National Post (National Edition)
ALBERTA SHOULD BE MORE LIKE TEXAS IN CLEANING UP OIL WELLS.
CALGARY • There are 155,000 non-productive oil and gas wells sitting idle in Alberta that pose a potential $8.6-billion liability to the energy industry and taxpayers, according to a new C.D. Howe Institute report.
The report calls on the Alberta government to change how it regulates the cleanup of oil and gas wells to avoid the massive and growing liability, which has come sharply into focus following the collapse in oil prices that has hurt the province’s finances.
“In the past, Alberta and other Western Canadian provinces had a system that worked but with low energy prices, it won’t work,” said Benjamin Dachis, associate director, research at the institute and co-author of the soon-to-be-published report.
As many as 155,000 oil and gas wells in Alberta, or 34 per cent of all the province’s 450,000 wells, are inactive but have yet to be fully remediated. In addition, the number of orphaned oil and gas wells for which there is no responsible owner has risen from under 100 to over 3,200 in the last five years.
On average, the report found oil and gas wells sit idle in Alberta for eight years at the end of their productive life before being remediated, but thousands of wells have been suspended for far longer than that.
To address the problem, the Alberta government loaned $235 million to the energy industry this year to help pay for the clean up of orphaned wells, and $30 million in interest payments on that loan will be covered by the federal government.
The province has also convened a commission to look at how it can improve regulations for idle oil and gas wells and drive down the number of problem wells in the province.
Dachis, along with co-authors Blake Shaffer and Vincent Thivierge, suggests the Alberta government should require oil and gas companies to post partial bonds for wells they intend to drill and acquire insurance on those wells to prevent the problem occurring in the future. The report authors also suggest the government provide some financing to clean up the existing problem.
Texas moved from a system similar to Alberta’s to one where bonds are required of all oil and gas companies in 2002 and industry production did not suffer while environmental problems declined.
“The fact that there is a bond that these companies had to pay created a very strong incentive for these companies to clean up their wells and it led to fewer environmental harms,” Dachis said.
In Texas, the switch to a bond system made large, financially stable companies better off compared to smaller operators, whose liabilities made up a larger portion of their balance sheet.
Dachis said the same outcome could happen in Alberta.
Most oil and gas producers in Alberta record their decommissioning liabilities assuming a 20-year to 30-year payment period and a 2 per cent to 3 per cent discount rate, according to a report by Raymond James in April.
However, some Canadian companies use 7 per cent discount rates and 50-year payment periods to drive down the decommissioning liabilities that appear on their balance sheets.
Raymond James analyst Jeremy McCrea said companies should standardize how they discount their future clean-up costs to improve disclosure for investors. “That would be easier for investors to compare companies and reward the companies that would take of their environmental liabilities,” McCrea said.