The Next Government needs to address Alberta’s Fossil Fuel Liabilities Part 1

The Next Government needs to address Alberta’s Fossil Fuel Liabilities

Part 1: Management of Liabilities, Orphans and Post-closure Sites

The management of oil and gas liability in Alberta is not working.  Estimates of oil and gas liabilities on the Alberta landscape range from about $60 billion to $260 billion.[1] There are over 6,000 sites with no legally responsible or financially able person to clean them up.[2] Every public dollar that goes to the reclamation and remediation of these sites means one less dollar for public education and health care.

Albertans deserve an oil and gas liability management approach which adheres to the polluter pays principle.  This requires:

• security deposits to address environmental obligations being required for all oil and gas activities before work commences;
• legislated timelines for reclamation and remediation to avoid inactive wells languishing on the landscape without clean-up; and
• monitoring being put in place for all inactive, orphan, legacy and post-closure sites.

While improving the management of oil and gas liabilities certainly is a key to avoiding the creation of future orphans and legacy sites, the fact is we have a growing number of post-closure sites that have potential to create future issues (especially without effective scrutiny of reclamation and remediation activities and effective ongoing monitoring of post-closure sites).  Although, improved calculation and collection of security deposits may go some distance to address future issues, more is likely needed (as not all future damage can be foreseen).  A possible solution is establishment of a heritage savings trust fund earmarked to address environmental liabilities.

Overall, it is time to consider alternative regulatory structures to ensure environmental protection and adherence to the pollution pays principle – rather than industry efficiency – guide oil and gas regulation in Alberta.

The Polluter Pays Principle and the Legacy of Fossil Fuels in Alberta

As has been stated by the Supreme Court of Canada, the polluter pays principle “has become firmly entrenched in environmental law in Canada… [and] also recognized at the international level”.[3]  The SCC describes the polluter pays principle as:

To encourage sustainable development, that principle assigned polluters the responsibility for remedying contamination for which they are responsible and imposes on them the direct and immediate costs of pollution.  At the same time, polluters are asked to pay more attention to the need to protect ecosystems in the course of their economic activities.[4]

In simple terms, the polluter pays principles means that industry should clean up the mess it makes. Implementation of this principle, however, may not be so simple (see our publication The Polluter Pays Principle in Alberta Law, An Introduction & Survey for more discussion).[5]

Looking at the legacy of fossil fuels in Alberta, it is apparent that the polluter pays principle has been poorly implemented with respect to fossil fuel extraction in the province.  There are over 6,000 orphan sites in Alberta – meaning there is no legally responsible or financially able person to conduct necessary abandonment and reclamation.[6] A public statement by the Alberta Energy Regulator (AER) in 2018 estimated oil and gas liabilities at $58.65 billion[7] (although the AER’s internal estimates have been as high at $260 billion[8]). Other estimates place the cost of Alberta’s well liability at $100 billion.[9]  Placing these liabilities on the public purse – as opposed to those who created the liabilities – diverts public funding that could be used in support of the provincial educational or health care systems.

This blog looks at several aspects of the liabilities associated with fossil fuel extraction in Alberta:

• Oil and Gas Liability Management which encompasses the licensee special action, licensee capability and inventory reduction aspects of the LMF; and
• Orphans, Legacy and Post-Closure Sites.

The second part of this (forthcoming) will look at oil sands fluid tailings management, an issue which has recently made headlines with the Imperial Oil Kearl Oil Sands incidents.

A Brief History of the Management of Oil and Gas Liability in Alberta

Prior to 2020, the key tool for managing oil and gas liability was the Licensee Liability Rating (LLR) Program.  The LLR Program applied to all upstream oil and gas wells, facilities, and pipelines included within the scope of the Orphan Fund.  The LLR Program was meant to assess a licensee’s ability to address its suspension, abandonment, remediation and reclamation liabilities by determining the Liability Management Ratio (LMR) of a licensee’s eligible deemed assets to its deemed liabilities.  If a licensee’s LMR fell below 1.0, then a security deposit was required.

In mid-2020, in response to ever growing liabilities (and the Court of Appeal decision in Redwater),[10] the provincial government announced its intention to develop a new liability management framework (LMF) for oil and gas activities in the province (see blog posts here and here).  The LMF introduced in 2020 broadly outlined five policy components: licensee special action, licensee capability assessment, inventory reduction program, addressing legacy and post-closure sites, and expanding the mandate of the Orphan Well Association.  Overall, the LLR program was to be enhanced by requiring more detailed financial information initially, on an ongoing basis, and with license transfer requests.

