Updates on Oil & Gas Liability and Rehabilitation in Alberta

28 Sep Updates on Oil & Gas Liability and Rehabilitation in Alberta

Updates on Oil & Gas Liability
and Rehabilitation in Alberta

It is no secret that Alberta has an oil and gas liability problem.

There are more than 96,000 inactive wells in Alberta (see GOA’s press release) For an oil or gas well, inactive status means that the well is not actively producing and has not be properly abandoned and reclaimed  (i.e. the well permanently capped and the site returned to a pre-disturbance equivalent land capacity).  In addition, there are a significant number of orphan facilities in Alberta meaning there is no legally responsible or financially able person to conduct the necessary abandonment and reclamation activities.  These orphan facilities are transferred to the Orphan Well Association (OWA) for management (the OWA list of over 6,000 orphan wells is here).

A public statement by the Alberta Energy Regulator (AER) in 2018 estimated total liabilities at $58.65 billion (see Public Statement). Other estimates place the cost of Alberta’s well liability at $100 billion (see The Narwhal’s investigation).  About half of this liability is associated with mining activities such as oil sands and coal mines (see National Observer article from November 2018).   Without a significant change in Alberta’s approach to addressing oil and gas liabilities, these numbers will continue to grow (especially so in economic downturns when insolvencies increase and there continue to be no set timelines for abandonment and reclamation).

Liability Management Framework

At the end of July, the provincial government announced its intention to develop a new Liability Management Framework (the LMF).  To date, the LMF is merely a broad outline of intended “mechanisms and requirements to improve and expedite reclamation efforts” (merely 2 pages long).    The LMF is to be composed of several elements:

• Licensee Special Action

This component of the LMF will provide “practical guidance and proactive support for individual or distressed operators”.  Presumably, the rationale being that assisting operators through difficulties will prevent the creation of more orphans. It is unclear whether this will include financial support or whether it will lead to regulatory interventions in cases where the support proves inadequate.

• Licensee Capability Assessment System

This will “replace the AER’s current Licensee Liability Rating program” which is used to determine whether a company is financially stable enough to receive a licence to operate and whether up-front security may be required.  The Licensee Liability Rating program uses a liability management rating (LMR) which is calculated as a ratio of a company’s deemed assets (production) to its deemed liabilities (abandonment and reclamation costs). A company with a LMR of 1.0 or less is required to provide a security deposit to cover abandonment, remediation and reclamation costs (see AER’s Directives 006 and 011).

The LMF indicates that the current program will be improved to assess “the capabilities of oil and gas operators to meet their regulatory liabilities “.  It is intended that a “more comprehensive and accurate corporate health assessment” will be made by “taking into account a wider variety of assessment parameters”.  There is no indication what these parameters will be.  This proposed program will be used to inform decisions about licence applications and, where appropriate, to trigger the Licensee Special Action program.

• Inventory Reduction Program

This program will “establish annual industry site closure spending targets over a 5-year rolling period to help reduce inactive well inventories”.  There is no indication in the LMF as to the actual spending targets to be imposed.  Nor is there any indication of the mechanisms that will be used to enforce these spending targets (which should include penalties for failing to meet targets).  There will need to be mechanisms in place to ensure expenditures are reasonable for work actually accomplished (i.e. expenditures not artificially inflated) and to track actual expenditures.  In addition, there will need to be provisions put into place to require record-keeping, reporting and disclosure.

An interesting aspect of this program is a mechanism to allow landowners to nominate sites for clean-up.  On public lands, members of the public can submit requests to the provincial government  which, in turn, submits them to the AER.  Once a site is nominated, the regulator is required to review the site and the operator must justify “why a site should not be immediately brought through closure stages”.

• Addressing Legacy and Post-closure Sites

The LMF provides that there will be a  “process to address legacy and post-closure sites, or sites that were abandoned, remediated or reclaimed before current standards were put in place and sites that have received reclamation certificates and the operator’s liability period has lapsed”.  Aside from indicating an intention to establish a panel to consider how to address this gap, there is no indication of what this process may consist.

