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

Alberta's energy minister is faulting the previous government for allowing the number of oil and gas wells left behind by bankrupt companies known as orphan wells to grow to the point where the province's auditor general is now examining how the problem got so big.

"Considering the previousNDPgovernment took no action on the issue, it is unfortunate that the auditor general now has to intervene,"Sonya Savage said in an email Thursday.

The comments from the United Conservative Party minister came afterCBCNews reported on the audit earlier on Thursday.

There are currently 3,406 orphanwells 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.

Meanwhile, the government is also reviewing its own processes to deal with orphan wells. Savage says the government will be proposing a suite of new regulations "covering the entire lifecycle of wells in the first quarter of the year."

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.

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But the regulator has been using a formula based on out-of-date commodity prices that has inflated the assets of many companies.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 eventualcleanup bill for every oil and gas well in Albertais $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.

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.- Dwight Popowich, landowner

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 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 Dakotahas 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 thecompany 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.

"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 problemwill 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."