Exploring the Regulatory Maze (3): The Auditor General Reports…

The bizarre story of the Mine Financial Security program (MFSP) continues to unfold. In May, the Minister of the Environment and Parks, Jason Nixon announced

a review of the program noting depressed profits in 2020 motivated the government to reset the rules in calculating security requirements.  This meant that increased security requirements under the existing requirement would be reduced. 

Then on 10 June, Auditor General Doug Wylie released a report which focused on processes to provide information about government’s environmental liabilities.

The report unfortunately raises serious questions about the competencies of provincial officials at all levels as well as the failure of senior officials and ministers to accept responsibility for environmental cleanups. Wylie’s report addressed the management of these liabilities at the Alberta Energy Regulator, and the Environment and Parks and Transportation departments.

Distressingly these problems can be traced back decades when coal mines, orphaned wells, gas plants, brine ponds, and maintenance yards became contaminated.  We highlight the litany of internecine financial battles between government organizations and then provide an update on the OAG’s progress report of the 2015 recommendations on the Mine Financial Security program (MFSP).

Processes to Provide Information About Government’s Environmental Liabilities

The context for the OAG review of processes to provide financial information about environmental liabilities is the OAG’s responsibility to provide an opinion on the Province’s consolidated financial statements. Although not explicitly stated, the concern is whether the provincial government’s financial statements might not accurately reflect the actual liabilities.  Understanding who is responsible for what and whether the liability is still a liability of the private sector owners or is now entering onto the provincial government’s accounts is a daunting task. The Alberta government currently manages 2,600 sites, including government facilities.

Environmental legislation in Alberta requires operators to clean up (remediate and reclaim) their sites to existing environmental standards—commonly known as the “polluter pay” principle. As a result, government is responsible for cleaning up the sites it owns and operates. However, there are also circumstances where the government may accept responsibility for sites that a non-government operator did not clean up—for example, sites where government has been unable to identify a responsible party and when an industry-funded backstop, like the Orphan Well Association (OWA), does not have responsibility for a particular type of site. For sites where government is responsible for or has accepted responsibility for clean up, accounting standards require that the cost of cleanup necessary to satisfy applicable environmental standards should be recorded as an environmental liability on the financial statements with disclosures when responsible parties are unknown. This provides information about the future resources required to protect people and the environment.

 The challenges facing departmental heads include determining who is responsible, the severity of contamination, the time frame for addressing the contamination, and which departmental budget or regulated fund the moneys will come from- who is ultimately accountable. Wylie’s findings read like a Keystone Cops episode in which the contamination is quickly passed on.

Recommendations from the OAG suggest the administration of these processes have been off the rails for some time. He recommends common sense principles to co-ordinate processes characterized by buck-passing and indifference to affected communities. For example:

• Environment and Parks develop guidance to determine who is responsible for cleanup work

• Environment and Parks and AER complete case-by-case assessments of sites to determine who is responsible and what work is required

• Transportation improve its processes to assess, estimate, and account for its environmental liabilities

• Transportation improve its processes to ensure compliance with environmental legislation

The audit recommendations were buttressed by seven sample reviews which are summarized in the table below.

Other critical observations in the report included Transportation’s adoption of a “risk management approach” in 2010 rather than remediating the contamination; long delays in carried out assessments and booking the liability; the absence at E&P and AER of systems to know how much it costs to manage contaminated sites or priority-setting process to manage clean-ups, and notably the lack of clarity and confusion over funding remediation activities.

Report on Progress -OAG October 2015 report on MFSP

In 2015, the AG identified a number of concerns about the program’s design. First, reserves’ estimates treat proven and probable reserves as equally valuable. However, a  recent IEA report casts doubt on whether mining of bitumen will be viable in 10- 15 years. If not, accounting rules suggest that these so called ‘probable’ reserves should not be considered as financial security. A second concern is the asset valuation calculation which applies a factor based on the average project profitability for the last three years, makes the dubious assumption that oil prices and operating costs move proportionally.  A third issue is there is no discounting of the value of the mine’s reserve value. The absence of discounting overstates the value of an owners’ financial capabilities. Finally, mine operators can alter the areas covered by their mine approvals or combine multiple mines into one, potentially extending reserve life and size. This flexibility is critical because under the security formula, accelerated security requirements commence as the reserve base enters its final 15 years of production.

This past week the OAG released an update on his 2015 recommendations. The OAG rated the progress “unsatisfactory” noting four of his five recommendations had been reviewed by interdepartmental “working groups” (made up of E&P., Treasury Board and Finance, and the AER) but no decisions had been made.  The only visible sign of movement is the 8 May announcement by Nixon advising of a program review.

These reviews had three phases: Phase 1 took place in 2015 and 2016 under the new NDP government.  Phase 1 recommended changes be made to the security calculation and there also was a need to collect more information from operators. Phase 2 was initiated in 2017 with the working groups advising changes be made to the security calculations. However, in December 2017 “management” decided to “gather more information over three to five years and conduct further analysis to help inform potential changes to the MFSP.” In short, the bureaucracy had killed the initiative to make changes to the program. By 2018, within the 18 months “red zone” before a provincial general election, Phase 3 began. With the “analysis completed in fall 2019” , no decisions had been made as of April 2021.  In early May a “program review” was started with the only real news being oilsands producers would be given some sort of a holiday on security postings.  

If this story sounds like bureaucratic foot-dragging and bureaucratic evasion of accountability, it is. The lost six years included time during the NDP  inter-regnum.  How much Shannon Phillips and Margaret McCuaig-Boyd knew about the bureaucratic responsibility shifting and quietly keeping industry happy is unclear. It is evident that the UCP government would be willing to give industry a pass. All this while three fossil fuel titans were recently being successfully challenged by activist shareholders and courts. At Exxon Mobil shareholders replaced three of management’s board nominees with nominees more aware of the threat to Exxon’s business from climate change policies. A shareholder resolution at Chevron is pushing the company to cut emissions generated by the company’s products. Finally, a Dutch lower court ordered Royal Dutch Shell to revise its emission goals to comply with the Paris 2015 commitments.

In this context, instead of funds being directed to actual remediation we see a consortium of oilsands producers extolling their “pathway to net-zero.’ Labelled as “an alliance for Canada,” five leading oilsands producers have launched oilsandspathways.ca.  The consortium’s full-page ad in the 12 June edition of The Globe and Mail notes “Our Pathways strategy requires both industry and governments to collaborate and make significant investments together.” Once again, the industry’s pattern is to invest in high-priced media relations and government relations.  This comes at a time when industry profitability is on the upswing and energy M&A activity is resuming in Calgary. Notable in the declaration is the expectations that government will “partner” (that is for the general taxpayers to pay) with industry to solve industry created, and government abetted, problems.

It is all distressingly predictable. Taxpayers are slowly waking up to this well-oiled strategy. To be sure, Alberta’s future economy may find opportunities available in renewables, hydrogen, and carbon capture underground storage. However, the royalty bounty expected from bitumen production is very unlikely. This reality brings into question who will end up paying for clean-up costs -the polluters or the public?

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