Originally posted on 5 November 2018
On Thursday, 2 November 2018 a startling Power Point presentation made by the Vice-President, Liabilities of the Alberta Energy Regulator [Go to National Observer] was released under Alberta’s Freedom of
Information and Protection of Privacy Act. The path-breaking investigation was undertaken by staff at the National Observer, Toronto Star, StarMetro Calgary, and Global News. Find the full Powerpoint presentation here. AER-FEB 28-wadsworth-liability-260 BILLION (1)
Mr. Wadworth (pictured) worked at the Bruce Nuclear power plant in Ontario prior to his taking the VP’s job at the AER. Mr. Wadsworth is a graduate of Royal Military College. In 2017, according to AER’s disclosure under the Public Sector Compensation Transparency Act, Mr. Wadsworth received compensation of $243,278 with other payments of $64,808. The level of remuneration speaks to the importance to which the AER regards pay as important in meeting its goal of being a best in class regulator and employer. [Pay levels in Calgary are important where the energy industry is known for being the highest paid industry.]
The 28 page powerpoint presentation was innocuously entitled “Liability Challenges.” The first half dozen pages discussed the orphan well problem including associated legal uncertainty caused by the Redwater litigation. The Powerpoint noted that since the initial Redwater decision (upholding the Receiver’s rights to disclaim unsellable wells) 1800 AER-licensed wells have been disclaimed with liabilities of about $110 million and the Orphan Well Association’s (OWA) inventory of wells has tripled from 1200 to over 3700.
An immediate challenge for the OWA is their Large Facility Program (LFP) closure costs. At issue was the insolvency of Shoreline, Lexin and Canadian Oil and Gas International. AER’s Wadsworth recommended a levy of $6 million over 7 years to cover the anticipated closure costs of the LFP.
Turning to the overall picture in the conventional drilling and exploration business, the presentation showed that over the past five years the number of active wells was declining while the number of inactive and abandoned wells was climbing. Adding to dilemma of a growing portfolio of abandoned and inactive (economically unviable) was disclosure that 61 per cent of the active well producers are “marginal producers” that produce 10 barrels of oil or less a day. On top of this was the disclosure that the regulatory agency did not know the specific numbers for facilities and pipelines but it was “likely” that a similar trend was true for this category of oil and gas infrastructure.
Slide 13
The slide which has drawn the most attention is, ironically, slide 13 called “Current State- Liability and Security.” In total the AER held $1.6 billion in security against a “calculated liability” of $57.8 billion. The estimated liability was $260 billion consisting of $130 billion for oilsands mining, $100 billion for oil and gas and in-situ, and $30 billions for pipelines.
The speaking notes emphasized that “Estimating liability values is very difficult with huge error bars. Even the Estimated Liability displayed is likely less than the actual cost.” (Emphasis added) The largest component, the estimated oilsands’ liability, was based on an average of $1 per cubic metre
“for tailings closure and adds that to the liability value, as this is not covered fully under MFSP. It does not assess other potentially under-reported liabilities in the sector. This is a very broad assessment that needs to be refined.”
For conventional oil and gas, the speaking notes reported:
The Oil & Gas estimate uses average Remediation and Reclamation costs for well sites and multiplies that across wells on the landscape. This is still considered to be a low value, as few heavily contaminated well sites have been reclaimed. Additionally, the Liability Estimated data does not include any adjustments for under-reported liabilities at large facilities such as gas plants and In-Situ central processing facilities.(Emphasis added)
The next slide then went on to outline where liabilities are expected to be under-estimated. That list included the aforementioned LFP, “Site-Specific Liability Assessments” (SSLA) for Oil and gas and in-situ sites.
According to the slide deck, the policy and regulatory options were “being discussed at the highest levels of GOA” (Government of Alberta) with “decisions in the spring of 2018.”
The AER’s goal 5 in its strategic plan is “AER mitigates the magnitude and likelihood of potential liability exposure to Alberta” includes: (1) bringing contamination to a timely close and (2) ensuring that industry “retains the liability for assets that no longer have a responsible party.”
