Between July 2014 and January 2015, the price of West Texas Intermediate, North American’s crude oil benchmark, declined from roughly $105 to $46. At the time, of course everyone in the energy industry recognized the fallout as simply bad news. Seemingly overnight, entire business plans for the global upstream oil and gas sector and the service industry supporting it turned upside down. And while the immediate effects of such a drastic fall in the price of oil were easy to see coming: layoffs, slashed corporate budgets, and bankruptcies and receiverships, it was the reverberations to be felt in the forthcoming few years that were hardest to predict. As with any industry thrust into a state of flux so quickly, it was safe to assume that yes, there was to be aftermath.
In the years since 2014, perhaps the most glaringly obvious reverberation to rear its ugly head in Alberta has been the seemingly irreconcilable puzzle of addressing environmental liabilities left behind by defunct explorers (of which there have been many). With the court case between the Alberta Energy Regulator and Grant Thornton, the court appointed receiver of Redwater Energy now going to the Supreme Court of Canada, it is clear this issue is a serious point of contention. As a reminder, the case involves setting the precedent for which parties receive priority in bankrupt estates when doling out the cash generated from liquidating assets. While the current precedent is for creditors to receive top billing, the AER wants that changed to address the billions worth of unfunded environmental liabilities routinely neglected and when push comes to shove, left to be paid for by the Alberta taxpayer.
Alan Harvie, a Calgary based partner at law firm Norton Rose Fulbright specializes in environmental law. At a recent luncheon hosted by the Petroleum Joint Venture Association, Harvie discussed what the implications of the Redwater case are to the energy industry, and Alberta in general. When I spoke to him afterwards, he came across as confident that the Supreme Court will uphold the decision made by the lower Alberta courts in not changing the status quo. Among the other industry people I spoke with, including executives of oil and gas producers, lenders, and investors, they all seemed to agree. Their collective reasoning was that since bankruptcy law lies in federal jurisdiction, it will ultimately trump provincial law. The laws the AER enforces are of course under provincial jurisdiction and so therefore second fiddle, in a sense, to federal law.
The question that remains, if the Supreme Court does in fact uphold the decision, how will this mess, in both a literal and figurative sense, of unfunded environmental liabilities be cleaned up? And by whom? Again, after questioning the same set of industry people, it quickly became clear that there really is no consensus answer. That in the end, there ultimately will need to be some sort of compromise between the energy industry, and the Alberta government (read the people of Alberta). How that compromise will shake out remains to be seen. I did however hear some colourful ideas on how to solve the problem going forward (as in for every new well to be drilled) and the massive backlog of historical wells awaiting reclamation.
In Alberta, the way the system works now involves companies posting a security bond upfront to the AER that is held for future liabilities. However in practice, the security deposit is often never fully posted or grossly inadequate. That said, there is indeed billions of dollars worth of security deposits currently sitting in a bank account, doing nothing more. One environmental consultant suggested to me that the security be made into an endowment fund. If prudently invested, the interest and or dividend payments being thrown of the endowment’s principal could go towards paying to clean up wells in the Orphan Well Association’s inventory.
Or perhaps, as one retired investment banker suggested, the province could create with the backing of the Alberta Investment Management Company (AIMCO), a mandated low cost reclamation operator to go about reclaiming disclaimed wells. Doing so would enable the currently fragmented reclamation service industry to achieve economy of scale, while also keeping the business’ return on capital sufficient enough to win business but also return money back to its provincial backer.
While both the above solutions seem at first glance tenable, when I mentioned these ideas to industry people like Alan Harvie, he for example didn’t seem to think they were realistic. Instead, Harvie mentioned to me an idea whereby companies could instead of watching their security deposit sit in a bank, actually use the money to clean up their wellsites. Seems simple enough. Another seemingly more realistic solution came from an executive that was convinced of it being the end result. He thinks the Alberta government will simply look to increase the Orphan Well Association’s budget by raising the annual levy well license holders are meant to pay to it (as to who actually pays the levy is another story). In other words, just one more incremental tax to be added onto Alberta’s oil and gas producers. But therein lies the deepest point of contention underscoring the quagmire Alberta finds itself in: how on one hand can the province create an environment whereby the all-important energy industry can flourish while on the other hand balance that economic activity with costly environmental stewardship?
To get to the bottom of that, Albertans will have to wait at the very least until the Supreme Court makes their decision. And who knows, maybe the Court will overturn the ruling. In that case, many people feel that will be end of bank lending to Alberta’s oil and has industry.
So…then what? Flux, meet chaos.