University of Calgary law professor Martin Olszynski.

But don’t bank on any immediate outbreak of sanity in Alberta.

And if you are a Canadian taxpayer, hang onto your wallet.  [Tyee]

Read more: Energy, Politics, Environment

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