Are there $260 billion in tailings pond liabilities in the oil sands, abandoned wells? Not even close

“AER-verified calculations estimate” is $58.65 billion and all or almost all will be paid by industry

Public agencies doing the walk of shame is a rare sight, but the Alberta Energy Regulator was forced to provide red-faced explanations for a presentation it delivered to a group of oil and gas executives in Feb. that estimated the potential total liability for orphan wells, un-remediated mining sites and tailings ponds, and intra-provincial pipelines to be a whopping $260 billion. As the AER said in its press release, the “numbers are staggering.” Unless, of course, they’re really not.

Several media outlets have reported liability estimates provided by the AER in presentations to industry. We want to apologize for the concern and confusion that this information has caused,” says the AER’s Thursday afternoon press release. 

Robert Wadsworth, Alberta Energy Regulator,. Source: AER.

The information in question came from Rob Wadsworth, vice president of closure and liability for the AER, and was delivered to a group of industry executives in February.

“This particular estimate was created for a presentation to try and hammer home the message to industry that the current liability system needs improvement,” the AER said. “While the message to address liability is important, the numbers were not validated and were based on a hypothetical worst-case scenario. Using these estimates was an error in judgement and one we deeply regret.”

The regulator deeply regrets using the estimates because diligent reporters from the National Observer, The Toronto Star, StarMetro Calgary, and Global News – cooperating in a “joint investigation” for the “Price of Oil” series – got their hands on the presentation and speaking notes using a freedom of information request.

Then the journalists – Mike De Souza, Carolyn Jarvis, Emma McIntosh, David Bruser – torqued the story beyond recognition, as the National Observer is wont to do with energy industry reporting.

This is a story that screamed for some balance.

What is or is not a liability instead of an asset can be a complex issue depending upon whether one is discussing abandoned oil wells used by conventional oil and gas producers, pipelines, or oil sands tailings ponds and facilities.

The issue of liability has long been neglected by governments. The current regime under Rachel Notley is trying to address the issue and has made some headway, but admits there is still plenty to be done.

Take the example of orphan wells, which was thrust into the media spotlight after a judge broke with years of precedent and allowed creditors of a bankrupt oil company to jump the queue in front of the Province – in the form of the Orphan Well Association – which was then stuck with clean up costs.

Since the infamous Redwater decision, which the AER is appealing to the Supreme Court of Canada, the Association has seen its workload soar, with over 3,100 wells slated for abandonment or suspension, as well as hundreds of facilities and pipelines.

Image from AER presentation.

The Alberta government is taking some action. In May, 2017 it leveraged $30 million from the federal government into a $235 million loan program to accelerate the orphan wells clean up and the regulator has tightened up the rules.

Through Directive 067, we now require more information at the time of application and have more discretion to reject applications where an applicant poses a risk to public safety or the environment,” the AER explained, with more than just a whiff of desperation, in its release. 

“The directive also allows the AER to review existing licensees to manage risk. Energy operators must disclose financial information to the AER, such as audited financial statements and the existence of insolvency proceedings. The AER has the authority to revoke or vary existing license eligibility or deny eligibility based on a company’s financial disclosure.”

All of which to say that Wadsworth’s estimate of $100 billion to reclaim every last conventional and in situ (oil sands wells using stream assisted gravity drainage to extract bitumen) in the province is exaggerated.

In a 2017 study, the CD Howe Institute pegged the number at $8 billion. Co-author Blake Shaffer explained to Energi News that Alberta’s policy is to blame.

“We don’t have any time limit on how long a well can stay in the suspended stage, or even plugged but not yet reclaimed. Most jurisdictions have some sort of fixed time limit,” he economist said.

“As a result, there’s not very much incentive to reduce that other than stopping paying for land payments and potentially some capital costs associated with liabilities on your balance sheet.”

Let’s consider the astronomical $130 billion oil sands liability.

As the AER explained in an email to Energi News, “industry is responsible for all the associated costs of cleaning up energy development activities” associated with oil sands mines. Even though the regulator notes that the eye-popping number was a back-of-the-cocktail-napkin guess, the “value is a very rough estimate of the work that industry needs to address. It does not mean that the province will be left to deal with those costs. This money will be spent by industry on closure and reclamation, not collected by the Province.”

Alberta would only be saddled with reclamation costs if an oil sands company declared bankruptcy. What is the likelihood that Suncor, Cenovus, CNRL, Husky, and Imperial Oil – giant companies that produce almost all of oil sands crude – are going to fail?

Nil, perhaps? Suncor stress tests its business model under extreme scenarios of low demand and price and maintains to investors that the company is profitable under all of them.

So, if $260 billion isn’t the number as the muckrakers at the National Observer claim, what is the number?

The “AER-verified calculations estimate” is $58.65 billion, according to the regulator’s release, and all or almost all will be paid by industry.

Yes, if demand for oil and gas vaporized tomorrow and the entire Canadian energy sector collapsed in a sea of red ink, then the Alberta government would assume those liabilities.

Instead, the Notley government is working with the regulator and industry to manage those liabilities, according to the offices of the Alberta ministers of environment (Shannon Phillips) and energy (Marg McCuaig-Boyd), the Canadian Association of Petroleumn Producers, and various economists consulted for this column.

Oh, and common sense.

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