• Expanding the Mandate of the Orphan Well Association

The mandate of the OWA was recently expanded by The Liabilities Management  Statutes Amendment Act (June 2020).  This includes enabling the OWA to better manage orphan sites (including operation of those that are still capable of production) and to monitor the behaviour and condition of orphan wells.  It seems that the LMF does not envision additional changes to the OWA’s mandate beyond those made in June 2020.

 Aside from broad statements in the LMF, there is little detail as to the precise mechanisms and requirements which will be adopted. Presumably, these mechanisms and requirements will be put into into place via regulatory changes and amendments to existing AER directives.  There is no indication of when these components of the LMF will be put into place.  Nor is there any indication of when (if any) opportunities for public consultation will occur.  Given the magnitude of liabilities associated with oil and gas operations, public consultation should occur.

While it is not possible to provide comprehensive commentary on such a sparse outline, three notable areas for reform of Alberta’s management of oil and gas liability are not mentioned.

Firstly, it appears that there is no timeline for completion of well abandonment and site remediation contemplated.  This requirement would prevent oil and gas wells from languishing in inactive status for an indeterminate number of years thereby decreasing the chances of a well’s responsible party disappearing before abandonment and reclamation occurs.   For more on this, see Reclaiming Tomorrow Today.  British Columbia recently brought in timelines for oil and gas activities with this Dormancy and Shutdown Regulation.

Secondly, by maintaining a financial risk assessment approach for determining whether security is required it is apparent that   full  up-front security for all wells (and other oil and gas infrastructure) prior to licensing will not be required.  Rather, the Licencee Capability Assessment System seems merely to be tweaking of the existing liability approach, the same approach that created Alberta’s oil and gas liability problem, the problem which is acknowledged to exist by our federal and provincial governments.

The LMF seems committed to continuing the approach of assessing financial health of potential oil and gas operators.  It is a massive understatement to say this is a difficult and an administratively burdensome task.  Who can accurately predict the financial health of an operator 10, 20, 30 or more years down the road when an operation may finally reach its end of life?  What type of administrative oversight (and associated costs) is required to continuously monitor the health of licencees? (The AER had its budget cut $147 million over four years, and this was prior to the pandemic)What about unforeseen events which may create economic havoc for seemingly stable companies (natural disasters, massive blowouts, pandemics)?  Further, what kind of mechanisms will be in place to audit the financial information provided by potential oil and gas operators? All these risks of administering the system currently land on the public or other operators.

Where the current Licensee Liability Rating program requires up-front security, it has been woefully inadequate.  Although the AER can require security from any licensee under the Oil and Gas Conservation Rules (see Part 1.1), security is generally required only for those licensees with a LMR of 1.0 or less (the high-risk licensees).

The most recent report (September 5, 2020) estimates total liabilities under the program to be over $29 billion (this includes liabilities from all licensees in the LMR program ranging from a LMR of 0.0 to 10.0+).  The deemed liabilities for the high-risk licensees (a LMR of 1.0 or less) is over $1.8 billion.  However, the total security held for the whole program is not quite $226 million (which presumably comes mostly from those licensees with a LMR of 1.0 or less).  The security held is a small percentage of the estimated liabilities from the high-risk licensees (and a much smaller percentage of the total estimated liabilities).  Granted, there are deemed assets associated with the high-risk licensees (about $1.3 billion) but even assuming those deemed assets are worth the stated value and assuming that all the security held applies to those assets, there is not enough security in place to cover the estimated liabilities ($1.3 billion plus $225 million ≠ $1.8 billion).

Rather than tweaking an ineffective system, it should be replaced by a requirement for up-front security.  Requiring up-front security would ensure (at least some) funds are in place for necessary abandonment and reclamation activities thereby lessening the burden on the public purse.  This approach also has the advantage of being relatively administratively simple.  It is essential that sufficient up-front security be obtained for all oil and gas operations.

