Alberta’s looming multibillion-dollar orphan wells problem prompts auditor general probe

There are 3,406 deserted oil and gas wells in the province, with growing concern about more joining the list

This oil well near Two Hills, Alta., has been inactive since 2012, and its owner, Sequoia Resources, ceased operations in 2018. Dwight Popowich, who owns the land, wonders who will clean it up. (Kyle Bakx/CBC)

As Alberta struggles to clean up thousands of oil and gas wells left behind by bankrupt companies, the province’s auditor general is set to investigate how the problem became so big and why the industry regulator’s efforts to collect security deposits came up so short, CBC News has learned.

Often referred to as orphan wells, there are currently 3,406 such wells scattered around the province, usually on the properties of rural landowners, where they lie untended.

There are another 94,000 inactive wells in the province, with the worry that many of these may become orphaned as their owners struggle — and taxpayers could be left with the bill.

The auditor general’s office will look at whether the province is doing enough to prevent wells from becoming orphaned in the first place, and whether it is prepared for more to be added to the list due to ongoing pressure on Alberta’s energy economy.

“We will be focusing on both whether the government — and specifically the Alberta Energy Regulator — has the systems and processes to assess whether orphan oil and gas sites are being managed and reclaimed efficiently and economically in the best interests of Albertans,” said Val Mellesmoen, spokesperson for the Office of the Auditor General of Alberta.

The Alberta Energy Regulator (AER), an arm’s-length agency of the provincial government that oversees the energy industry and its activities, has a liability management system that is supposed to make sure companies that are permitted to drill have a healthy enough bottom line to pay for cleanup later on.

Val Mellesmoen, spokesperson for the Office of the Auditor General of Alberta, says they are set to review the orphan wells issue. (CBC)

If a company’s estimated assets fall below the cost of its environmental liabilities, the AER can collect and hold what’s effectively a security deposit to make sure there’s money on hand for cleanup if the company later walks away from the well.

But the regulator has been using a formula based on out-of-date commodity prices that has inflated the assets of many companies. As a result, companies were not asked to put down large enough security deposits for future cleanup.

The province’s own estimate of the eventual cleanup bill for every oil and gas well in Alberta is $30 billion, while the AER only holds $227 million in financial security.

“The promise of this production was that companies would clean up their mess,” said Nikki Way, a senior analyst at the Pembina Institute, a clean energy think-tank based in Calgary.

“I’m disappointed that we’re at the point where the ‘polluter pays’ principle is not being upheld and we’re considering cleaning up a bill that was always supposed to be accounted for.”

Alberta has asked the federal government to help pay for cleaning up orphan wells. In a November 2019 letter sent by Alberta Finance Minister Travis Toews to Bill Morneau, his federal counterpart, the province asked Ottawa for funding and tax instruments to encourage investment in well reclamation.

“This system is just not sustainable,” said Lucija Muehlenbachs, an economist at the University of Calgary who specializes in the energy industry.

“It’s not functioning, so it will have to be completely thrown out the window. But it’s many years too late.”

 

The AER uses a liability management rating, or LMR, to determine whether a company has enough money to clean up its wells down the line. If the company’s estimated assets — calculated based on the amount of resources in its wells — are less than the estimated cost of cleaning up the wells, the company has to pay a security deposit.

But the AER has been using commodity prices from 2008-2010, back when oil prices were much higher, to estimate the value of assets. Even though the regulator assesses these assets every month, because of its use of old commodity prices, many companies that should be putting up security deposits have not had to.

And simply adjusting the calculation now to account for current prices isn’t an easy fix, according to the AER, because it could force struggling companies into bankruptcy.

“In many cases, this would have negative consequences for those already facing financial difficulties, and increases the risk that end-of-life obligations would not be addressed,” AER spokesperson Shawn Roth said in an email.

Landowners left in the lurch

Meanwhile, landowners who agreed to lease their land to oil companies so they could drill wells were promised the companies would clean up after the wells were done producing and restore the surface of the land to its original state.

Instead, many are left with inactive wells that nobody is monitoring, let alone cleaning up and closing.

