Economic Letter

David Bond is a retired bank economist who lives is Kelowna.

Alberta is facing a significant economic problem occasioned by lax regulation of the oil and natural gas sector over many years. The issue is that, of more than 95,000 inactive wells, more than 73,000 have been sealed and taken out of service but not yet fully remediated. The remainder have been properly sealed.

When a well is abandoned, it is permanently plugged (usually with cement), cut and capped according to regulatory requirements. Reclamation involves returning the well site to a state that is equivalent before it was disturbed, or at least as close as possible. Reclamation includes replacing top soil and removing any pipes or waste such as fracking liquid. Companies are responsible for reclamation liability for 25 years, after which the liability reverts to the Crown.

Clean-up for an individual well can cost anywhere between $20,000 and $1 million. The provincial government is therefore concerned about the size of the liability it might have to assume. At $20,000 per well, the liability would minimally amount to $1.46 billion if Alberta has eventually to assume the full cost of reclamation. The actual figure may well be something in excess of $8 to 10 billion.

Why does this problem exist? In part it reflects the successful lobbying of the oil and gas sector on the provincial government. After all, the royalties paid to the provincial government allowed Alberta to be the sole province with no sales tax.

Just ignoring the problem is not a viable policy because the abandoned wells threaten the environment and the climate if not properly sealed. Collectively, these wells are a major source of air and ground water pollution because of the toxic substances leaked, including arsenic and methane.

The government has taken some action to address the pending tsunami of expenditure. According to the head of the Alberta Energy Regulator, it has just instituted a new set of regulations that, among other things, will ensure the clean-up costs rest on the shoulders of the industry. The industry will be required to spend $422 million next year and $433 in 2023 plus similar amounts in each of the following three years. These amounts are based on the industry’s pastspending and will deal with about 4% of the total liability each year.

These industry expenditures will be in addition to the $1 billion made available by the federal government to help deal with the problem. Moreover, under the new regulations, those seeking licences for new wells will be assessed as to their financial ability to meet clean-up and reclamation expenses. Those wishing to transfer licenses between companies will also undergo a similar assessment regarding clean-up and remediation. Yet even with these new rules, it is estimated that, at the rate of 4% per year, it will take between 25 and 39 years to take care of the existing backlog of wells, even assuming no additional wells are added (which is pretty unlikely).

But things have changed of late. Taxpayers, it appears, are becoming increasingly reluctant to pick up the tab for a problem they did not create. Further, both landowners and environmental advocates point out that, with the revival of both oil and gas prices, profits for the sector have been substantial. They also point out that, rather than meeting their obligations for a rapid reduction of non-reclaimed wells, these companies have been paying out substantial dividends to shareholders. (The limits which existed in the 1990s as to how long abandoned wells could be left before reclamation started were ended under industry pressure.)

Consider the following scenario. If global demand for oil and gas declines in an effort to reduce carbon emissions, Alberta oil, particularly that produced from oilsands which is among the highest priced in the world, will have no market. That will dramatically and adversely impact the provincial revenues. To minimize the impact of this possibility the province might consider a sales tax and call it a well-reclamation tax. The industry might object, but it’s time the public faces the consequences of the industry having long avoided paying its debts.

David Bond is a retired bank economist who lives in Kelowna.