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

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.