Regulator’s Scenario Shows $260 Billion in Unfunded Oilpatch Liabilities, Four Times the ‘Public’ Estimate
UPDATE: Following publication of the story on which this summary was based, the Alberta Energy Regulator apologized for the “concern and confusion” it caused. ““The numbers are staggering – $260 billion in total liability, which is $200 billion more than we have consistently reported. This particular estimate was created for a presentation to try and hammer home the message to industry that the current liability system needs improvement,” the AER said in a prepared statement. “While the message to address liability is important, the numbers were not validated and were based on a hypothetical worst-case scenario. Using these estimates was an error in judgement and one we deeply regret.”
The reporting team behind the original story notes that the AER’s statement “appears to be at odds with [VP Robert] Wadsworth’s presentation, which stated multiple times that the $260-billion figure was likely to be a low estimate.” Wadsworth had previously declined an interview to explain or elaborate on his remarks.
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A “flawed system” of industrial oversight has left Alberta with a staggering C$260 billion in estimated liabilities for abandoned oil and gas facilities, more than four times higher than the figure previously disclosed in public documents from the Alberta Energy Regulator (AER), National Observer reports, based on a joint news investigation with Global News, the Toronto Star, and StarMetro Calgary.
“We can continue down our current path until the impacts are felt by the public,” said AER Vice President of Closure and Liability Robert Wadsworth, according to notes for a private meeting he addressed in February. “Or we can start to implement the numerous changes that we now know need to be made.”
Warning that the lack of oversight could “ultimately could leave taxpayers on the hook to cover a portion of the costs”, Observer reports, Wadsworth “called on all stakeholders to accept tougher regulations and move away from a system that now allows the largest companies to take centuries to clean up their toxic well site graveyards.”
The notes for Wadsworth’s presentation didn’t indicate how AER had come up with an estimate that was so much higher than the $58 billion previously disclosed to the public. So far, Alberta has collected $1.6 billion in liability security from fossil operators.
“The liabilities include costs that companies must assume to shut down aging and inactive oil and gas exploration wells, facilities, and pipelines once they are no longer needed,” Observer explains. “Another significant part of the liability is the clean-up of toxic tailings ponds from oilsands extraction mines near Fort McMurray. The ponds have sprawled to cover an area the size of Kelowna.”
Wadsworth warned that the industry will now be held to a higher standard.
An AER spokesperson called his remarks “a snapshot in time of estimated total liability” in the event of a “worst-case scenario” in which the entire industry shut down. But that was at odds with the VP’s caution that his numbers were “likely less than the actual cost”—and that the price tag was still rising, given an “increasing number of licencees with questionable financial capacity to meet closure obligations.”
Orphan Well Association Executive Director Lars De Pauw said the figure may indeed be a worst case, adding that his organization’s cost for well remediation is coming in 70% below the regulator’s estimates. Even so, in his February presentation, “Wadsworth said the current rules are so weak that companies can delay setting aside money to cover cleanup costs until they are out of business and can no longer afford to pay anything,” Observer writes.
“Even though we have known these programs were flawed, there has been no proactive change to the liability programs,” he said, according to speaking notes for a February 28 talk to the Petroleum History Society. “Until recently, the implications of our flawed system had not been realized.”
As a result, “despite our best efforts, there are liabilities that are no longer owned by a company, or are not addressed by existing liability programs,” he added. “We must ensure that the costs of these liabilities are retained by industry and not passed on to Albertans.”
Wadsworth’s numbers prompted experts to declare “an economic and environmental crisis that raises questions about the financial health of a province that prides itself on strong fiscal management,” Observer reports.
“These are mind-blowing numbers,” said environmental consultant Amin Asadollahi, who previously worked at Natural Resources Canada and the International Institute for Sustainable Development. He added that Alberta has work to do after previous governments failed to take action.
“The current government is essentially (inheriting) bad policies and poor decisions of previous governments that were trying to make a buck or two in the short term,” he said.
“I have never come across anything like this before where the known risk estimated by decision-makers is so much larger than the publicly available estimates,” said economist Robyn Allan, a former president and CEO of the Insurance Corporation of British Columbia.
“It’s a big deal,” and “there’s no way industry could fund that right now,” said Ryerson University accounting professor Thomas Schneider. “I mean, $260 billion is a lot of money…We’re sitting on a huge liability, and then it’s just a matter of who’s going to end up having to pay for it.”
While “I don’t see imminent collapse tomorrow,” Schneider added, “it’s more like a slow-speed financial crisis…and it’s a matter of when are we going to deal with it. Are we going to deal with it now? Are we going to deal with it in 50 years or 100 years? What kind of legacy is going to be left?”
Alberta Environment Minister Shannon Phillips reiterated the AER’s position that Wadsworth’s figures were a worst-case scenario. “The fact is that there are certainly liabilities with orphan wells, with tailings ponds and with other activities on the landscape, but our government from day one has taken these matters seriously and we’ve actually seen pretty good progress on this,” she said. “There’s no question there’s more to do, but we’ve taken it very seriously from the beginning.”
Alberta opposition leader Jason Kenney’s office declined to review the documents obtained by Observer and its reporting partners, or to comment for the story. “Thanks for the opportunity but we’re going to pass,” wrote spokesperson Christine Myatt in an October 26 email the news outlets involved in the research. “Have a great weekend!”
In a separate post for Observer, analyst Regan Boychuk says a multi-billion-dollar liability set in motion by former Alberta premier Ralph Klein is now coming home to roost.
Just a year before Klein was sworn in 1992, Boychuk recalls, a unanimous Court of Appeal of Alberta ruling had sent shockwaves through the oilpatch by signaling that fossils would actually be held responsible for cleaning up the messes their operations left behind. Then oil production boomed, Klein was elected, and the Orphan Well Association formed to take responsibility for abandoned sites with no “solvent entity” in place to pay for their reclamation.
“With Klein calling the shots, the oilpatch effectively escaped accountability for billions of dollars in reclamation obligations in exchange for merely plugging some wells after companies disappeared. In fact, the Orphan Well Association has only reclaimed about 700 sites in more than 15 years,” Boychuk writes.
“Today, Klein’s environmental liabilities are about to blow up in the face of Albertans.”
Boychuk was one of a handful of expert witnesses called in by Keepers of the Athabasca in an unsuccessful bid to make the unfunded liabilities an issue before the joint federal-provincial panel looking into Teck Resources’ $20.6-billion proposed tar sands/oil sands mine in northern Alberta.
“While the hearing continues until October 27, 2018, the Joint Review Panel denied our motion to bring two AER witnesses forward,” Keepers wrote in an October 22 release, about 10 days before the news report by National Observer et al. “We know the AER has a ‘non-public’ assessment of the amount of liabilities now held by Albertans when it comes to bitumen mines and their tailing ponds.”
Responding to Keepers’ motion, the joint review panel said it was “not persuaded that the information sought regarding the scale of Alberta’s unfunded environmental liabilities is necessary or critical in order for the Panel to carry out and fulfill its mandate.” Keepers responded by asking how the panel could make its decision without that information.
“Teck Resources makes inappropriate use of large, own risk discount rates to minimize the balance sheet impacts of its vast environmental liabilities,” Boychuk stated in the Keepers of the Athabasca release. “It does not publicly report sufficient data to allow a detailed evaluation of its environmental liability management, and the company has not properly planned to fund the eventual retirement of its significant global liabilities. This leaves the public at extreme risk of inheriting very significant environmental liabilities, virtually guaranteed to exceed the economic benefit it derives from Teck’s proposed bitumen mine.” (h/t to Keepers of the Athabasca for first pointing us to this story)