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Scotiabank is warning that the Alberta government's plan to give oil companies a royalty credit for cleaning up their old wells could damage the reputation of Canada's oil and gas industry.Jeff McIntosh/The Canadian Press

The Bank of Nova Scotia has weighed in on an Alberta government plan that would provide incentives to oil and gas companies to clean up their old wells, warning that it would fly in the face of “the core capitalist principle that private companies should take full responsibility for the liabilities they willingly accept.”

Alberta is pondering a pilot program that would provide oil and gas companies with royalty credits to offset legally required abandonment and reclamation expenditures. Essentially, they would pay a lower royalty rate on new fossil fuel production until they have paid off the cost of reclaiming older, inactive sites on their books. Details of the new site liability pilot program haven’t yet been finalized.

In a Thursday research note, Scotiabank cited the landmark 2019 Redwater decision by the Supreme Court of Canada, which noted that cleanup costs aren’t debts requiring payments – they are duties to the public and nearby landowners.

Scotiabank noted that the biggest beneficiaries of the potential program would be Canadian Natural Resources, Ltd. CNQ-T, Cenovus CVE-T, Whitecap WCP-T and Paramount POU-T, adding it’s unlikely the pilot program would lead to increased drilling activity.

The bank also said the program could “perpetuate negative views against the energy industry” and be used as an example of a new fossil fuel subsidy.

Scotiabank’s critique of the new program joins a growing chorus of voices that have raised concerns about the plan.

Rural municipalities, economists, environmental groups and the opposition NDP have all questioned why the government is considering any kind of economic assistance for companies that have shirked their legal responsibility to clean up their messes.

Alberta Premier Danielle Smith and Energy Minister Peter Guthrie have argued that the program would increase economic activity, stimulate jobs in rural municipalities and give fossil fuel companies an incentive to prioritize cleanup.

Ms. Smith told reporters Thursday afternoon that the pilot program would target “the worst wells in Alberta,” some of which date back decades to when environmental standards were more lax.

“There hasn’t been anything done so far to stimulate the cleanup. We’ve got to do something different if we want to get these sites cleaned up, and so I’m willing to try a pilot project to see if it will work,” she said.

Martin Olszynski, an associate professor at the University of Calgary’s faculty of law, said in an interview Friday that instead of the pilot program, the government could ensure industry pays for its own mess by increasing both mandatory spending targets for cleanup activities and the fees the sector pays to the Orphan Well Association, which is responsible for the cleanup of oil and gas sites with no viable owner.

“Why would any operator spend any kind of money on cleanup right now to deal with any of the reclamation liabilities if they can just hope that they might be incentivized to eventually clean these up?” he said.

“The moral hazard here is just astounding.”

If implemented, the program would be the latest in a long line of economic breaks and funding Alberta’s United Conservative Party government has given the oil and gas sector over the past few years.

In March of 2020, then-premier Jason Kenney announced Alberta had committed $1.5-billion in direct financing and $6-billion more in loan guarantees to TC Energy Corp. TRP-T for the cross-border Keystone XL expansion project. The pipeline was scrapped after U.S. President Joe Biden scuttled the building permit, costing Alberta taxpayers $1.3-billion.

In October of 2020, with the industry battered by low oil demand and prices induced by the pandemic, the province implemented a three-year property tax exemption on new wells and pipelines, eliminated a tax on well-drilling equipment, reduced property taxes for less-productive oil and gas wells for three years and continued a program that cut assessments on shallow gas wells by 35 per cent.

Mr. Kenney also announced in 2020 that taxpayers would cover Alberta Energy Regulator levies for six months – a cost usually borne directly by industry. The province also foots the bill for the Canadian Energy Centre. Originally floated as an energy “war room” with a budget of $120-million over four years, it was created with the sole purpose of defending the energy sector.

Provincial and federal governments have also spent more than $1-billion specifically to address the environmental reclamation of old oil and gas wells scattered around Alberta. That includes loans to the Orphan Well Association under the UCP and former NDP Alberta governments, and a $1-billion federal grant in 2020 to pay for the cleanup of dormant wells.

Mr. Guthrie’s office told The Globe Friday that consultations on the proposed program are continuing, and no decisions have been made.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 19/04/24 4:00pm EDT.

SymbolName% changeLast
Canadian Natural Resources Ltd.
Cenovus Energy Inc
Whitecap Resources Inc
Paramount Resources Ltd
TC Energy Corp

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