The AER now uses wholistic Licensee Capability Assessment (LCA) to determine whether a company is financially stable enough to receive a license to operate and whether upfront security is required.  The LCA approach is introduced in the AER’s Directive 088 which also outlines the licensee management program and inventory reduction program.  The Licensee Management Program is meant to proactively monitor licensees to support the responsible management of energy development.  The Inventory Management Program sets mandatory closure spend targets for closure activities (in an effort to achieve a certain level of closure activities on an annual basis).

Alberta’s Management of Oil and Gas Liability is not Working

In March 2023, the Auditor General of Alberta (AGA) released its report on the audit conducted pursuant to section of the provincial Auditor General Act.  This audit included looking at the  liability management of (non-oil sands) oil and gas infrastructure. In its report the AGA notes that the new liability management framework announced in 2020 was meant to shrink inactive inventory, ensure faster restoration of land and protect against future backlog of sire needing clean-up. As such, the objects of the AGA’s audit were to assess whether:[11]

• whether the AER has an effective liability management system to mitigate the risks associated with the closure of oil and gas infrastructure, and
• whether the AER’s analysis of the oil and gas liability management system appropriately identified risks and gaps and whether AER prepared an implementation plan to effectively mitigate those risks and gasp in the design of its system changes.

In conducting the audit, the AGA looked at six key areas of the AER’s liability management system: risk management, performance management and public accountability, assessing information from the Orphan Well Association, timely closure of inactive sites, financial security and license transfers, and regulatory compliance of closure activities.

Noting the AER’s estimate of inactive closure liability as about $11.3 billion, the AGA found that:[12]

This liability issue has been long standing and historic attempts to manage it have had limited success.  Over many years, statistics from AER show closure work has not kept pace with the steady grants of the number of inactive wells. …

AER acknowledges the significant liability management challenge, the historically reactive approach, and the need for system improvements.  Our engagement sessions with a wide group of stakeholders confirmed many long-standing issues and risks associated with the liability management systems.  They include the lack of timely closure, proper closure, inadequate security collection, appropriateness of certain license transfers and sustainability of OWA.

The AGA concluded that the “AER has a system to mitigate the risks for the closure of oil and gas infrastructure; however, parts of the system have not operated effectively”.[13]  Specifically, there were issues with:

• risk management practices;
• goals, performance measurement and public accountability;
• assessing information from OWA;
• timely closure of inactive sites;
• collecting sufficient financial security and minimizing risk of inappropriate licence transfers; and
• suspension, abandonment, remediation and reclamation regulatory processes.

The AGA made several recommendations in order to address these shortcomings.  As stated in the audit report:[14]

Inactive oil and gas infrastructure that isn’t properly closed can pose serious environmental, public health and economic risks to Albertans. Inappropriately abandoned wells, for example, can leak contaminants into the soil and into the air people breathe and the water they drink. Failure to ensure that operators and industry conduct and pay for the safe shut down of their infrastructure increases the risk that extensive closure costs could be shifted to the public. Albertans needs an effective liability management system in place to hold industry accountable for meeting their environmental obligations to the province and to ensure that industry’s liability management risks are being properly managed.

Poor Management of Liabilities creates Orphan and Legacy Sites

Without legislated timelines for abandonment, remediation and reclamation, oil and gas sites are allowed to languish on the landscape for indeterminate periods of time.  The chances of there being no legally responsible or financially viable person increases as time passes. Indeed, the historic and current approach to oil and gas liability drives the creation of orphan and legacy sites which fall on the public purse.

To understand management of oil and gas liabilities in Alberta, it is important to understand the lifecycle of an oil and gas well (as well as other infrastructure):

• Active Well: currently producing oil or gas.
• Inactive or Suspended Well: has not produced in 12 months (or 6 months if a critical sour well). Inactive wells must be suspended within 12 months of the inactive date.  An inactive or suspended well may be reactivated to begin production at a later date.
• Abandoned Well: permanently dismantled, sealed and taken out of service.
• Reclaimed and Remediated Well: after a well is abandoned, the site must be reclaimed and remediated.  Reclamation means the well-site land must be brought back to a land capacity equivalent to the pre-development state.  Remediation means that the well-site has been cleaned up to meet soil and water conditions.

Regardless of where a well may be in its lifecycle, it becomes an orphan when there is no legally responsible or financially viable person to deal with the abandonment, reclamation and remediation responsibilities for the well.  Legacy and post-closure sites are those site that have been abandoned, remediated or reclaimed (either to current standards or previously existing standards).

How are orphan, legacy and post-closure sites managed?

