On 23 March the Auditor General issued his spring reports into four areas including the Liability Management program for oil and gas wells administered by the Alberta Energy Regulator.
AER has a system to mitigate the risks for the closure of oil and gas infrastructure; however, parts of the system have not operated effectively…criteria were not fully met in the following areas:
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risk management practices
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goals, performance measurement and public accountability
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assessing information from OWA
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timely closure of inactive sites
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collecting sufficient financial security and minimizing risk of inappropriate licence transfers
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suspension, abandonment, remediation and reclamation regulatory processes
Three main problems with the current liability management system are:
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lack of prompt closure of inactive oil and gas sites
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unfunded liabilities such as legacy sites where there is no owner or industry funded backstop
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inadequate collection of security from operators to ensure they can meet their obligations when project end.
Why This Conclusion Matters to Albertans
Inactive oil and gas infrastructure that isn’t properly closed can pose serious environmental, public health and economic risks to Albertans. Inappropriately abandoned wells, for example, can leak contaminants into the soil and into the air people breathe and the water they drink. Failure to ensure that operators and industry conduct and pay for the safe shut down of their infrastructure increases the risk that extensive closure costs could be shifted to the public. Albertans need an effective liability management system in place to hold industry accountable for meeting their environmental obligations to the province and to ensure that industry’s liability management risks are being properly managed.
Commentary and analysis
The Alberta Energy Regulator has been the subject of annual examination since 2015. The Office of the Auditor General of Alberta (OAG) has reported on the Mine Financial Security program in June 2021, the Orphan Well Association (OWA- an industry-controlled organization) which is responsible for levying a fee on industry to ensure that if wells are abandoned three will be sufficient security to fund the cleanup.
The following are links to extensive work by the Audit Office on the subject area of environmental liabilities.
At the bottom of the page there are related posts which discuss judicial decisions involving the OWA and Sequoia Resources, explore the roles of the OWA and the Surface Rights Board, and discusses estimates of liabilities provided by the AER.
What emerges from a reading of this OAG report and previous reports is an unflattering image of an organization too friendly to the industry, dysfunctional internally, and the capacity to stall initiatives to uphold the polluter pay process.
A more recent example of the fickleness of its operations is the failure to communicate to the First Nations and to the Government of Canada the existence of a tailings pond leak at Imperial Oil’s Kearl Lake site.
The OAG is rightly concerned that vast liabilities of both active and inactive corporations are not going to be paid for by industry.
This report of the OAG is a massive mobilization of resources by the auditor (a complete team effort), who is NOT the auditor of the OWA =which it should be – meaning the OAG can gain access to its books.
According to the report, the OAD interviewed dozens of staff from AER, Environment, and the OWA, but also academics, advocacy groups, professional associations, oil and gas companies, regulators from different jurisdictions, landowners, community members, and municipalities representatives. That is a lot of attention to understanding all the key players in this industry.
Before this interaction took place, the OAG examined all the relevant legislation, regulations, directives, judicial decisions, and regulatory programs. Specific attention centred on liability management programs (LMP). They interviewed key staff in the AER including executive management to the support staff.
In addition the policies and procedures and the information technology part of the LMP including systems control procedures, information systems controls and other documentation to supporting “control design”- (cybersecurity?). The OAG completed site visits accompanied by AER staff. examined records and historical information, including analysis of data to examine relationships and transactions, assessed compliance and monitoring processes by examination of samples of inactive, abandoned, remediated and reclaimed sites. Another source of input comes from interviews with external stakeholders impacted by the systems, including academics advocacy groups,
I cannot imagine a more diligent and independent means to conduct a quasi-judicial review of this regulatory program.
A rating
So how would the OAG rate the AER after this intense scrutiny on a scale of 0 to 100?
The Report covers 6 areas. These areas are
- Risk Management and the New Liability Management Framework
- Goals, Performance Measurement and Public Accountability
- Processes to Assess Information From the Orphan Well Association (OWA)
- Processes to Ensure Timely Closure of Inactive Sites
- Processes to Ensure Sufficient Financial Security and Minimize Risk of Inappropriate Licence Transfers
- Processes to Ensure Oil and Gas Site Closure Regulatory Compliance (Suspension, Abandonment, Remediation, Reclamation
Each of these are meaty policy areas where considerable scholarship and investigative reporting is becoming mainstream. These opposing views question what has hitherto been divine right of the oilpatch to run Alberta.
