Thursday, September 28, 2017 — If Alberta doesn’t change how it requires companies to finance their own oil and gas well cleanup costs, the energy industry and, ultimately, taxpayers in Alberta face cleanup costs of up to $8 billion, according to a report by the C.D. Howe Institute. In “All’s Well that Ends Well: Addressing End-of-Life Liabilities for Oil and Gas Wells,” authors Benjamin Dachis, Blake Shaffer and Vincent Thivierge use a financial stress test to estimate future cleanup costs and recommend ways for the government to better manage the problem.
“The recent downturn in energy prices has shone a spotlight on the issue of cleaning up orphaned and inactive oil and gas wells,” notes Dachis. “Continued low energy prices and growing company insolvencies could worsen the problem.”
In Alberta, mounting insolvencies have caused the number of “orphaned” wells – i.e., without a financially accountable owner – to balloon from fewer than 100 to 3,200 in the past five years, note the authors. With low energy prices, that list of wells risks growing longer. The authors estimate the cost to clean up currently orphaned wells at between $129 million and $257 million.
Of the roughly 450,000 wells registered in the province, approximately 155,000 are no longer producing but not yet fully remediated. These wells impose potential risks and costs not borne by those who benefited during the productive phase. The authors use a financial stress test for this potential exposure based on various ranges of future bankruptcy rates and well cleanup costs. Their estimate for non-oil-sands wells ranges from $338 million (including all firms whose asset value of their wells is less than their expected liabilities) to $8.6 billion (when including wells from firms with asset values just greater than their liabilities.)
The cost to clean up wells once a well has a bankrupt owner has the potential to spill over to surviving firms in the industry and, ultimately, citizens. Alberta, along with other energy producing provinces in Canada, has a system in place to manage the risk of end-of-life well liability, say the authors. However, a system that worked in the past is now strained under the weight of low prices. In addition, a recent court decision placing financial creditors in higher priority than environmental liabilities has further degraded the efficacy of current policies. This speaks to the need for reform.
“To its credit, the Alberta government is in the midst of consultations on reforming the province’s well liability policies,” says Shaffer. “In this report, we propose a two-part solution of partial bonding and mandated insurance for existing and new wells.”
First, the authors recommend the province introduce an upfront bonding requirement. However, this bonding requirement should be less than the full expected liability cost. This recognizes that society should accept some risk in exchange for greater economic activity, as well as aligning with the time profile of a well’s net asset value.
Second, once a well enters the inactive phase, the province should require companies to hold insurance to cover the cost of cleaning up the well. In comparison to a strict time limit on inactive wells, an insurance requirement would allow firms to weigh the increased cost of holding unproductive wells against the potential value of returning them to production.
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.
For more information, contact: Benjamin Dachis, Associate Director, Research, C.D. Howe Institute; Blake Shaffer, Fellow-in-Residence at the C.D. Howe Institute and PhD candidate at the University of Calgary; Vincent Thivierge former Researcher at the C.D. Howe Institute and currently a PhD Student at the University of California, Santa Barbara. Phone: 416-865-1904; Email: AMcBrien@cdhowe.org