The Alberta government is introducing sweeping changes to rules that govern oil and gas wells to try to fix a decades-old problem that has resulted in tens of thousands of inactive sites littering the province.
The new liability management framework will introduce mandatory well cleanup rules, overhaul a system that assesses companies’ fiscal health before granting them regulatory approval for wells, and allow farmers and ranchers to demand well reclamation on their land. Regulations and enforcement of the new rules will fall to the Alberta Energy Regulator.
The problem of inactive oil and gas wells has been “festering for 60, 80 years,” Alberta Energy Minister Sonya Savage told The Globe and Mail. “But it can’t continue. It’s causing too much uncertainty.”
Unlike other jurisdictions including British Columbia, Texas and Colorado, Alberta won’t impose mandatory limits on how long a company has to clean up a well once it stops producing. Instead, the province will establish annual industry site-closing spending targets over a five-year rolling period, to help reduce inactive well inventories.
Ms. Savage likened the new approach to paying down a mortgage – by chipping away at the number of inactive wells, she said, “eventually you get to the point where all of the liabilities are cleaned up.”
“What we’re trying to do with the mandatory reduction target is incorporate and emphasize the polluter-pay principle, and clean up the problems so future generations aren’t left in a position of cleaning up inventory that accumulated under previous generations,” she said.
A new opt-in mechanism will also allow landowners to nominate sites for reclamation. The applications will be reviewed by the AER, with the onus on operators to justify why a site should not be immediately cleaned up.
It’s a change for which Alberta property rights lawyer Keith Wilson has been advocating for years.
“The landowners have been really forgotten in this, and it has been frustrating,” he said.
In Alberta, oil and gas companies have the legal right to set up a well on any public or private land. They can keep the well there as long as they like – even if it no longer produces – as long as they pay rent to landowners.
“That’s why I’m so positive about this new policy. It allows landowners who are being adversely affected by these old, inactive wells to take reasonable steps to compel the company to clean up,” Mr. Wilson said.
But he said it’s also fair to companies, which will have the opportunity to make the case for coming business plans.
“If there are real, valid economics, it would be unreasonable to force an oil company to prematurely close the hole and reclaim that site.”
Alberta is home to more than 91,000 inactive wells. Part of the problem is that the current rules governing well cleanup were put in place decades ago, when Alberta’s oil and gas industry was booming and laser-focused on growth and building new infrastructure.
To receive regulatory approvals, a company simply had to demonstrate to the AER that it had twice as many assets as liabilities on its books, thus proving it could cover the cost of reclamation when a well reached the end of its life. Even if it didn’t meet that criteria, it could apply for special dispensation.
But over the past five or six years, as oil prices fell, the recession hit and bankruptcies spread like wildfire through the oil patch, companies simply dusted their hands of their cleanup responsibilities, dumping sites onto the Orphan Well Association and walking away.
As a result, the number of inactive oil and gas sites has climbed steadily, even as the industry’s capacity to pay to clean them up has fallen.
More than 6,000 inactive wells are now the responsibility of the OWA. The association is supposed to be funded by industry, but the sharp decline in the energy sector has resulted in $535-million in taxpayer-funded loans from the provincial and federal governments.
Ms. Savage said the mandatory cleanup rules and a new licencee capability assessment system (which replaces AER’s current licensee liability rating program, or LLR) will work together to reduce the number of inactive wells and keep them from being handed off to the OWA.
The LLR’s process of weighing assets against liabilities “wasn’t an accurate assessment of a corporation’s financial health,” Ms. Savage said. As a result, companies secured well transfers when they were unable to cover costs. When they went bankrupt, their inventory ended up with the OWA. In other cases, Ms. Savage said the LLR ratio prevented healthy operators from acquiring licences.
The new assessment system will take into account a wider variety of factors to gauge a company’s ability to pay for cleanup before they receive regulatory approvals. Ms. Savage said it will be “much more fair and accurate,” by taking a complete look at companies’ finances, including their debts.
The province is also introducing a program designed to provide guidance and support to companies that are financially distressed or on the brink of insolvency, so they can maintain their operations. It will allow the AER more flexibility, and bring to the regulator people with more expertise in bankruptcy, insolvency, financial health and lending.
“We had heard so many examples of companies that – with a little bit of discretion – could have been financially healthy and pulled through. But because of some of their inactive wells and their liabilities, they got tipped over and went into bankruptcy,” Ms. Savage said.
“It’s better to keep a company healthy if it has the potential to survive, so they can pay for cleaning up their own liabilities.”
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Emma Graney