Last week, the federal government announced a $1.7 billion plan to clean up orphan wells in BC, Alberta, and Saskatchewan.
This probably left some frustrated Canadians asking themselves: what are orphan wells, and why are tax payers funding the cleanup?
An Introduction to Orphan Wells
Although orphan wells exist in three provinces, we’ll focus primarily on the centre of Canada’s energy sector: Alberta. That’s where the number of orphan wells increased from 1085 in March of 2018, to 2151 in March of 2019, an indication of the escalating problem.
So what are they?
Since the 2014 downtown in oil prices, companies have been squeezed financially and many have gone bankrupt. This has increased the number of orphan wells, along with growing concern about who will pay for their abandonment (securing the infrastructure), remediation (cleaning the land), and reclamation (returning the land to 85% capacity).
In Alberta, there are nearly two wells per square kilometre, averaged across the province. It is very important to note there are nearly 90,000 inactive wells in Alberta, the majority of which will be properly closed and not orphaned. Many companies do abide by the rules.
For readers curious about an oil well’s life cycle, and how orphaned wells affect land owners, you can find an introduction here
How Are Taxpayers Involved in Cleanup?
In Alberta, any orphaned well is the responsibility of the Orphan Well Association (OWA), funded by levies from the oil industry. They are a non-profit operating under the Alberta Energy Regulator (AER) and oversee work on orphan wells.
In 2017, due to a spike in orphan wells after increased bankruptcies triggered by the 2014 crash, the provincial government loaned the organization $235 million. In the same year, the Feds committed $30 million to orphan well cleanup, although most of that money was used to pay for interest on the provincial loan.
The OWA states the original loan will be paid back by the annual Orphan Fund Levy, beginning in 2019 and ending in 2027. Needless to say, with the oil industry in the condition it is now, the Orphan Fund Levy will struggle in the near term, at the very least.
Last week’s $1.7 billion announcement by the Federal government will aid cleanup, although it is not clear how much will go to the OWA.
What Got Us Here?
It is not difficult to understand why some believe a lack of industrial oversight is to blame for this ballooning problem. And there is certainly evidence to support that.
There are “no required timelines for a company to complete reclamation“. It can take years to fully close a well, and there are no timelines for when the work has to be completed.
The AER does have a system to ensure companies are able to clean up their wells in the future, but some claim it is based on faulty oil prices, allowing companies to inflate their assets and underestimate liabilities.
Also, oil producers feeling the pinch can sell their high-liability wells to smaller companies, which are also sensitive to market volatility.
The current economic slump and oil price crash will likely exacerbate these trends.
Alberta needs to take action on timelines, establish better cleanup estimates before projects start, and ensure the OWA is adequately funded. The AER and province are looking into addressing some of these issues.
A jurisdiction they could emulate is North Dakota, who requires timelines for wells which have stopped producing, followed by financial penalties if those deadlines are not met. The state also has an adequate remediation fund, to make sure taxpayers aren’t on the hook for future costs.
A new system using more accurate current oil and gas prices to determine a companies assets is necessary. Producers could also be asked to front a deposit for the full estimated cost of cleanup, regardless of their balance sheets, to prevent tax payers from future bankruptcies.
But these actions need to be carefully considered. They should to be done in a sustainable way which accurately assesses future costs, to avoid unfairly cutting into already struggling oil producers’ bottom lines. The industry needs certainty and predictably. These policies cannot be left to the whim of any single entity and collaboration is critical, both for companies to know what is expected of them, and for taxpayers to feel confident they won’t be left with the tab.
And it is possible: as of January 4 of this year, North Dakota has no orphaned wells, even though it is the second largest crude producer in the US.
With new policy guaranteeing companies return land to its original state within timelines, ensuring OWA is financially capable of covering unforeseen expenses, and protecting tax payers against unnecessary liabilities, we can ensure citizens only reap the benefits oil revenue provides for all Canadians.