Unethical oil: Alberta’s shameful secret

The first of a multi-part investigative report that will explore how Alberta accumulated huge environmental liabilities (abandoned wells, oil sands tailings ponds) while hiding the truth behind the myth of “ethical oil”

“We are an ethical producer of energy and we should be the go-to source for the world’s energy needs,” Premier Danielle Smith likes to brag. She is dead wrong. In the real world, Alberta’s oil and gas is highly unethical. Energi Media has undertaken an investigative report to uncover just how unethical. What we found is that governments, regulators, and the oil and gas industry have been lying to Albertans for decades. Why should Albertans care? 

Less than two weeks before the start of the election campaign, the UCP government released its Emissions Reduction and Energy Development plan, signalling that energy will be a key part of its re-election strategy. Both the UCP and NDP subscribe to some version of “ethical oil,” which holds that Alberta’s are some of the most environmentally-responsible hydrocarbons in the world, bolstered by democratic institutions and a world class regulatory regime. 

In fact, “ethical oil” is a facade to hide the truth: that oil companies, the provincial government, and Alberta’s various energy regulators have long conspired to put profits above the public interest, with the province now potentially on the hook for hundreds of billions of dollars in abandoned wells and leaking tailings ponds.

Unethical oil is Alberta’s shameful secret. 

Albertans also need to face the truth: oil and gas is already facing an existential crisis created by the energy transition. Here’s when the penny dropped for veteran Alberta oilman Donny Bobocel and his management team, now heading up hydrogen startup Innova: 

“Through the downturn of the last few years, it became exceedingly evident that capital was evaporating from our traditional businesses in a very big way. Attracting capital for traditional energy plays was becoming near to impossible, except for the very few select teams. There was also an additional realization that transition was going to be required. As we watched regulatory bodies the world over change to hard [climate change] regulation, it began to be obvious that this was inescapable.” 

When I was writing my book The New Alberta Advantage: Technology, Policy, and the Future of the Oil Sands back in 2018, one expert predicted the inflection point for electric vehicle sales would arrive in 2030. Instead, it arrived in 2020. An International Energy Agency (IEA) told me in a 2021 interview that peak oil demand would likely occur in 2032. A few weeks ago, the IEA said that demand for road transportation fuels (gasoline and diesel), which comprise half of global oil consumption, would happen in 2025. The global energy transition is speeding up in ways we couldn’t imagine even a few years ago.

Not all Albertans are energy transition deniers or “slow walkers,” those who believe, against all evidence to the contrary, that the transformation of the global energy system means a diversification of energy sources rather thanthe outright decline of hydrocarbon consumption. But plenty are. Take Alex Pourbaix, CEO of Cenovus Energy: “I think we’re finding out that this is a many, many decade transition and it’s probably going to look more like diversification than it is like transition.”

“Ethical oil” is part of that industry-led narrative that supports Alberta exceptionalism, the idea that the energy transition will affect other oil and gas-producing countries but somehow pass over Alberta. And if Alberta is affected, then it will be someone else’s fault – Justin Trudeau and the Liberals or foreign foundations funding environmental groups. The idea of “ethical oil” needs to die so that Albertans can calmly and rationally assess the risk, which is considerable, to their prosperity and way of life.

That’s the political dimension of “ethical oil,” but there is a practical one, too.

From the start of serious oil and gas production over 70 years ago, the industry and politicians in Alberta agreed to an informal pact: Alberta’s priorities would be growing the industry, attracting capital, creating jobs, and generating revenue for the provincial government. Reclaiming environmental liabilities like inactive and abandoned oil wells or oil sands tailings ponds were a much lower priority. Liabilities would be kicked down the road and paid for with future revenue. Until recently, it was unimaginable that there would not be enough of that future revenue to cover them.

Now, Albertans are confronted with a new potential reality, in which global oil demand peaks in the very near future, then bumps along a plateau for a few more years, then begins to decline. No one really knows what the decline curve will look like or how that will affect prices. 

The IEA forecasts 102 million barrels of oil demand in 2023. For argument’s sake, let’s bump that up to 105 million barrels per day by 2025, when road transportation consumption peaks. Then let’s say the plateau ends in 2030 and decline begins in 2031. Under this very plausible scenario (though, admittedly, not the only one), what happens to prices in the early to mid-2030s when 105 million barrels per day of supply is chasing 103 million barrels per day of demand?

