Home April 2019 Well, Well, Well…What Have we Here?

Well, Well, Well…What Have we Here?

A closer look at the finanical issues behind orphaned, suspended and abandoned wells

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Canada’s energy sector is vast and complex, but one thing is simple — oil and gas resources are dwindling and Alberta’s economy is in a crisis. As the industry continues to shrink, more and more oil firms are ceasing operations and abandoning their wells. According to the Government of Alberta, there are approximately 69,000 abandoned wells scattered across the province’s agricultural land. A recent report by the C.D. Howe Institute estimates more than 155,000 wells in Alberta have no economic potential. Although that sounds alarming, abandonment isn’t the cause of our province’s financial woes. In fact, property owners like Daryl Bennett consider abandonment to be a good thing.

“Abandonment means that all surface infrastructure has been removed and the well is capped underground and covered. This is what landowners want to happen to a non-producing well because they are closer to being able to farm the entire leased site again” explains Bennett, who is also the director of the Action Surface Rights Association (ASRA). The ASRA is a nonprofit organization composed of landowners who are dedicated to helping fellow landowners understand and navigate government and industry processes when dealing with the energy sectors.

Although abandoned wells generally pose less risk than suspended wells, which are unplugged, they can still omit air pollutants and cause soil and water contamination, which leads to food and farm safety concerns. Nearby fracking can also cause old abandoned wells to explode and leak. Sealing a well is only the first step in restoring a site, and farmers can only grow crops on land that has been fully reclaimed. However, landowners in Alberta cannot legally deny an energy company from drilling on their property, so the responsibility is on the company involved in the development and production of the well.

“Reclamation restores the land, both on a surface and sub-surface level, to a pre-development state. It may not return to its original state, but it is more likely to be capable of supporting enhanced biodiversity and ecosystem services such as carbon sequestration, retention of water, and erosion protection,” says Brian Ilnicki, executive director of the Land Stewardship Centre, a nonprofit organization that works with people and organizations to improve their understanding of healthy ecosystems, and encourages the development of practices and policies that support sustainable resource use. Their Alberta Stewardship Network and Watershed Stewardship Grant programs are a few ways that the Land Stewardship Centre help grassroot groups undertake projects like invasive species management, water quality testing, and overall capacity-building.

Restoring the land as close to its original state as possible requires the soil to be remediated of any contamination. To do this, the well must first be permanently sealed. Then the head must be removed and the pipe below the ground has to be severed. Access roads must also be removed before any topsoil is returned back to the site. However, this process isn’t cheap, and recovery isn’t guaranteed even if a site has been issued an official reclamation certificate. Unfortunately, it also happens to be the last priority for many oil and gas companies and even a few government agencies.

“Every year, a well produces less than the year before so every company is in a state of decline. Aging and inactive wells are managed in Alberta by the Licensee Liability Rating (LLR) program, which is designed by the oil and gas industry itself. It allows the industry to carry on drilling and producing wells without funding eventual cleanup until bankruptcy, which is when the profit from three years’ additional production is used to fund the cleanup. Unfortunately, the Alberta Energy Regulator (AER) has never had any mechanism to collect that those funds,” explains Regan Boychuk. Boychuk is an advocate for the cleanup of oilfield environmental liabilities and the founder of Reclaim Alberta.

While the Alberta Energy Regulator does have a system in place to ensure that financially unstable companies pay their deposits for cleanup, it is outdated and has not been strongly enforced. According to a recent internal report from the AER, this has left Alberta with a $260,000,000,000 oil patch cleanup bill that no one seems eager to pay. Cue the economic crisis.

“The collapse of the price of oil didn’t help, but the AEG hasn’t been properly enforcing liability management programs out of fear that it would lead to more companies going bankrupt. The AER should have been requiring deposits when the price of oil was high, but, so long as everyone was making money, the Conservative government was happy to let operators exploit the system. Unfortunately, now the taxpayer may be responsible for the clean-up,” Bennett adds.

Although a few fingers are being pointed at the AER for its role in Alberta’s current environmental and economic debacle, the organization did appear before the Supreme Court of Canada last year to dispute the ruling of the Redwater Case. The ASRA also made an appearance to appeal the decision that bankrupt energy companies, particularly Redwater Energy Corporation, could abandon wells during bankruptcy proceedings without reclaiming the sites.

After Redwater Energy Corporation went belly-up in 2015, its bankruptcy trustee wanted to sell the firm’s valuable wells and repay its bankers before paying for clean up. These wells would then become the responsibility of the Alberta’s Orphan Well Association (OWA). The OWA is a collaboration between the Alberta Government, provincial regulators, and the oil and gas industry, and works to protect public safety by managing the environmental risks of abandoned oil and gas properties that do not have a legally or finically responsible party to hold accountable. However, the association’s files are already bulging. As of March 2017, the OWA had an inventory of 2,084 orphaned wells.

Redwater Energy Corporation’s receiver and creditor, Grant Thornton Limited and ATB Financial, went to court in May of 2016 to determine whether or not they could walk away from their leased sites without funding cleanup. The Alberta Queen’s Bench ruled in their favour. Under the ruling, the profits from the sale of assets, which included 17 producing wells, would first go to creditors instead of being used to clean up operations sites. However, this decision was recently appealed by both the AER and the OWA and overturned by the Supreme Court with a 5-2 majority. The Supreme Court ruled that even bankrupt oil and gas companies are responsible for cleaning their messes, and the money left over from Redwater’s assets must be used for reclamation.

Bennett believes that this ruling means the Alberta Energy Regulator will have a greater claim on the good assets of a company and should be able to liquidate them to help pay for clean-up.

“Now, it’s more unlikely that operators will arrange to go bankrupt to avoid clean-up costs. Redwater may make it more difficult to get funding from banks, however, lenders likely won’t be so quick to force bankruptcy either, because they won’t get anything out of it. It may also create an incentive for solvent companies to clean-up wells more quickly as they attempt to remove liabilities from their financial records in order to get more loans from lenders, but they won’t be able to dump them onto the OWA as quickly now,” he says.

It seems like this 12-figure cleanup job has another silver lining. Boychuk sees reclamation as an opportunity for a job creation program that can offer full-employment in the energy sector for decades to come.

“If Alberta retooled its economic engine to restore the landscape of this beautiful province, rather than continuing to ravage it with extraction, riggers could keep right on rigging and truckers could keep on trucking. With comparatively little retraining or relocation, hundreds of thousands of oilfield service workers could keep doing what they do, where they do it — protected by the same unions too,” wrote Boychuk for an article in last year’s The Star.

As to what will happen in the future, however, only time will tell.

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