Politician of all different levels and energy executives have been reeling this fall in response to a host of challenges and attacks to Alberta’s oil and gas industry. An Alberta Energy Regulator (AER) presentation to an outside group left dangling a cost estimate of $260 billion to clean up the oil and gas mess in our province. The timing of this revelation couldn’t be worse.
Cleanup, or Asset Retirement Obligation (ARO) spending, may be best viewed as a kind of insurance, an investment against rising costs due to tightening regulations and worsening site conditions. A company should know everything it can about their liabilities, most of which will be relatively routine in nature. The whoppers are relatively few. The former can be safely planned for, whereas the latter demand close attention and quick action.
Some of the more egregious aspects of Alberta’s liability issue is winding its way through the courts. All signals point to more and more stringent environmental regulations for energy companies, increased levies, and more oversight. For Alberta, shielding the Orphan Fund from unreasonable inventory growth is paramount, on par with protecting our air, land, and water.
Based on publicly available information, here’s an estimated breakdown of oil and gas wells in this province:
Producing – 162,000
Inactive – 71,000
Abandoned – 187,000
Other – 26,000
“Producing” is straightforward, but “inactive” means no longer producing – most of these awaiting abandonment and surface environmental reclamation (land restoration).
“Abandonment” means pulling all equipment from the down the well and the surface, setting permanent plugs and capping with cement downhole, and fixing any downhole or surface leaks, if they exist. The latter can become an involved operation, but the regulations are strict and an operator must ensure this is all done properly and safely.
“Other” covers new drilling licenses and other minor catagories.
A tough balance must be struck between the priority of reducing this inventory while avoiding operators being pushed into insolvency. The latter would only drive more liability into the Orphan Fund.
Existing legacy issues should not be permitted to be held off indefinitely. It seems incredible, but there is no government mandated deadline on well abandonments, something that producing states like Texas do not allow.
The current news coverage is reaching something like crisis levels, with some dominant themes emerging, starting with fear. The public’s fear, the industry’s fear, is making us more vulnerable to every new uncertainty and event. The fear is being stoked on the revenue side (pipelines) and the cost side (liabilities).
The second theme is doubt, something not unusual from politicians. But from the actual regulators? Provincial and federal regulatory bodies, previously above reproach, are now off-message and off-balance. Some of this can be attributed to a change in the media’s tone, starting about ten years ago. The criticism, or sometimes celebration, for repeatedly botched pipeline approvals here and south of the border, misfired attempts to set things right, outside geopolitical forces making their unwelcome presence known, all of this has reached a new intensity. It seems Albertans can’t catch a break.
The concerns are real, but hardly new. Pipeline and energy projects in general carry grave implications for competing interests. Witness Newfoundland’s heartbreaking and decades long struggles with hydroelectricity contracts, or the rancorous TransCanada debates under Prime Minister John Diefenbaker, or now this “Alberta $260 billion” issue, a search term that now returns millions of hits.
The AER is at pains to explain this was a hypothetical worst case scenario unvalidated number. To that I would add the term ridiculous, an error the regulator says it deeply regrets. AER’s own validated figure is just under $60 billion. Also, this cost will be managed over future decades, not spent today in one shot.
For the most part, oil and gas development continues to take place with tight oversight from those responsible.
That is happening in conjunction with heightened expectations. The public is a far more engaged, questioning, and skeptical one than a generation ago, or perhaps social media is making that skeptical mindset more apparent, but this scrutiny is not going away.
We mostly have the laws and regulations in place to handle it. We definitely have the expertise: the people, the innovators, the body of knowledge as good or better than any in the world for solving this. Cleanup has to be integral to the long term business plan, and lawmakers must strike a balance between incentives and penalties. The new area-based closure program is a good additional step in this effort.
Companies that tackle their share of the problem head on, rather than ignore it, hoping it will go away (and there are some of those), will have the best case to present to investors.
The result will be a cleaner Alberta, one that proves the critics in Ottawa, Victoria and Europe wrong. Our openness and willingness to examine the scope of the problem is not a weakness. It is our strength and best chance of finding solutions.
Andrew Bizon, P.Eng. is an experienced oil and gas asset evaluator and environmental planner. To make liability planning a more integral part of your acquisition or disposition, contact him here: (email@example.com)