In the speaking notes, the AER endeavours to “be open and transparent in our liability facts.” The presentation also recognized the financial problems facing the industry in a low price environment observing “(T)he economic performance of a company determines their ability to cover costs during closure.” (Emphasis added)
Reflecting the province’s ongoing efforts to hold industry’s (and creditors’) feet to the fire, the notes admit:
Despite our best efforts there are liabilities that are no longer owned by a company, or are not addressed by existing liability programs. We must ensure that the costs of these liabilities is retained by industry and not passed on to Albertans.
The presentation also recognized the current weakness of its security backstop program which was was termed “reactive.” At the same time “there is limited capacity of the industry to continue to pay an every increasing levy.” (Emphasis added)
In a revealing and candid set of speaking notes the following question was asked and then “answered”:
While we could have made improvements to security collection, the financial backstop mechanism and implementation of targets, why have we not done so?
Historically, even though we have known these programs were flawed, there has been no proactive changes made. Why has there as been no political will to make changes to the liability programs? Until recently, the implications of our flawed system had not been realized ….. There had been little to no impact to the government or the public of the flawed system.
This is changing (ie Smoky, Redwater). We can continue down our current path until the impacts are felt by the public of Alberta or we can start to implement the numerous changes that we know need to be made. (Emphasis added)
Reaction
Very shortly after National Observer story broke, the AER issued a statement apologizing for the “concern and confusion that this information has caused.” The release essentially disavowed their Vice-President’s presentation noting :
“While the message to address liability is important, the numbers were not validated and were based on a hypothetical worst-case scenario. Using these estimates was an error in judgement and one we deeply regret.” (Emphasis added)
In a classic case of understatement, the AER went on to say: “We know that we have a lot of work ahead of us in the liability space.”
Adding further to the gloom was the announced resignation of Jim Ellis, the AER’s Chief Executive Officer since 2013. Ellis was previously the Deputy Minister of Energy before joining the AER and Deputy Minister of the Environment before that.
What does this mean?
Firstly, the AER has now gone on record as admitting that it has done a less than thorough job of addressing environmental liability. Secondly, the agency brought into question the work of its most senior official tasked with managing the regulator’s program to address well abandonment and reclamation initiatives. This is a striking measure for an organization that boasts in its employment ads that “AER’s vision is to be recognized for regulatory excellence, ensuring the safe, environmentally responsible development of energy resources for the benefit of Albertans.” As a highly paid regulator, it is improbable a presentation of this kind to industry would not only have been vetted by the CEO (if not the board of the AER). In addition, a best in class regulator would certainly be expected to have its “ducks in a row” when tabling such a presentation before industry. Normally, extensive financial analysis would be undertaken, possibly with industry feedback, by the agency’s professional staff.
Thirdly, although downplaying the “worst case” scenario, the slide deck shows that there is not only measurement uncertainty but considerable upside in the costs of remediation. In other words, despite disavowals by the AER, some of the estimates of liability, are probably low. Fourthly, a cynic might argue that the AER was doing its job by keeping costs of pledging security low and the question of environmental liabilities off the public’s radar.
Another point made by a business professor in the National Observer story is possible financial effect of these liabilities on the province’s own credit rating. At the present time, a decision by the Supreme Court of Canada on the Redwater case is imminent. Should the courts rule in favour of ATB and creditors, this decision will mean that industry survivors will be expected to pay higher fees to the Orphan Well Association. OR these remediation costs will fall to the stretched provincial treasury. Such an outcome will have a direct and desultory impact on the province’s credit rating which, heretofore has been based on a known quantum of debt outstanding. However, if anywhere from $50 to $150 billion in future liabilities are left with the province (along with stranded “assets”), the province is facing dire financial straits. This is not the likely outcome at this stage, but it will probably mean a lot of money flowing into lawyers’ trust accounts! It will also mean many trips back and forth between Edmonton and Ottawa as the magnitude of the liability sinks in at both the bureaucratic and political levels.
Finally, the fact that this information was available in February and discussions were ongoing at the “highest levels of the GOA,” might suggest that deputies and ministers were aware of the potential staggering liabilities. The fact that the slide deck contemplated a action in the spring of 2018, which has not happened, means the NDP government will wear some of the fall-out from these revelations.
While a fair-minded observer would concede the NDP inherited a bureaucracy and regulator beholden to the energy industry, after 3 and one-half years in office, this government will be be vulnerable to charges that its own “political will” to deal with the problems, may be lacking.
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