Thirdly, although the LMF mentions post-closure sites, it is really unclear what might be done to address these sites.   Environmental liabilities can persist long after abandonment and reclamation is completed.  These sites must continue to be monitored.  As well, there must be some mechanism to fund monitoring and any additional clean-up requirements that arise.  How are oil and gas operators to be held to account for these expenses?  The LMF mentions only that a panel will be assembled to consider the issue of post-closure sites… when? will there be public consultation?

Site Rehabilitation Program

The Site Rehabilitation Program – launched in May 2020 – predates the announcement of the LMF but certainly has complementary objectives.  This program is designed to distribute the up to $1 billion in funding provided by the federal government to clean-up inactive wells in Alberta (see Government of Canada Backgrounder).  The federal government states that well clean-up consists of both abandonment and reclamation (according to the federal government this means capping the well and removing all site facilities, remediating ground and soil contamination, and returning the site to its original condition).  As well, the federal government states that as “part of these agreements, the Government of Alberta has committed to implement strengthened regulation to significantly reduce the future prospect of new orphan wells…[t]his will create a sustainably funded system that ensures companies are bearing the costs of their environmental responsibilities” (see Government of Canada Backgrounder).

Starting on May 1, 2020, the Site Rehabilitation Program has been implemented in 4 periods (to date) granting $100 million each period. The initial period  provided funding to cover 100% of the costs up to $30,000 per application.  The second period provided funding to cover 100% of the costs with no contract limit.  The third provided up to $139,00 (again with 100% coverage). The fourth period applied only to projects with area-based closure plans submitted to the AER and provided 50% coverage (or 100% if using an indigenous company).  Periods 1 and 2 are closed to further applications.  Periods 3 and 4 remain open for application until March 31, 2021.

Details of this program are found in the Site Rehabilitation Program Guidelines and, because this is a staged program with differing priorities for each period, there are stage specific guidelines (see here).  This program provides grants to oil field service contractors – not well licensees – for oil and gas infrastructure abandonment and reclamation work.   The field service contractors must be located in Alberta (and cannot be in-house to the oil and gas licensee).  There are advantageous terms for work being completed by indigenous companies (in period 4 receive 100% funding as opposed to 50% funding).

This program only applies to wells, associated facility sites and pipeline rights of way that are (1) inactive and require abandonment (2) abandoned and require surface reclamation or (3) have been reclaimed or reclamation has started but further remediation is required.  Orphan wells do NOT qualify under this program (although it should be noted that the federal government has provided $200 million in funding to the OWA, see Government of Canada Backgrounder).  Further, the sites must be located in Alberta and the work must commence after May 1, 2020.  All work must be completed and invoiced before December 31, 2022.

Activities that qualify are:

• well, facility, or pipeline abandonment,
• environmental site assessments (phase 1 and 2),
• remediation
• progressive reclamation leading to reclamation certificate, and
• related expenditures (materials, supplies and so forth).

Other activities – suspension and non-closure work – are not eligible.  Administrative costs are not eligible for grant funding.

This program allows sites to be nominated for clean-up under this program by private landowners and by First Nation Reserve and Métis Settlement residents.

A Path Forward

Alberta has a long road ahead to address the existing backlog of orphans and legacy wells.  It is essential that steps be taken today to ensure that the problem doesn’t continue to grow.

There needs to be mechanisms in place to closely monitor existing legacy and post-closure sites to ensure they are not causing negative environmental impacts.  Further, we need to take clear steps to prevent future orphans and legacy sites.  Good first steps are (1) legislated timelines for abandonment, reclamation and remediation and (2) upfront payment of security to cover clean-up costs.

Ultimately, an approach which is predictable and relatively administratively simple; doesn’t allow wells to languish without clean-up; and adheres to the polluter pays principle is needed.

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