An abandoned well site to be decommissioned by the Alberta Orphan Well Association is pictured near High River, Alta., on Aug. 12, 2020.Todd Korol/The Globe and Mail
The oil patch’s fortunes have rebounded to levels not seen in more than half a decade as oil and natural gas became hot commodities again. There’s a lot of talk in Alberta about the energy sector getting its mojo back, and Premier Jason Kenney’s UCP government is doing a lot of that talking.
It’s no wonder. As announced this week, a revenue jolt from the industry went a long way to slashing the government’s deficit forecast for this fiscal year by two-thirds from the initial $18.2-billion budget estimate.
But bubbling away in the background is familiar discontent among landowners and environmental advocates about the industry’s windfall and how it’s being directed to dividends and share buybacks, rather than accelerated cleanup of the idle and spent wells that are a legacy of past booms. This after taxpayers stepped in last year to provide $1-billion in stimulus money to help deal with a mess they did not create.
Abandoned oil and gas wells place unfair burden on landowners, taxpayers: study
It’s a long-running problem the UCP inherited and, to its credit, has taken steps to solve. This week, the Alberta Energy Regulator (AER) finalized a much-needed retooling of its rules aimed at reducing multibillion-dollar environmental liabilities and preventing companies that can’t afford cleanup from acquiring assets.
But the new regulations are hit and miss.
The overhaul includes new financial scrutiny on companies and their ability to handle the future costs of plugging and reclaiming old sites. This is long overdue.
Based on the regulator’s own estimates, however, a new quota system for industry spending on abandoned sites could take decades in helping to reduce a backlog that tops 95,000 inactive wells. There will be more sector busts in that time and, again, the industry’s ability to foot the bill for cleanup will be strained.
These sites dot the province. In fact, there are far more inactive wells than active. The issue is contentious for the industry and Albertans on whose properties old wells require cleanup. Many of the wells have been in suspended animation for years.
Controversially, the AER has shied way from setting limits on how long wells can sit idle, as various other jurisdictions do. If wells in Texas have been shut down for more than a year, for instance, operators must apply for extensions that require security bonds. Alberta had a five-year limit briefly in the 1990s, but that ended under industry pressure.
Alberta should lower barriers that discourage businesses from reusing abandoned oil wells: report
The AER now has 40 measures it will consider when deciding on whether a company has the wherewithal to handle future cleanup costs, especially if it is also acquiring assets. They include the company’s record with previous work and compliance with regulations, along with financial health and the remaining years left for cash-generating assets. The regulator can also demand security deposits to reduce risks, and is updating that policy.
Previously, the main yardstick was a calculation of assets versus liabilities. The system allowed workarounds and promises by applicants of future riches in place of meeting even that threshold. Still, the result was sometimes bankruptcy court and scads of idle wells added to the orphan inventory.
So what about that backlog? The AER has instituted industrywide spending minimums of $422-million in 2022, and $443-million the following year to be dedicated to cleaning up idle wells. Future amounts are estimated to increase by 5 per cent a year through 2026. Each company will have to meet a mandatory annual target.
These are certainly tougher standards than in the past, but they won’t get the job done quickly enough if global demand for oil and gas wanes in the predicted transition to cleaner energy sources in the coming years, and as more wells peter out.
AER chief executive Laurie Pushor has said the aim is to work through the backlog at 4 per cent to 5 per cent a year. At that rate, it could take two decades or more to deal with just the current list, says Sara Hastings-Simon of the University of Calgary’s school of public policy. Meanwhile, the energy sector is gushing free cash flow and not directing the money to big boosts in capital spending, she points out. Here is a proper use for some of that extra coin.
It was a strain on companies to keep up with cleanup during years of industry malaise. It makes sense, then, that now they should make a bigger contribution toward solving a problem that was supposed to be dealt with as part of their approval to drill in the first place.
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Jeffrey Jones