Orphan wells are managed by the Orphan Well Association (OWA).  In June of 2020, the mandate of the OWA was expanded to allow better management of orphan sites and to allow monitoring of the behaviour and condition of orphan wells. Ultimately, the OWA decommissions orphan sites and undertakes remediation and reclamation of those sites.  The OWA is funded in part by industry levies and has received government loans (often interest free).[15]

In terms of addressing legacy and post-closure sites, as part of the 2020 LMF proposal, a panel was established in January of 2021 to explore issues and identify potential solutions.[16]  It is not clear how the work of this panel is progressing.  While there are provisions in place under the Oil and Gas Conservation Act and the Environmental Protection and Enhancement Act addressing releases of substances into the environment, unless there is a party that can be identified and held responsible for clean-up of such releases, the burden falls to the government.  This means that legacy and post-closure sites typically become the government’s responsibility, a breach of the polluter pays principle.

Another issue that arises with post-closure sites is that, even if a certificate of reclamation is issued, that does not guarantee there will not be future issues.  Audits conducted by the AER in 2014 found that a large portion of inactive wells in the province were not compliant with suspension requirements.[17]  As pointed out by the AGA in its 2023 report, the AER has not conducted well suspension compliance work for several years, the reclamation certificate process is automated, and reclaimed wells are rarely inspected.  The AGA has recommended that compliance and assurance processed for suspended and abandoned wells be improved.

In an attempt to avoid the creation of orphan and legacy sites, the 2020 LMF introduced closure spend quotas (the Inventory Reduction Program). Each licensee is required to meet an annual mandatory quota, keep records and report annually to the AER on all closure activities and spends, and provide information as requested by the AER. However, this approach can be criticized for both not setting high enough spend quotas[18] and for not prioritizing clean-up of more complex sites (i.e. companies determine which sites to spend to reach their quotas).

The Site Rehabilitation Program has also been established to distribute $1 billion in federal funding to oil field service companies for conducting oil and gas site closure and reclamation.  While this is necessary work, it is another illustration of failure to adhere to the polluter pays principle in that public funds are being used to clean-up legacy oil and gas sites.

As pointed out by Jeremy Barret et al.:[19]

Perhaps one measure of the success of the new Liability Management Framework is the time it takes for the AER to discontinue the Orphan Fund Levy. If the new Liability Management Framework is as effective as advertised and a more robust model is not determined to be required by the AER, then the Orphan Fund Levy ought to be discontinued as soon as all existing orphan liabilities are paid, and industry should not have to continue to fund future obligations.  It would encourage investment and incentivize new entrants to the oil and gas industry if participants did not have to pay a retroactive tax to fund prior obligations of others or future obligations of others, which should be properly mitigated by the new Liability Management Framework. 

Improving the management of oil and gas liabilities certainly is a key to avoiding the creation of future orphans and legacy sites.  However, the fact is we do have orphans and legacy sites.  We also have a growing number of post-closure sites which, even if they are remediated and reclaimed to today’s environmental standards, may create future issues.  Future issues are especially likely without effective scrutiny of reclamation and remediation activities and effective ongoing monitoring of post-closure sites.

Alberta’s Government can and should implement a better system

Clearly, management of oil and gas liability in Alberta has not worked in the past.  The changes introduced in 2020 (and still being implemented) are really just tweaks to that same system and so are unlikely to be adequate. Albertans deserve an oil and gas liability management approach which adheres to the polluter pays principle.  This requires:

• security deposits to address environmental obligations being required for all oil and gas activities before work commences;
• legislated timelines for reclamation and remediation to avoid inactive wells languishing on the landscape without clean-up; and
• monitoring being put in place for all inactive, orphan, legacy and post-closure sites.

These steps would address the three main issues found by the AER’s own risk analysis of its liability management system in 2019 – that is, lack of prompt closure of inactive oil and gas sites; liabilities such as legacy site where there is no owner or industry funded backstop; and inadequate collection of security from operators to ensure they can meet their obligations when projects end.[20]

Furthermore, it is essential that the efficacy of the security deposit amounts be confirmed by continuous monitoring, periodic evaluation and adaptation of regulatory systems.  Even if calculation and collection of security deposits is improved, these amounts may well be insufficient to address future liabilities associated with post-closure sites.  Some solutions that have been proposed include repurposing inactive oil and gas well sites for geothermal or solar energy,[21] or establishing a heritage savings trust fund earmarked for addressing legacy sites.  Such a fund could be created using funds levied from the industry, using royalties generated by oil and gas activities (recognizing this is public funding which does not completely align with the polluter pays principle), or a combination of both.[22] 

Currently, the AER is responsible for regulating all aspects of the oil and gas industry including authority to issue approvals under the Environmental Protection and Enhancement Act and the Water Act.  Enforcement and compliance activities also fall within the AER’s mandate.  While this may increase efficiency from the perspective of the oil and gas industry participants, it also results in a lack of transparency and independent regulatory oversight of the industry.  Indeed, lack of transparency has often been raised as an issue for various aspects of oil and gas liability: including the calculation of security deposits, the determination of closure spend quotas, the estimations of liability, and the containment and treatment of fluid tailings.  It is time to consider alternative regulatory structures to ensure environmental protection and adherence to the pollution pays principle – rather than industry efficiency – guide oil and gas regulation in Alberta.

