Alberta’s Auditor-General launches probe as province struggles with orphan wells problem

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Alberta’s Auditor-General has launched an investigation into the growing problem of orphan wells as the province struggles with underfunded environmental liabilities in the oil and gas industry that have climbed into the tens of billions of dollars.

Auditor-General Doug Wylie’s office will study whether the Alberta Energy Regulator’s current systems are sufficient for dealing with the orphan wells, oil and gas sites that require cleanup but whose owners have gone bankrupt. The office will also assess the effectiveness of current regulations aimed at preventing the number of sites from increasing, and gauge if the government and regulator have a good understanding of the financial and environmental risks.

“Environmental liability is a huge area of risk for government that we’ve identified across the board from a financial perspective, because of the significance and scope of it – not just wells, but oil sands, anything that needs reclamation,” said Val Mellesmoen, spokeswoman for the Auditor-General. The environmental and human health risks only add to the urgency of the issue, Ms. Mellesmoen said. The report is expected late this year or in early 2021.

Orphan wells and underfunded environmental liabilities – insufficient sums of money put aside for future cleanup obligations – present major risks to the industry and taxpayers. In Alberta, they are transferred to the industry-funded Orphan Well Association, which is in charge of decommissioning the sites.

Several corporate bankruptcies since oil prices crashed in late 2014 have caused the number to balloon. Experts have highlighted several factors that have contributed to the problem, including in outdated regulatory system that allowed wells to be transferred to companies with insufficient financial capacity to deal with their-end-of-life costs.

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At last count, there were 3,406 orphan wells to be decommissioned in the province, up almost fivefold in five years, and 2,772 sites to be reclaimed to predrilling condition, an increase of six times over that same period. In that time, the OWA’s total expenditures on decommissioning wells and pipelines and reclaiming sites jumped to $94.4-million from $16.6-million.

Companies now in receivership, including Sequoia Resources, Trident Exploration and Houston Oil & Gas, have thousands more wells, and any not sold by their bankruptcy trustees will end up in the fund.

The OWA’s executive director, Lars De Pauw, wrote recently that the rules governing well transfers are insufficient for dealing with the problem. The association is underfunded, and in 2017 the provincial government backstopped it with a $235-million loan. Recently, Premier Jason Kenney has pushed for the federal government to fund a program that would put unemployed oil workers on the job cleaning up orphan sites.

The Auditor-General had planned on investigating the issue in 2019, but Ms. Mellesmoen said its energy specialists became focused on investigating the revelations about AER’s leadership and their role in the creation of the International Centre of Regulatory Excellence, a side-project that investigators concluded distracted staff and diverted the regulator’s funds.

One expert who has been studying oil and gas, as well as oil sands, liability closely welcomed the review, and the spotlight it should shine on the problem.

“In the recent past, anyway, when the premier’s been asked about some of these things, as he and his office are wont to do, they started to impugn the people who were raising the issues,” said Martin Olszynski, associate law professor at the University of Calgary. “When the Auditor-General steps in, Albertans can take that as a signal that, objectively, there is a problem here and it needs to be assessed rigorously and at arm’s length.”

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To guard against financial failure following asset acquisitions, the AER has required that companies’ assets be twice the value of deemed liabilities before its approves transfers, and that any shortfall be made up by posting security. It has made numerous exceptions, however, and in some cases it has ended in insolvency. The AER is in the process of updating its approval process. This will include collection of more company-specific financial data, it said.

Currently, the regulator estimates the cleanup liability for all of Alberta’s conventional oil and gas wells at $30.08-billion. It holds $227-million in security under its liability management program, though companies with sufficient financial wherewithal decommission their own wells.

The AER said it is working with the government to make sure the industry, rather than Alberta taxpayers, remain responsible for cleanup. “We are also looking at our own processes to better understand what is working well and what needs to change,” spokesman Shawn Roth said.

Energy Minister Sonya Savage said in an e-mail her government didn’t initiate the auditor’s review, but said it’s “unfortunate” Mr. Wylie has to intervene after years of government inaction on the file.

“On orphan wells and liabilities our government is taking action and will be bringing forward a full suite of products, covering the entire life-cycle of wells in the first quarter of the year,” she said.

With a report from Emma Graney

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