If 2014 is any guide, prices collapse. All it took was 1.5 million barrels per day of supply exceeding demand and West Texas Intermediate fell from $105 per barrel to below $20, even briefly hitting negative territory. The Alberta economy was devastated for more than two years. Imagine if that happened again, but this time demand (and prices) never recover, it just continues to fall over time.

Now, here’s the important point: oil companies don’t have to fail to imagine the worst case happening in Alberta. Oil sands producers, almost all of them big integrated companies with plans to drive down production costs to the mid-$20s to low $30s per barrel, have modelled supply and demand out to 2050 and think that becoming a competitive barrel will help them survive even the low prices of a 25 million barrel per day market (the IEA’s net-zero scenario). Let’s be generous and agree with them.

What will oil prices be like? It’s to imagine them being much higher than production costs. That means profit margins take a big hit from current levels, around $35 billion in 2022 for Alberta’s Big Oil.

Where will the money come from to pay for environmental liabilities as promised by the industry and the Alberta government? 

Furthermore, investors around the world have demanded that oil companies return most of their free cash flow in the form of higher dividends and share buybacks. Alberta companies have happily complied. Giant integrated company Suncor, for example, tells investors that it will give them 75 per cent of free cash flow and, if circumstances are favourable, half of the remaining 25 per cent. Do we imagine that under a falling demand/low price scenario that investors will stop demanding high returns? If anything, fearing the failure of their investments, wanting the highest return possible while the getting is good, they will ask for more.

Again, where will the money come from to reclaim the oil and gas industry’s environmental liabilities?

The size of them is staggering. A 2018 estimate, which the AER disavowed but is generally considered reasonable by the experts I interviewed, is $260 billion. Since then, the Alberta Auditor General has increased conventional liabilities by $30 billion. Round up and the bill is a cool $300 billion. Sure, that number could be less if oil companies accelerate both conventional production and oil sands reclamation efforts in the near future. 

But it could also be much more. For example, 900 square kilometres of northern Alberta has been disturbed by oil sands operations. No other country has ever tried to reclaim an ecologically sensitive area that size, according to Dr. Andre Sobolewski, a scientist who has worked on tailings ponds around the world, including the oil sands. The likelihood is high that the cost to reclaim oil sands operations will be much higher in the future, not lower.

If the companies can’t pay, then there is only one option remaining: The Alberta taxpayer. Or, even worse, no one pays and Alberta faces an environmental disaster.  And what if Alberta is financially ruined trying to repay its liabilities and still faces an environmental disaster, in which case it’s almost a Doomsday scenario for the province?

This is where the AER becomes important for our story.

The Alberta Energy Regulator

From the beginning of the modern Alberta oil and gas sector, the regulator was set up to favour the industry’s interest over the public interest, oil companies over farmers and indigenous communities, and all other interests over the environment. That alone qualifies Alberta oil and gas as unethical. But how this was accomplished is equally unethical. 

For example, according to a source employed by the AER at the time, a decade ago they attended an executive meeting with industry representatives who effectively said, “We fund the AER. We own the AER. You’ll do what we want.” And the AER executives agreed. This story sounds fantastical, except that the source is unimpeachable and the facts jibe with the views of many of the sources interviewed for this report.

A brief word about sources. I interviewed over 30 experts and several persons knowledgeable about the regulator from personal experience. Only two were granted anonymity. One was the aforementioned former AER employee because they are still working in the industry and their job prospects would likely be affected, while the other was a former Alberta government cabinet minister. All other sources spoke on the record, usually recorded in video. A number of professionals still working within the oil and gas industry reached out for off-the-record conversations, but those were not relied upon during the writing of this report. A pleasant surprise during this project was the number of senior scientists, engineers, administrators, and others who work in the system that came forward to share their expert insights. 

AER’s role in Unethical Oil

Previous governments created regulatory regimes that, on paper, compare favourably with that of any other oil producing jurisdiction. In 2014, the Canadian Association of Petroleum Producers (CAPP) commissioned a study by consultancy Worley Parsons that compared Alberta to other international regulatory regimes. “The review of 10 jurisdictions, representing seven major continental regions across the world, revealed that Alberta, Canada; Queensland, Australia; and the United States, Gulf Coast were consistently leading in a comparison of existing environmental policies, laws and regulatory systems,” was how CAPP summarized the report.

Janet Annesley is an Alberta oil and gas veteran who started her career with Shell Canada, became VP of communications at CAPP, worked as the chief of staff to the federal energy minister, and was an executive VP at Husky Energy before it merged with Cenovus Energy. She defends the AER. But even she has to admit that the Alberta industry has done a poor job saving for what has become a massive bill for environmental liabilities that, depending on how one calculates the damage, could reach $300 billion or more.

