Industry says oilfield cleanup will unlock Alberta’s next job boom, create 366,000 jobs

Government and industry experts are urging action to develop a program that cleans up Alberta’s abandoned oil and gas wells in 2021 and beyond.

In November 2020, the Alberta Liabilities Disclosure Project found that abandoned wells across the province would cost Albertan taxpayers billions of dollars to reclaim properly. However, the vast discrepancy between government and industry estimates is substantial, with the province estimating costs to be around $18.5 billion and industry north of $70 billion.

"The problem in Alberta is that we’ve had no mandatory requirement, no legislation, no policy requiring that wells be cleaned in a timely manner," said land right’s lawyer Keith Wilson. He has been raising alarm bells for 25 years, blaming companies for punting clean-up responsibilities down the road.

"Several small companies have been able to fold, by the Alberta Energy Regulator (AER), to take over these liabilities, which has exacerbated the problem," he said. Wilson worries about larger companies selling to smaller companies and what that means for clean-up.

"These bigger companies will package five or six good wells with 200 non-producing liabilities and hand them over to smaller companies. Then, they remove themselves from that liability, and whatever happens, happens."

Today, the Alberta Liabilities Disclosure Project (ALDP) analyzed the liability cost to clean up Alberta’s oil and gas wells. The current liability assessment on Alberta’s non-producing wells is over $25 billion. Retired wells will only add to the liability over time.

"While we agree with ALDP on the urgent need to address the liability and begin an aggressive plan to clean up wells, their solution would do the opposite," said Kris Kinnear, president of Sustaining Alberta's Energy Network (SAEN).

Kinnear took exception with ALDP's proposal, which advocates creating a state-owned energy company to address the current and future costs of cleaning oil and gas wells.

"Pooling funds from producing assets and defunct liability-ridden companies to create this state-owned company would result in more insolvencies, more unpaid municipal taxes, more landowner leases going unpaid and less investment into Alberta’s energy industry," said Kinnear.

SanLing Energy, a Chinese-state-owed energy company, owed $67 million in security payments to the AER over repeated failures to comply with maintenance and cleanup orders of well sites and infrastructure decommissioning. They harvested over 3,781 BOE (Barrels of Oil Equivalent) per day from Alberta’s oil mineral reserves for years, despite not paying landowners, municipal taxes or local vendors for years.

According to the Western Standard, SanLing Energy ceased operations as of April 30, prompting the Orphan Well Association (OWA) to apply to the Court of Queen’s Bench to assume control of SanLing’s inventory.

For the last two years, SAEN has been developing a program that incentivizes cleanup and gives the company responsible for cleaning up old wells to reclaim them before drilling new wells. Kinnear suggests giving RStar (R*) Credits for cleaning up Alberta’s liabilities to improve the economics of drilling new wells in Alberta.

The R* Job Creation program is a "made-in-Alberta-program" designed to incentivize decommissioning oil and gas liabilities while encouraging capital investment into Alberta’s energy sector by providing a reduced royalty when drilling a new well.

Due to the Red Water Decision in 2019, environmental liabilities hold a higher credit position than the investor, including institutional banks, when a company declares bankruptcy.  

The ruling has over-empowered the regulatory system, resulting in penalties and delays, primarily targeting small and medium-sized producers. This has rendered outside investment virtually impossible. The impact is devastating for investment into small and medium-sized producers.

Alberta, as a province, owns over 80 percent of the mineral rights. This gives Alberta a unique opportunity to attract investment by offering reduced royalties on new production. The investor can recapture their investment quicker, and Alberta's government can use the reduced royalty rate on new energy production to stimulate capital investment into Alberta.

Ralph Klein’s PC government gave royalty-free periods in the 1990s, but that is no longer the case.

If Alberta is content with giving a reduced royalty to attract investment, then why not do the same for reclaiming wells?

When the NDP formed the government, they implemented the CStar (C*) incentive program in 2017. This resulted in changes to the Modernized Royalty Framework (MRF) to encourage investment into Alberta through C*.

The C* incentive program is an existing program that an R* credit would dovetail onto, thus making R* easy to implement and redeem.

The Drilling and Completion Cost Allowance (C*), based on average industry drilling and completion costs, is a proxy for well costs. It determines the allowable revenue after which individual well sites begin paying higher royalty rates (post-payout). A company will pay a flat royalty of five percent on a well’s early production until the well’s total revenue from all hydrocarbon products equals C*. Afterwards, the company will pay higher royalty rates that vary depending on the resource and market prices. Royalty rates will drop to match declining production rates when the well reaches a Maturity Threshold.

Harmonizing the royalty structures reduces exploration risk, enabling producers to assess the highest value development opportunities based on market forces without worrying about how the royalty framework will characterize the well’s products or productivity. A company that reduces its drilling and completion costs below the industry average will benefit from lower royalty rates as C* is based on average industry costs. This provides an incentive for companies to innovate to reduce their costs.

Kinnear states this would change Alberta’s $20 billion liability problem into a $20 billion investment opportunity. “We have created and presented a new innovative program to Alberta’s government,” he said. “It will address Alberta’s well-noted environmental liability while improving conditions for investors to invest their money in the Western Canadian Conventional Basin through reclaiming abandoned wells.

"Our experts calculate SAEN’s approach will result in $76 billion in new economic activity and honour the principle of polluter pay, resulting in another job boom that could create as many as 366,000 new high-paying jobs in Alberta," said Kinnear. "Under the right circumstances and programs, the industry can clean up its liabilities without killing investment into our sector."

Though the program has yet to be refuted by any government member, it has not yet been moved forward to industry frustration. If adopted, it will change the way the investment world and the environmental world view Alberta.

During the recent legislative session, United Conservative MLA Pete Guthrie spoke of its importance in addressing the “price volatility” that continues to wreak havoc on the industry. “Demand for oil will be strong in the decades to come, and we need to look to the future to create a policy that supports companies to maintain strong ESG track records while upholding a competitive investment environment,” he said.

"The concept of R* is simple: Upon reclaiming an abandoned well and receiving a reclamation certificate, companies earn a future royalty credit based upon a well site’s liability value, as predetermined by the Alberta Energy Regulator."

SAEN earned considerable praise from MLA's Guthrie and Jeremy Nixon, who have championed the program for industry. "This is an Alberta-made solution that will drive development in the area of site rehabilitation," said Nixon. "Alberta is a leader in environmental stewardship and technological development, and R* builds on that legacy and the entrepreneurial spirit of Albertans."

"Rather than using a heavy hand to force reclamation, R* incentivizes companies to clean up sites while strengthening their balance sheets and provides the opportunity for a company to grow organically," added Guthrie. He cites the beauty of R* is that credits can only be redeemed in Alberta, which means an economic benefit to the province and good-paying jobs for Albertans.

The R* Program was created by industry experts, producers, non-producers, and industry monitors.