Dwight Popowich has been left in limbo and unable to sell his land while it has an inactive well left behind by a company that ceased operations in 2018. (Kyle Bakx/CBC)

Dwight Popowich has an oil well on his property near Two Hills, Alta., about 100 kilometres east of Edmonton, that was drilled in 2008. It stopped producing in 2012, and its owner, Sequoia Resources Corp., stopped operating in March 2018. No remediation work has been done on the well.

Popowich is waiting for the well to be transferred to the Orphan Well Association, which is an industry- and government-supported group that is trying to manage orphan wells. But, in the meantime, no one is monitoring the well on his property.

“We don’t know if it’s safe. We don’t know if it’s leaking. Nobody’s showing up to even take a look at it,” Popowich said.

Sequoia held licences for 2,300 wells when it ceased operations in 2018.

For Popowich, the well has become a financial headache in addition to an environmental problem. He wanted to subdivide his land and sell off half of it to help pay for his retirement. But the well is in the way.

“Nobody wants to buy the land if they have to deal with a well that’s in limbo,” he said.

A better way

Across the border in North Dakota, as oil prices declined, the state saw a growing number of inactive wells, but it has not experienced the same problem with orphan wells as Alberta.

North Dakota has strict timelines in place to deal with inactive wells. If a well stops producing for as little as three months, it’s immediately flagged. The state also collects a bond from companies upfront — $50,000 US if the company is drilling one well — and can use that money to pay for plugging and remediating wells.

North Dakota, which is the second largest crude oil producer in the U.S. after Texas, has only 1,683 inactive wells — and not one of them is an orphan.

The head of North Dakota’s regulator says a combination of a bond system and plugging and reclamation fund is essential for preventing orphan wells.

“You’ve got to start somewhere,” said Lynn Helms, director of the North Dakota Department of Mineral Resources.

Alberta, on the other hand, does not have any timeline for how long a company can leave a well inactive. This has raised concerns that many of the approximately 94,000 inactive wells in Alberta may become orphaned before their owners clean them up.

Looking ahead

Alberta’s industry knows the liability management system needs to change, and the AER and provincial government have said they are reviewing the program. The AER says a new system would gather more company-specific information to gain a more holistic view of whether a company can meet its environmental obligations.

But the government and regulator have to tread lightly on an industry that’s struggling.

Inactive wells that are not properly plugged and cleaned up could leak contaminants into the soil and air. (Kyle Bakx/CBC)

“We want to see progress on the file, but you have to manage the unintended consequences,” said Brad Herald, vice-president of Western Canada operations for the Canadian Association of Petroleum Producers.

“You don’t want to create more defaults. There are a lot of companies struggling. We are empathetic to that.”

Nikki Way of the Pembina Institute says concerns over low oil prices should not stop the government from taking action now. New wells can be treated differently, with more financial security collected prior to drilling.

She points out that while the government has to balance the profitability of the industry with any new regulations, the liability problem will continue to grow if nothing is done.

“The pressures aren’t going away any time soon,” she said. “So the scope of the problem needs to be front and centre and transparent.” SOURCE

 

The Drilldown: Redwater ruling poses threat to the energy sector


The Supreme Court of Canada in Ottawa. (iPolitics/Matthew Usherwood)

The Supreme Court of Canada passed the Redwater ruling earlier this year requiring energy companies to complete their environmental commitments before repaying financiers to avoid bankruptcy or insolvency repercussions. Before this ruling, financial experts vocalized that this decision could negatively impact the financial backing of the oil and gas sector, which is proving to be true.

“We also will be focusing in the next few weeks on doing everything we possibly can to mitigate the unintended consequences of the Redwater decision, which has done so much to restrict access to both capital and credit, equity and credit, for this industry,” said Alberta Premier Jason Kenney at a Canadian Association of Oilwell Drilling Contractors (CAODC) hosted luncheon on Wednesday, reported CBC News.

The Redwater ruling repealed two previous Supreme Court decisions that said bankruptcy law superseded the environmental obligations of the province. This allowed energy producers to refund their financiers before cleaning old oil and gas wells, which often led to companies abandoning oilfields without taking environmental responsibility.

