By
Mike De Souza &
Julia Wong
Global News
Published December 16, 2020
13 min read
The oil and gas industry has left two inactive wells on Verna Phippen’s farmland in central Alberta.
She has been waiting for years for someone to decontaminate one of the sites. It changed hands several times, she explained, and no one has confirmed whether the reclamation work was completed.
“It makes me feel like the petroleum industry could do a lot better,” she said.
Her concerns about the industry’s legacy are shared by some senior officials at the Alberta Energy Regulator who have warned that the novel coronavirus pandemic made an existing problem worse.
Staff at the provincial regulator warned in April that some companies were walking away from contaminated sites without ensuring it was safe.
The sites host some of the tens of thousands of inactive wells in Alberta. Many of these dormant wells are owned by companies facing serious financial difficulties and at risk of going bankrupt, according to internal briefing notes.
There’s also a sour gas lease nearby Phippen’s property that has changed hands several times, and she no longer knows who to call in an emergency.
“That’s a huge concern of mine right in my own neighbourhood,” she said.
Sour gas is a natural gas that contains large amounts of hydrogen sulfide, which could be deadly if there’s a leak.
“If a company gets into financial difficulty, walks away and we’re in four sour gas zones, who’s going to look after us? Nobody is. Nobody’s looking after us.”
Overall, some 17 pipelines and a couple of pumpjacks share the property that is teeming with wildlife and tree growth between Battle Lake and Pigeon Lake in Wetaskiwin County.
Phippen’s in-laws, who previously owned the land, had allowed the companies onto their property to supplement their income as farmers. Phippen and her husband, Brian, inherited the land, and they continued to sign contracts with operators.
Phippen said she never thought much about the impact of those contracts until she started to see pipeline corrosion along with spills and well blowouts.
“I began to hate it. I began to hate the petroleum industry,” she said.
The internal documents obtained by Global News show how the AER sounded alarm bells last spring over a crisis that it said was exacerbating a rapidly growing inventory of liabilities that puts public health, the environment and government finances all at risk.
“The impact to operators is widespread,” said an April 30 internal briefing note prepared for Martin Foy, executive vice president of operations at the Alberta Energy Regulator (AER).
“Many are shutting down production and ceasing to operate wells and facilities.
“In some cases, we believe operators are shutting down facilities and equipment without following proper suspension and decommissioning procedures.”
These suspension and shutdown rules were created to prevent leaks on land, or in the air and bodies of water. But the briefing notes said that the pandemic made it hard for some companies to continue operating as thousands lost their jobs in a province that is home to the world’s third largest reserves of crude oil — after Saudi Arabia and Venezuela.
After the virus struck, the federal government offered more than $1 billion in financial support for companies in Alberta, Saskatchewan and British Columbia to clean up the legacy oilpatch sites and help keep some industry workers employed on inactive and legacy sites that now outnumber the active ones.
“The present COVID-19 situation is impacting all sectors of the oil and gas industry across the province,” said the briefing material.
“Many larger companies are more likely to endure through this crisis by operating at reduced production rates, and with fewer people. Smaller companies with fewer producing assets and low capital reserves are less likely to endure this crisis and will be forced to shut down some/ or all operations, particularly with a prolonged period of exceptionally low oil prices.”
The warnings from Foy followed a series of calls for reforms from within the regulator, well before the COVID-19 pandemic struck the world.
Global News has reviewed the internal advice in hundreds of pages of briefing notes, presentations and emails, released by the regulator through freedom of information legislation.
The documents, along with interviews with former and current employees at the regulator, industry stakeholders and government officials, show that the regulator has been pressing the Alberta government for years to impose tougher rules to require polluters to pay and ensure that they can afford to clean up sites before they run out of money.
They also warn that Alberta and Canada face a financial reckoning that could result in up to $260 billion in liabilities in a worst case scenario, according to the internal documents.
But many of the proposals to address the liabilities either remain under review or haven’t met their targets.
Oldest site inactive last drilled in 1911
In June 2018, a senior executive from the regulator delivered a presentation explaining that a new program called area-based closure would reduce liabilities by up to $600 million per year. The program, backed by industry lobby groups, was designed to generate savings by encouraging companies to work collaboratively on neighbouring sites.
