This is part two of a series about aging oilpatch sites in Alberta. Read part one over here.
The Alberta government says some of Canada’s biggest oil and gas companies will be eligible for millions of dollars in federal grants to pay contractors that clean up their aging sites as part of a coronavirus job-creation program.
The totals appear on a provincial government website that details the maximum amount of grants available for major oil companies such as Canadian Natural Resources Ltd, Cenovus, Husky, Paramount Resources and Imperial Oil through a provincial site rehabilitation program.
The Alberta government created the clean up program after the Trudeau government announced about $2 billion in federal funding to help the industry clean up its older sites, including in Saskatchewan and British Columbia, and reduce methane pollution.
Alberta’s clean up program is expected to get about $1 billion in transfers from the federal funding and it has already started to award this money in phases.
The program is taking a step toward addressing major financial, environmental and economic liabilities in western provinces as inactive and abandoned wells grow faster than the active ones. The total clean up costs for the aging sites could cost in the tens of billions of dollars, while industry has only set aside a fraction of that total, potentially leaving Canadian taxpayers on the hook for the bill.
One of the latest phases of Alberta’s new federally-funded program would cover up to $31.39 million in contracts for CNRL, $8.99 million for Cenovus, $5.66 million for Husky, $5.24 million for Paramount Resources, and $4.67 million for Imperial Oil, the Alberta government estimated on a website.
It’s not clear how much of this funding would create or save any jobs, or whether it would reimburse companies for contracts they had already planned.
Three of the companies did not respond to requests for comment, but in its last financial statement, Paramount Resources said it had already received approval, in collaboration with its vendors, for up to $10 million of funding.
A spokesperson for Cenovus said it is able to access the funding for reclamation, abandonment and decommissioning through its service providers while a spokesperson for Husky said funding received will allow work that had been on hold to move forward, helping it address legacy well retirement and reclamation.
“The programs are an important support for employment, especially in the service and contracting sector,” said Husky spokesperson Kim Guttormson.
Kavi Bal, press secretary to Alberta Energy Minister Sonya Savage, defended the clean up funding, while noting that the provincial government introduced a new regulatory framework in July to shrink the industry’s inventory of inactive and orphaned wells.
“Alberta’s government does not award grants to oil companies but directs the funding to oil field service providers so the money is used to create jobs while addressing environmental liabilities,” said Kavi Bal, press secretary to Alberta Energy Minister Sonya Savage.
Mark Dorin, a former oil industry worker who now assists landowners trying to settle disputes with companies about contaminated sites, said he believes the provincial funding program is flawed, and will not actually create jobs.
“Those who were abandoning wells anyway [are] the ones who are taking advantage of this federal program,” Dorin told Global News in an interview. “In other words we’re not creating any jobs.”
The federal Finance Department was not able to respond to questions from Global News on Wednesday about its funding for the oil and gas industry.
In the meantime, regulatory experts say Alberta’s plan to deal with oil and gas liabilities would improve if it accepted longstanding proposals to fix the problem such as setting timelines for well closures and collecting security deposits for new sites.
Timelines for well closures
There are currently close to 100,000 inactive wells in the province, which are wells that have stopped producing. However, there is no timeline for how long a well can be inactive, meaning there is little incentive for them to be cleaned up, and it is rare for an inactive well to be reactivated.
According to a public inventory on the Alberta Energy Regulator’s website, many wells have been inactive for decades, including some that have not been drilled on for more than 100 years.
“I’m not speaking for all companies, but there were some who I think took a lot of money out of the situation at the time, but didn’t plan for a rainy day,” said former NDP energy minister Marg McCuaig-Boyd in an interview.
“They always believed that there was going to be good times. And so and I think those are the ones that have fallen apart and have, in some cases, gone missing.”
British Columbia recently introduced time limits for how long a well can remain inactive; it is the first province in Western Canada to impose timelines for oil and gas wells.
“We need to start chipping away at those inventories. We’re not,” said Martin Olzynski, a professor at the University of Calgary’s faculty of law and an expert in environmental law.
“I think the inventories are only going to get bigger and bigger in the years to come.”
While the Canadian Association of Petroleum Producers is concerned about the growing inventory of inactive and orphaned oil and natural gas sites, it has urged Energy Minister Sonya Savage not to set deadlines for closing the dormant sites.