With the deepening opposition to the fossil fuel industry, this is a divisive time for Albertans. We are experiencing a 60-day race to the finish line between Rachel Notley and Danielle Smith. Whom will you TRUST to lead over the next 4 years.
Doug Wylie and his team have done an admirable job in fleshing out issues which should be of concern for all Alberta not just some policy geeks but to all Albertans.
On risk management and the new liability management framework, the OAG found:
- Future performance measurement and upcoming decisions will be critical to demonstrate whether objectives in the new framework are being achieved.
- Additional gaps identified by AER, like exclusion of pipeline liabilities, were not dealt with directly in the new framework.
- AER’s enterprise risk management system is under development, but not yet fully functional.
On a scale of 0 to 100 where corporate executives have to make a judgment on how strong these organizations would perform in a crisis. Not very high is my guess.
- Goals, Performance Measurement and Public Accountability
Well my guess is that from what the media has disclosed as well as Alberta’s Public Interest Commissioner, the AER would deserve no more than a 50.
- Processes to Assess Information from the Orphan Well Association (OWA)
The key finding is that the AER, while receiving information from the OWA, before 2022 did not scrutinize the orphan levy proposed by the industry-controlled OWA. The OAG notes that the risks to the polluter pay principle has increased in recent years- an understatement.
On page 11, the report provides a useful table indicating the number of licensed sites versus the amount of inactive infrastructure.
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Activity and Infrastructure |
Facility Counts and Number of Licensees (August 31, 2022) |
Inactive Infrastructure (August 31, 2022) |
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Oil Facilities |
28,000 |
12,000 sites |
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Gas Facilities |
19,000 |
10,000 sites |
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Operating Wells |
156,000 |
89,000 sites |
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Pipelines |
442,000 km |
76,000 km |
In short the conventional oil and gas industry is two-thirds productive assets and one-third environmental liabilities.
These findings again would qualify for a failing grade.
- Processes to Ensure Timely Closure of Inactive Sites
Incredibly, there are no timelines for other closure activities like abandonment or reclamation, other than a timeline to suspend inactive sites. Secondly, although “inactive well sites have grown, abandonment work has remained flat and licensees have focused more on low-risk and lower-cost sites.” Thirdly, AER has developed a new Inventory Reduction Program which establishes targets for closure spending. “However, whether the program encourages more timely closure is something AER will have to evaluate over time.” Here again, one could perhaps give a passing grade for effort, but this finding suggests more resources and vigilance are required from the AER than is currently in evidence.
- Processes to Ensure Sufficient Financial Security and Minimize Risk of Inappropriate Licence Transfers
There are two areas of findings: first is there adequate security posted and secondly are license transfers approvals assuring the effective implementation of the polluter-pay principle? Key findings include:
The Licensee Liability Rating Program, which has historically failed to properly identify financial risks and to ensure sufficient security is collected, remains in place while AER determines a future approach to security. Under the new framework, AER is collecting more operator information to better evaluate risk; however, future changes to the security system have not yet been decided (emphasis added).
Once again, it would be difficult to give a passing grade here except for the promise to do better.
With respect to license transfers, improvements are noted but the licence transfer process “lacks sufficient monitoring of licensee conditions.” In addition, licences can be exchanged outside of AER’s licence transfer application process via certain corporate transactions (e.g. Sequoia).
- Processes to Ensure Oil and Gas Site Closure Regulatory Compliance (Suspension, Abandonment, Remediation, Reclamation)
With respect to suspensions AER has not completed well-suspension compliance assurance activities for the past three years. While the AER implemented a five-year program in 2015 to bring 27,000 into compliance, 17,000 remain non-compliant for a 37 per cent achievement.
In the case of abandonment or decommissioning AER completes proactive inspections on abandoned wells;
“however, there is no assurance process to ensure routine abandonments are complying with directives. Inspections of inactive facilities are occurring. With less than three per cent of inactive facilities currently reclaimed, the number of inspections is considerable. Requirements exist for measuring fugitive greenhouse gas emissions from active wells; however, no similar requirements exist for inactive wells (emphasis added).