Representatives from the oil and gas sector claimed they were content with the court’s decision as it was happening, but the ruling has had a “significant” effect on the sector, said Tristan Goodman, the president of the Explorers and Producers Association of Canada, on Thursday.

The number of abandoned wells in Alberta has increase substantially over the last five years. According to the Orphan Well Association, orphaned well numbers were lower than 200 in 2014, and as of November 1, 2019, totalled 3,406.

CAODC projections show stagnant activity in drilling, and as companies continue to move to the U.S., layoffs in the sector are expected to continue. SOURCE

RELATED:

Alberta seeks to lessen financial hit of Supreme Court ruling on orphan wells

 

Both Notley and Kenney Hiding from a $260-Billion Cleanup Problem

The Alberta government may well leave taxpayers to clean up the oil and gas industry’s mess.

Oil well
‘I think this issue is too big and too scary for both government and industry to face.’

The main thing Jason Kenney and Rachel Notley have in common, other than their affinity for pipelines, is their joint fear of the possible $260-billion cleanup bill for the province’s aging oil and gas fields.

Neither Kenney, the United Conservative Party leader, nor NDP Premier Notley have said much on the hustings about this astounding liability, which includes tens of thousands of inactive wells, abandoned gas plants, oil sands tailing ponds and 400,000 kilometres of pipelines.

The mountainous size of the cleanup costs dwarfs the puny pile of security deposits the province has collected from industry to pay for the cleanup — $1.5 billion.

Regan Boychuk, a 41-year-old Calgary roofer, independent researcher and a driving member of the Alberta Liabilities Disclosure Project, understands why Kenney and Notley don’t want to talk about such embarrassing math.

“I think this issue is too big and too scary for both government and industry to face. It is a can of worms,” said Boychuk in a Tyee interview.

But if not corrected, the scale of the problem could affect the province’s credit rating, bankrupt hundreds of smaller oil and gas firms and leave Canadian taxpayers with the mother of all cleanup bills. MORE

 

B.C. audit blames ‘gaps’ in provincial law for growing oilpatch liabilities


Oil and gas infrastructure is seen behind a chain link fence in this undated file photo by Louie Villanueva

The number of abandoned oil wells in British Columbia almost doubled between 2007 and 2018 and funds collected from operators to cover cleanup costs for a growing number of orphaned wells are insufficient, the province’s auditor general said in a report issued on Thursday.

A major reason for that is that the industry’s regulator, the BC Oil and Gas Commission (OGC), lacks the power to compel operators to decommission and restore well sites in a timely way, said Carol Bellringer.

“We found that gaps in the provincial legislation governing the OGC meant operators weren’t required to decommission or restore their inactive well sites unless the OGC explicitly ordered them to do so because of specific safety or environmental issues,” she said.

The provincial government has created a new law that will give the regulator more coercive powers, she said in a phone interview, but the regulations that would allow it to be enforced are still being drafted. MORE

RELATED:

A Fracking Disaster: BC Failing to Make Polluters Pay

B.C. left holding massive bill for hundreds of orphan gas wells as frack companies go belly-up

On the cusp of a major fracking boom, B.C.’s Oil and Gas Commission is already struggling to keep up with the ballooning cost of cleaning up inactive and, at times, contaminated sites that have grown by 48 per cent in the last two years

Fracking Farmington B.C.
Fracking operations near Farmington. B.C. Photo: Garth Lenz / The Narwhal

Nearly 400 kilometres north of Fort St. John is a large, leaking fracking pond owned by Ranch Energy Corporation, a Calgary-based company that went into receivership last year leaving 700 gas wells in B.C. and a sea of debt.

The storage pond is filled with 113,000 cubic metres of sludge and water that may be contaminating soil and groundwater through a documented leak in its outer lining, according to the B.C. Oil and Gas Commission.

Twenty months ago, the commission issued an order to Predator Oil BC Ltd., the company that sold Ranch the wells, to empty the pond and test for contamination.

But nothing has been done. Ranch’s receiver, Ernst & Young, says it’s an expense the estate cannot afford.

The story of Ranch — pieced together by The Narwhal from a review of receivership documents and B.C. Oil and Gas Commission documents — highlights some of the mounting financial and environmental problems created by B.C.’s fracking industry. MORE