“CAPP does not support site-based timeline requirements for closure but instead believes that all operators should be required to annually reduce a proportion of their corporate inactive liability,” wrote the lobby group in a letter dated June 24, 2019.
Stakeholders from both industry and government have also warned that aggressive action to slash the amount of liabilities could backfire and trigger more bankruptcies that force taxpayers to pay more.
“You tear around the landscape chasing those timelines, you destroy your economics. Your prices can be 40, 50 per cent more,” said CAPP vice-president Brad Herald in an interview.
“Think of it like doing work in your garden — if you concentrate on your patch, but if you’re jumping to the neighbour’s patch, all of that incremental time — that’s kind of what we’re dealing with.”
Some jurisdictions have taken a different approach.
Adrienne Sandoval, oil conservation director for the New Mexico Energy, Minerals and Natural Resources Department, said the state has an inactive well rule that dictates how many inactive wells an operator is permitted to have based on how many active wells they have. If a company goes over the limit, they are required to plug the well or bring it back into production. Otherwise, she said, the operator can risk penalties or their ability to obtain new permits.
The statute dates back to 1935, and Sandoval said it is meant to prevent waste.
Security deposits from companies
Currently, only certain companies are required by the AER to put security deposits, based on a general assessment of the ratio between their assets and liabilities.
South of the border, jurisdictions such as New Mexico appear to have a more aggressive approach.
Sandoval said the state requires companies to provide security deposits (also known as bonding) up-front. She said the measure, which is dependent on how many wells an operator has, was strengthened in 2018 and is being revisited to become stricter.
“We recognize that there may always be situations where wells are orphaned and when that happens, the state has to manage those. And so the bonding helps to offset any of the costs that the state might incur,” Sandoval said.
“We want to make sure to buffer the public and the taxpayers and make sure that they’re not having to pay for some companies bad business practices.”
Explorers and Producers Association of Canada President Tristan Goodman said the organization is open to working with the government but stopped short of throwing support behind the idea.
“I don’t think, at this point in time, that some of the healthy, larger companies, there is evidence to suggest that a security deposit on every well will actually resolve your problem on a go-forward basis in comparison to making sure that Alberta remains competitive going forward,” he said.
Herald, with CAPP, said up-front security deposits would not be helpful to an industry that is struggling to attract new capital for production.
“The challenge is the wells that are on the landscape and that does nothing to address those.”
AER acknowledges shortfalls
The regulator itself acknowledges that there is more that could be done to improve the situation around inactive wells.
In 2018, former AER vice-president Robert Wadsworth made a series of presentations, released through freedom of information legislation, that recommended tougher rules related to collecting security deposits, imposing timelines and how to assess the financial capabilities of a company.
“While we could have made improvements to security collection, the financial backstop mechanisms and implementation of targets, why have we not done so?” reads speaking notes from a Feb. 2018 presentation. “Why has there been no political will to make changes to the liability programs?
“Until recently, the implications of our flawed system had not been realized… We can continue down our current path until the impacts are felt by the public of Alberta or we can start to implement the numerous changes that we know need to be made.”
The previous NDP government started to adopt some changes, such as changing rules to close a loophole that was allowing owners and directors of companies to go bankrupt and then start new businesses that no longer had to worry about dormant wells, which would then need to be cleaned up by the rest of the industry.
The Alberta government’s current plan would set targets that require companies to spend a minimum amount of money every year to reduce their inventory of dormant wells and allow landowners to nominate the sites that need to be cleaned up. It has also pledged to reform rules to allow it to better assess the financial capacity of companies before they start drilling.
The office of Alberta’s energy minister said the framework would be fully implemented by the end of 2021.
McCuaig-Boyd, the former energy minister, said most proposals were well-received by industry, while noting that it was hard to completely transform a system that had not been modernized for a long time.
But she added that she believed the current United Conservative Party government would also have trouble resolving all of the problems within its current four-year mandate.
“It’s going to take a lot of years to clean up that old inventory and to get the regulations in place and give the companies time to adjust their business business practices for it,” she said in an interview. “It’s a very complex thing. I think we got a really good start. But it wasn’t something that was going to be fixed in four years when it had been left for so many years previously.”