On reclamation efforts, the agency has automated the approval process, but improvements are necessary to ensure that approvals “are consistently valid.” Manual reviews for reclamation certification require improvements “to ensure judgments and reviews are properly evidenced.” Troubling is the finding that the AER lacks processes to ensure third-party professional declarations meet requirements. Lastly “AER audits reclamation post-certification; however, the process has been inconsistent and there is a 16 per cent rate of non-compliance” (emphasis added).
There are a lot of” howevers” throughout this report. Perhaps there is a passing grade here with evidence that some progress is being made. Part of the problem may have stemmed from the UCP’s first budget which reduced the AER’s budget resulting in the projected loss of 270 jobs (p. 190 of 2019 Fiscal Plan).
What is to be done?
Given the critical report by the OAG- the latest in a long-line of examinations of the AER, it is incumbent for MLAs after the election to ensure a new government is held accountable for assuring Albertans that the polluter principle be upheld. In particular, there is growing concern that by this lackadaisical regulation, the industry is escaping its responsibilities to reclaim and remediate these sites. The implications of a shift to a public-pay system are enormous, especially the financial costs of a thorough clean-up. And we are not even talking about the oilsands facilities and tailings ponds.
Truly troubling are earlier advocacy from Danielle Smith on the RStar program which hints that the the government’s failure in regulatory enforcement might be grounds for public contribution. And already there have been huge contributions from taxpayers including a $235-million interest-free loan to help speed up clean-up as well as a $1.7 billion infusion from the federal government, of which about $1-billion was for Alberta.
Some of Smith’s comments as a lobbyist for the oil companies do suggest that the problem is a shared one.
In her letter to Sonya Savage she makes the following points:
In Alberta, we took the approach of “polluter pay” to deal with the issue of inactive and orphan wells which is a position we continue to support at the Alberta Enterprise Group. However, we also know that broad-based tax incentives have been a powerful method to incentivize the energy industry going back to the days of Peter Lougheed and Ralph Klein.
I hope we can all agree that the current government finds itself in a very difficult situation that has been inherited from decades of well-meaning policy decisions by previous administrations that have nonetheless resulted in unintended negative consequences. We recognize that your government did not create today’s problems, but we believe we have a solution that will help you to fix it…
The regulator assumed in good faith that transferees would take responsibility for the cleanup, and that the assets and production would generate enough money to cover the cost of cleanup without the need for mandates…
Unfortunately, none of this has occurred and a series of events has caused this model to break down….
Meanwhile, for a period of time in the past 10 years, the regulator permitted well financed large companies to offload significant liabilities to small companies that have become overburdened with wellsite cleanup responsibilities that exceeded their ability to pay.
Plus, the Redwater decision put the liability for environmental cleanup ahead of other claims on a company’s assets. The practical effect of this is that any company with a Licensee Management Ratio (LMR) of less than 2 has found it impossible to arrange financing for new drilling programs that would yield new revenues in order to pay their obligations.
What this all means is a brazen attack to have the Alberta government “incentivize” the industry by royalty credits to do something they are legally obligated to do. The letter suggests the AER is not approving reclamation certificates quickly enough. The regulator has also erred in allowing companies to get out of their legal responsibilities by dumping assets to under-financed companies. In short, she makes a case that this liability is a shared liability.
What Smith did not anticipate as premier was how this issue would blow back so strongly. Indeed even a Scotiabank market note criticized the suggested program on the basis it would undermine trust in capitalism.
“While we see the potential for select companies to benefit from the program, we believe it has the potential to generate negative public sentiment toward the sector. Moreover, we also believe the program goes against the core capitalist principle that private companies should take full responsibility for the liabilities they willingly accept.”
What is happening at the Alberta energy Regulator should be all Alberta voters’ concern. It could be that a future Smith government could attempt to socialize the risk of these massive liabilities by legislatively disavowing the polluter-pay principle which has been judicially accepted. If that occurs one can only hope that the Canadian Taxpayers’ Association will lead the battle against this possibility.
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