A creosote-contaminated site in Calgary provides a clear example of the problem. While not an oil and gas site, the remediation issues are the same. Over a 40-year period, creosote seeped into the ground over a 44-acre site near downtown Calgary, on the banks of the Bow River. In the good old days, people were worried about things like World War II and not chemical spills on the ground. The creosote leaked not just into the river, but under and to the banks on the other side. The debate on how to handle this site rages on today with no end in sight, and no sign of anyone finding a workable solution.
To prevent howls of indignation, it is acknowledged that this spill is larger and more complex than a typical hydrocarbon spill. But there are a lot of similarities, particularly with oil and gas facility sites, and the meaningful comparison relates to the wild range of cost estimates required to clean it up. The Alberta Energy Regulator (AER), is also now focusing on aging energy infrastructure as well, so we may see a lot more old facility sites that approximate the Calgary creosote problem. The cost estimates to remediate the site illustrate the cataclysmic problem facing the oil patch and provincial regulators.
The high cost of remediation is smashing the property acquisition/disposition market, because liabilities may (or may not) dwarf the value of the reserves. On the open market, an oil and gas property is worth some estimate of the value of reserves, the strength and stability of the cash flow, or some expected upside. For example, an oil property may sell for $10/bbl of proved reserves, or $40,000 per flowing barrel, or 5 times cash flow, etc. Weighted against these valuation metrics is the cost of ultimately abandoning these facilities, which has historically been pretty much a theoretical exercise. Few meaningful abandonment programs were put in place to deal with the growing inventory of wells, and old wells and facilities changed hands frequently with the A/R problem always further down the road. While this practice is in hindsight not the best, it nevertheless existed for decades. And there’s no use in pointing out now what should have been done. What matters now is how to go forward, and that is going to require recalibration all around.
The current eco-centric mindset is creating pressure to ‘clean all this up’. Which sounds great, but so does ending poverty, or defending pipeline safety. Again with the icebergs, the depth and complexity of some issues goes way beyond the obvious.
Two examples best illustrate the point. Calgary’s creosote problem has cost the city $12 million so far, and some of the wilder predictions as to the total cost are as high as $300 million. The city itself recently pegged it at between $65 million if done over a leisurely 8-10 year period, or $110 million to speed it up by a few years.
The second example is Enbridge’s legendary (but fairly small) 2010 Michigan spill that occurred when a few hapless operators paid for years of boredom and minor false-alarms in spectacular fashion. The pipeline leak spilled 20,000 barrels of oil into a creek, leading to an estimated $400 million dollar clean up tab, which was fortunately written in pencil, and the paper got thin from all the erasing, and eventually settled out somewhere around $1 billion.
Compare that to the Exxon Valdez spill of 1989, which impacted 1,300 miles of shoreline, cost approximately 2.1 billion to clean up. Enbridge’s spill contaminated 35 miles of a creek, with less than one tenth the oil volume, and cost nearly half as much (subsequent litigations aside).
Several key points therefore should be considered when pondering how to clean up Alberta’s million mini-messes: the world today is far different than it was when many of these environmental pigs were born, and with today’s stringent reclamation standards the cost and regulatory requirements to fully remediate might be unachievable.
Extrapolating those factors into the discussion, it should also be apparent that ‘business as usual’ isn’t gong to work, and that applies across the whole spectrum. Companies can’t keep kicking the can down the road, pretending that a future abandonment cost can be NPV’ed down to near zero because it’s so far away. Governments can’t simply crack down on the industry; the industry is cleaved neatly in two between big companies that have such an overwhelming potential liability that they can’t be kicked around, and small companies so frail that merely sending out enforcement notices would have the same effect the bubonic plague once had on Europe.
Environmentalists and environmental firms have to rethink methods and strategies for achieving the hallowed “rec cert granted” status because present costs are too astronomical for most companies to bear. Landowners are going to have to realize that the infinite cash flow stream from wells on their lands (some abandoned sites still receive lease payments, while crops grow unhindered or even enhanced on the very site) is not infinite.
If the government can conjure intelligent, varied panels to study royalties and climate stuff, why not do the same for the A/R issue? A task force made up of industry, government, landowners, environmental specialists, biologists, is needed to formulate a new plan. Companies want to do the right thing and clean up old sites. There could be royalty changes/tax credits, and achievable environmental standards that take into consideration the age and scope of certain ancient oil fields where environmentally ignorant practices once routinely happened with hardly a care in the world. A plan is needed to compensate land owners for the sites that will disappear from their land along with the annual payments. Generally, there is more incentive to keep the old sites active than to sign off on a final reclamation. Energy companies need to get on with the clean up, but in an environment where there is at least some cost certainty and a clear path to a timely and realistic site reclamation.
We need specific factual information on what is keeping reclamations from moving forward. The first step is for all the parties involved to begin working with real data. The AER’s review of suspended wells was a good start; the review of infrastructure is the next necessary step. But that is the first half of the equation; in order for there to be a successful outcome, the cost expectations associated with these clean ups needs to be far more realistic than current ‘under perfect conditions’ expectations. Multiplying those two numbers together will provide a sobering estimate of what the province and the industry is up against. And maybe that’s what it will take to get all the parties to the table and talking in a constructive manner.
Or, we can wait hundreds of years for nature to take care of it. It happens, you know.
Read more insightful analysis from Terry Etam here