But the AER told Global News that these estimated benefits never materialized since the program was voluntary, and companies were not required to participate.
The $600 million estimate was previously censored by the AER, in response to a freedom of information request for a copy of the presentation in 2018. But the regulator later released the details following an investigation by the Office of the Information and Privacy Commissioner of Alberta.
Both industry and government officials say they are still working on how to address the larger liability problem. But they have rejected calls for timelines that would require the industry to clean up thousands of sites that have been inactive for decades.
At least eight oilpatch sites have been inactive for about 100 years or more, according to published AER data. The oldest one was last drilled on in 1911.
Foy, the AER executive vice president, told the regulator’s board in May 2020 that the situation would get worse due to the pandemic as staff fielded hundreds of requests from industry lobbyists for coronavirus relief from existing rules and other lobbying pressure to delay proposals to increase environmental oversight.
Foy also told the board that the AER had already taken three calls in April from “possible insolvent companies.”
“We continue to monitor distressed licensees and know that some operations will likely not ever be able to restart due to continued low product pricing and a reduced demand,” said Foy’s presentation in May.
At least 86 companies failed to pay clean up levy
About seven months later, the regulator published names on Nov. 30 and Dec. 7 of at least 86 companies that face a 20 per cent penalty for failing to pay a provincial industry orphan wells fund levy. This is more than double the 35 warnings issued for the same infraction over the previous six years combined. But the regulator later told Global News on Wednesday that some companies have since paid the levy, without specifying how many.
The regulator collects the levy and then transfers the money to an industry-led group, the Orphan Wells Association, responsible for cleaning up sites previously owned by bankrupt companies.
Regulatory records also show that provincial officials have issued other warnings in recent months to companies related to failures to close inactive sites, but the AER is having a hard time penalizing some of the most serious infractions.
In November, the AER admitted it had run out of time to prosecute an environmental consulting firm that was alleged to have provided false and misleading information claiming it had cleaned up 59 sites.
The regulator issued reclamation certificates through an online approval system, but later revoked the certificates after learning in November 2018 that the consulting firm had allegedly submitted misleading photos and other misinformation about the state of the sites.
The AER wrote in a pair of Nov. 27, 2020 letters to the consultant and the company that owns the wells that the matter was “very serious” and could have resulted in “more significant enforcement action.” But the regulator said in the letters that it was only able to review a limited amount of information within the two-year statutory timeline for investigations under Alberta environmental protection legislation. So it decided instead to send the warning letters and close the investigations.
Sonya Savage says UCP government moved quickly
Prior to the pandemic, oilpatch companies were already struggling due to falling global demand for fossil fuels.
In Alberta, a number of rural municipalities said they were losing millions of dollars in revenues due to some companies not paying property taxes.
The AER also warned in a September 2019 briefing note to officials at the Alberta Energy and Environment Ministries that there were enough companies in financial distress to result in a “land-slide” of new orphan wells adding up to a 480 per cent increase over two years.
“Our data shows industry closure rates are not keeping pace,” said the briefing note.
“Industry is not prioritizing end-of-life obligations.”
This increase would be equivalent to tens of thousands of wells that would cost billions of dollars to clean up.
“I think it’s a function of an industry that’s maturing and an industry that’s having some difficulties,” Alberta Energy Minister Sonya Savage said in an interview.
Savage is a lawyer and previously a lobbyist for pipeline company Enbridge. She became a minister in 2019 when Premier Jason Kenney’s United Conservatives formed a majority government.
Savage’s predecessor, former NDP energy minister Marg McCuaig-Boyd told Global News in a separate interview that the previous government was also working on a plan to address the situation, which it was unable to implement before the 2019 provincial election.
Savage said Alberta is now taking steps to address the situation. This includes offering new tools to the Orphan Well Association to sell some assets it inherits from bankrupt companies, to help pay for reclamation of other sites, she explained.
The government is also proposing to impose new targets that require companies to spend a minimum amount of money every year to reduce their inventory of inactive wells and create a system that allows landowners to nominate the sites that need to be cleaned up.
In addition, the government has pledged to reform rules to allow it to better assess the financial capacity of companies, before they start drilling.
But the government says that details of this new approach are still under development, including whether to collect more security deposits from companies up front.