[1] Alberta Energy Regulator, “Public Statement” (November 1, 2018), online: https://static.aer.ca/prd/documents/news-releases/AERPS2018-05.pdf; and Carolyn Jarvis et al., “Alberta regulator apologizes for spooking public with $260-billion cleanup cost estimate” (November 2, 2018) Global News, online: https://globalnews.ca/news/4621955/alberta-regulator-apologizes-for-spooking-public-with-260-billion-cleanup-cost-estimate/ [Jarvis et al.].

[2] See list of orphan sites on the Orphan Well Association website, online: https://www.orphanwell.ca/about/orphan-inventory/.

[3] Imperial Oil Ltd. v Quebec (Minister of the Environment), [2002] 2 SCR 624 at para. 23.

[4] Ibid. at para. 24.

[5] Environmental Law Centre (Alberta), The Polluter Pays Principle in Alberta Law, An Introduction & Survey (Edmonton: 2019, Environmental Law Centre).

[6] See list of orphan sites on the Orphan Well Association website, online: https://www.orphanwell.ca/about/orphan-inventory/.

[7] Alberta Energy Regulator, “Public Statement”, supra. note 1..

[8] Jarvis et al., supra. note 1..

[9] Sharon J. Riley, “Investigation: The story of Alberta’s $100-billion well liability problem. How did we get here?” (November 2, 2018) The Narwhal, online: https://thenarwhal.ca/the-story-of-albertas-100-billion-well-liability-problem-how-did-we-get-here/.  See also the Alberta Liabilities Disclosure Project website, online: https://www.aldpcoalition.com.

[10] Orphan Well Association v. GrantThornton Ltd., 2019 SCC 5. See also ELC’s blog post, online: https://elc.ab.ca/where-to-from-here-more-green-regs-and-ham-in-calgary-october-24-2019/ [Redwater].

[11] Auditor General of Alberta, Liability Management of (Non-Oil Sands) Oil and Gas Infrastructure, Alberta Energy Regulator (Edmonton: 2023, Office of the Auditor General of Alberta) [AGA Report 2023] at 2.

[12] Ibid. at 14.

[13] Ibid. at 16.

[14] Ibid. at 17.

[15] Orphan Well Association website: https://www.orphanwell.ca.

[16] Alberta Energy Regulator website: https://www.aer.ca/regulating-development/project-closure/liability-management-programs-and-processes/addressing-legacy-and-post-closure-sites

[17] Barry Robinson, The Inactive Well Compliance Program: Alberta’s latest attempt to bring the inactive well problem under control (Calgary: 2014, Ecojustice).

[18] See for example: Drew Yewchuk, “The AER’s Mandatory Closure Spend Targets are Deficient” (July 27, 2021) Ablawg, online: https://ablawg.ca/2021/07/27/the-aers-mandatory-closure-spend-targets-are-deficient/ and Drew Yewchuk, “The AER Quietly Implemented a Two Tier Mandatory Closure Target” (November 8, 2022) Ablawg, online: https://ablawg.ca/2022/11/08/the-aer-quietly-implemented-a-two-tier-mandatory-closure-spend-target/

[19] Jeremy Barrett, Jeff Davidson, Chris McLelland, Tamara Prince, and Alyshea Surani, “Leading the Way? Liability Management for the Alberta Oil and Gas Industry” (2022) 60(2) Alberta LR 487 at 512.

[20] AGA Report 2023, supra. note 11.

[21] Marla Orenstein and Juli Rohl, The LEAD Project: Leveraging our Energy Assets for Diversification (Calgary: 2021, Energy Futures Lab).

[22] Alberta has an established heritage savings trust fund, see online: https://www.alberta.ca/heritage-savings-trust-fund.aspx and Norway also has a similar fund called the Government Pension Fund Global, see online: https://www.nbim.no but these funds are used for general government budgets, not specifically earmarked to address legacy sites.

Photo courtesy Pembina Institute https://www.pembina.org/blog/taking-responsibility-abandoned-oil-wells