What CAPP didn’t mention about the Worley Parsons review is that it examined design, not performance. This gets to the heart of Alberta’s problem. University of Calgary law professor Martin Olszynski explains why this is the AER’s greatest weakness.

“We generally say that good environmental laws limit discretion because when you have broad discretion the regulators, politicians, and bureaucracies will make the decisions that they want to make as opposed to the ones that may be in our broader, longer-term interest.”

Olszynski says that Alberta’s oil and gas legislation and regulation has more discretion built into than almost any other jurisdiction. This essentially means that the rules can mean whatever the regulator needs them to mean. They can be bent a little or a great deal, depending on the circumstances. Or not at all, if that’s what circumstances require. The AER itself relies upon discretionary decision-making from its CEO down to its field staff, according to former AER senior toxicologist Mandy Olsgard.

Essentially, Alberta has rigged the game so that the rules can be shaped to the industry’s interest. The unethical practices that have been condoned in the name of economic growth over the decades are nothing short of scandalous. And all of it was done quietly, out of sight, and with the full endorsement or tacit agreement of the oil companies and executives who profitably gamed the system.

The real role of “ethical oil”

The “ethical oil” narrative is nothing more than a distraction, a magician’s sleight of hand to make the audience look at one hand while the other hand performs the trick. Considering the person behind it, we shouldn’t be surprised.

“Ethical Oil” is the title of a 2010 book by political activist and muckraker Ezra Levant, the publisher of the widely reviled (at least in legitimate journalism circles) Rebel Media. He made the case for the Alberta oil sands, then embroiled in an international controversy over the high emissions-intensity of its bitumen, arguing that Canada’s superior human rights record compared to other oil-soaked countries like Libya, Nigeria, and Saudi Arabia, made the oil sands the more “ethical” choice for petroleum customers.

The problem is, no one buys “ethical” oil. Oil sands ultra heavy crude is processed by specially kitted American refineries because the lower grade petroleum sells at a lower price. The provenance of the oil is irrelevant. Refineries are just as happy to buy heavy crude from Venezuela, Mexico, Brazil, or Colombia if the price is right. End of story. 

The story would have ended there, except that Alberta oil boosters seized on the phrase as a rallying cry, applying it to all types of Canadian oil and to natural gas. Astroturf groups like Canada Action use it. Conservative politicians can’t get enough of it. Industry proxies like Brett Wilson dine out on it. “Ethical oil” is now ubiquitous. 

But that doesn’t make it true. 

Unethical oil

My typical response to the oil and gas boosters is that one cannot reconcile “ethical oil” with 82,000 abandoned wells (another 91,000 that have been plugged but the site has not been reclaimed) that blight rural Alberta, the 37 oil sands tailings ponds (containing 1.7 trillion litres of toxic sludge) that no one understands yet how to reclaim, and greenhouse gas emissions that comprise 26 per cent of Canada’s entire emissions inventory. That’s hardly “ethical.”

Not being “ethical,” however, is not the same as being actively unethical. That’s why Energi Media is devoting considerable time and resources to this project. As Professor Olszynski says, Albertans have been lied to for decades. They have been told their oil and gas industry is “the most environmentally responsible in the world,” while the industry with the active help of government and the regulator was accumulating massive environmental liabilities.

Those lies have human consequences. Indigenous communities’ fear when they finally found out 10 months after the Kearl oil sands tailings pond leaked and no one knew if local water supplies had been contaminated or if local food sources were safe to eat. Or Mark Dorin’s family’s 45-year struggle to have a well on their Didsbury property properly remediated after what they claim is malfeasance on the part of both the well’s owner and the AER. Or rural municipalities that lost hundreds of millions in unpaid oil and gas taxes. Or thousands of farmers who signed leases with oil companies that no longer bother to pay their surface lease payments but still enjoy full access to their well sites.

If nothing else, Albertans deserve the truth. 

Energi Media series about the AER

This column is the first in a series that will comprise an investigative report into Alberta’s unethical oil through the lens of the Alberta Energy Regulator. The report will include video interviews with leading experts, video news stories, podcasts, columns, and in the end, a deep dive that ties all of our reporting into a coherent, evidence-based argument. 

If Alberta hopes to avoid a Doomsday scenario, then the first step is to ditch “ethical oil” myopia and take a clear-eyed view of its oil and gas future. That first step has to include an understanding of how the Alberta government and the industry have used the provincial regulator to help create (and ignore) the province’s current predicament.