“This phenomenon started back in the early two thousands and particularly accelerated after 2015,” Savage said. “We moved on it extremely quickly as a government moving forward with consultations and putting a liability management framework in place — something that no government before us has done and something that, frankly, should have been done 20 years ago.”
Lars DePauw, executive director of the Orphan Well Association, said his organization started to see signs of progress in recent months as new money started to flow from government.
“We do see that the funding that’s coming from the provincial and federal governments has helped expedite the work that we are doing and we do feel that we are well situated to deal with the issue at least here for the short term,” DePauw told Global News.
But Alberta is still not going as far as some other oil-producing jurisdictions such as New Mexico, which requires all companies to pay a security deposit, before they can start drilling.
Martin Olszynski, a University of Calgary law professor with environmental regulatory experience from previous work at the federal Fisheries Department, describes the situation as a bit of a “perfect storm.”
“We know with COVID that all our companies — except for perhaps some of the largest, more solvent ones — a lot of companies in Alberta are in financial distress,” he said.
The amount of inactive wells has been growing at a rate of five or six per cent over the past few years, and a forecasted inactive well list contains more than 6,100 wells scheduled to become inactive in the coming year.
Regulator tracking companies under financial distress
As of Sept. 28, 2020, the AER says there were 98,811 inactive wells in Alberta, a jump of 10.3 per cent from the year prior. The number has been steadily growing the last few years; in 2016, the regulator says that there were 77,787 inactive wells, meaning the inventory has grown more than 25 per cent in four years.
According to a definition by the AER, an inactive well is a well that has stopped producing, for economic or technical reasons.
“We’re very near that worst case scenario,” said Olszynski. “We have a pattern of these liabilities just piling up when in good times and in bad. There’s really no reason for Albertans to assume that this issue is under control and will be dealt with in any kind of reasonable way.
“We really are starting to see, I think, the tip of the iceberg in terms of massive, massive liabilities that are going to be dumped onto the public purse.”
The Orphan Well Association currently has over 9,000 sites in its inventory, including old wells and pipelines. These either need to be shut down or reclaimed in a process that could take years.
The association also wrote in its last annual report that it wrote off more than $3 million in bad debt from companies that failed to pay their levy in 2019 due to insolvencies, while using some provincial loans.
As of October 2020, the AER said it had a list of 30 companies it was tracking that were in “financial distress” and/or with a significant history of violations such as persistent environmental and safety problems.
‘Left derelict for dozens of years’
Phippen, who lives on the farmland in Westerose, said she used to think that busy rigs were a good thing for Alberta and its economy. But, because of the issues on her property, that thinking has changed.
“When we look at the liabilities and that all these leases are not being cleaned up, they’re being left derelict sometimes for dozens of years,” she said.
When asked whether the compensation her family had received from the companies was worth it, Phippen said no and explained they are no longer allowing companies access to the family land.
“If I knew then what I know now, we would refuse oil and gas development on our land,” she said.
“It’s not worth your health — the health of your children, the health of livestock and the wildlife, your pets. It’s not worth it.”
Industry organizations Explorers and Producers Association of Canada (EPAC) as well as the Canadian Association of Petroleum Producers (CAPP) said they are not aware of their members walking away from their sites.
EPAC President Tristan Goodman said he does not think it represents the majority of the industry but notes it is something that the government should be paying attention to. CAPP Vice-President Brad Herald said there is concern every time there is distress but also noted that most companies were adequately managing their liabilities. The Orphan Well Association is a safety net, Herald added.
Goodman said he is always concerned when inactive wells do not return to production, saying that is not positive from an economic standpoint. However, he said the number of inactive wells in Alberta is not unusual.
“They really are driven partially by price. So recently, obviously, as prices have been lower, both on the side of natural gas and oil, you will see increased movement that is moving in those numbers,” Goodman said.
Herald said the inactive wells are a concern for the whole industry and the obligation is on the operators to get through that inventory. He, like Goodman, said defaulting operators who are not able to fulfill their end-of-life obligations are the minority.
Editor’s note: This article was updated at 10:32 a.m. MT on Dec. 16 with new statements from the Alberta Energy Regulator updating that some of the companies which didn’t initially pay the orphan fund levy have subequently paid. It also clarifies that the oldest inactive site was last drilled on in 1911.