I am of course referring to Alberta’s abandoned/suspended well problem: a thorn in everyone’s side and currently the topic du jour in Canada’s oilpatch. From the viewpoint of an eco-warrior, it is a black eye for the government and the province. But it is also a nasty hangover for industry, and particularly small companies that are most at risk of perishing. The abandonment/reclamation (A/R) problem is at the epicenter of a number of colliding forces, namely an environmentally friendly government, a flummoxed regulator, destitute companies, and increasing pressure to clean up a decades-old mess.
Thankfully, there are solutions that would work. I’ve outlined one below that is simple, effective, and realistic, provided the parties involved can collaborate and recalibrate each of their perspectives. But first, a quick trip down memory lane to recall how we landed in this bog.
The sheer size of the problem causes much of the gridlock. Recent estimates put the number of abandoned and to-be-reclaimed wells at 67,000, and inactive wells at 77,000. A/R cost estimates are outlined by the provincial regulator (AER), and while these are good enough for auditors who place value on companies’ asset retirement obligation calculations, they are woefully inadequate for the real world. That’s because they don’t account for the skewing effect of problematic fields. For any given average estimate, costs can be reduced to a theoretical (and of course unlikely) zero, but can escalate to kingdom come for problematic wells or sites – the Black Swan problem, except that these problem sites aren’t particularly rare.
Many old oil fields are in bad shape, because 40-50 years ago spills or “incidents” were not uncommon and standards were different. A contaminated water spill that happened at a wellsite 50 years ago was dealt with in a certain way befitting the times, i.e. possibly not at all. (If you don’t believe that, explain the existence of flare pits.) Over time, the contaminants may have migrated far and wide depending upon soil characteristics. Today, such a spill would be dealt with promptly and completely, and might cost $50-100,000 for a minor surface clean up. Remediation of a 50-year-old spill can require an excavation of Grand Canyon proportions and a similar sized pot of money. For some old fields, multiply a much higher estimate by 100 (or more) wells/spill sites/flare pits and quickly you will realize the futility of the project. That is, if costs stay high and reclamation standards stay where they are.
And the costs are major, in total. Abandonment costs for old leaky wells can go through the roof, so using even an average like $100,000 per well isn’t high enough – in many instances we won’t know until it’s done. But even at $100,000/well to abandon all the inactive wells, the total is nearly $8 billion. Reclamations seem more benign, and they can be, but on the other hand they can also get stratospheric in the case of spills that reached groundwater (or might have). In that instance, $100,000 would be an absolute bargain, and the 67,000 wells that need reclaiming will probably cost something similar.
An obvious reflex is to point the finger solely at industry as being responsible for the legacy problem. But industry today is not what it was then, just as regulations and governments are different. To single out today’s owners as being solely responsible for the cleanup is a bit unfair as well, when standards have changed so considerably. For example, the aforementioned flare pits were once common methods of disposal whereas now, the very term is an embarrassment to all. We no longer tolerate asbestos in buildings, but do we track down whoever used it as a construction material 80 years ago and sue them into oblivion?
There are structural issues as well with the current program to monitor the state of the A/R situation. The AER’s LLR (Licensee Liability Rating) program was designed to safeguard the province by requiring companies to post bonds if it appears the “value of the assets” (an erroneous label, more on that in a second) exceeds the calculated liabilities. In theory it makes sense, as things often seem to when they come out of the mouths of economists (which this concept reeks of), but in practice it’s a different story.
The LLR calculation takes assets as the numerator and divides by the estimated liabilities. A major problem is that this is not a true asset value; it actually has nothing to do with the asset value (which implies something to do with reserves). The deemed asset value is simply the most recent production history multiplied by a provincial rolling average netback multiplied by three years. What ends up happening (as in right now) is that as commodity prices fall, asset values fall in tandem. This provides a dual stressor to companies; they are seeing their cash flow dry up at the same time their deemed asset value falls, pushing them closer to the dreaded 1:1 ratio. To make matters worse, wells that are uneconomic to produce at these low prices cannot be shut in, otherwise they are thereafter deemed liabilities, and boom there’s another spike in the head.
To be truly useful, the LLR calculation would take into account more than one part of the equation; it would be far more helpful to have a solvency measure alongside. This may not make decrepit companies feel better, but it is surely as important as the LLR rating itself. There are companies going bankrupt as we speak that have very healthy LLR ratings. Yet the fact that their precious wells may wind up in the orphan well fund just like any other indicates that there is something wrong with the measure. Or if not wrong, at least incomplete.
The AER, after losing a recent court case, made changes to well transfer rules (requiring a 2.0 LLR rating for both parties immediately after any transfer of assets) to prevent wells from bankrupt companies heading into the orphan well fund. While this measure may halt some limited attempts at gamesmanship, it does little to address the backlog problem.
For companies that own old legacy fields and for those in financial distress, the industry, the AER, and the government should be working together on a game plan. It shouldn’t be a free lunch, but it should be some systematic attempt to do mass scale abandonments and reclamations in as cost-efficient a manner as possible, while also being responsive to stressing times like right about now.
And since there is presently a simultaneous surplus of finger pointing and paucity of interesting alternatives, here is a suggestion intended as a starting point to fill the void.
As a basic proposal, companies should be required to abandon and reclaim a certain number of wells based on a percentage of their total inventory of the lepers. The percentage would be tied to the price of commodities. When prices are low, the percentage falls and companies are required to spend only minimally. As prices rise, so do the requirements.
Problem sites need special attention. Once a predetermined maximum has been spent on either an abandonment or reclamation attempt, the well or site would then go to a special needs fund administered by industry and the government. Reclamation and abandonment specialists should then look for systematic ways to deal with the basket cases. Industry needs some sort of cost certainty to be persuaded to tackle problem sites; it is unrealistic to expect anyone to tackle bottomless money pits. All parties should work together on the biggest challenges.
This concept works because it takes the foot off the throat of industry when it can least afford it, and moves the burden to when industry can. In times of high prices (which are coming back again regardless of what you read in the news), industry loses its mind with the euphoria of ever-increasing cash flow; wells get drilled almost regardless of cost and millions flow into Stampede parties. That is exactly the time that accountability should be at a maximum. No company wallowing in cash at $100 oil can claim to be unable to afford its liability commitments.
Going forward, let’s position ourselves now to tackle the backlog once and for all, when the good times return. If we piss away another boom, to paraphrase a once-popular bumper sticker, we may never get another chance.
It’s time for creative, bold and courageous thinking on the part of industry and government. That’s what made this industry, so why shouldn’t the solution bear the same hallmarks?
Read more insightful analysis from Terry Etam here