Alberta regulator privately estimates oilpatch's financial liabilities are hundreds of billions more than what it told the public

Nov 1, 2018 - Cleaning up Alberta's fossil fuel industry could cost an estimated $260 billion, internal regulatory documents warn.

The staggering financial liabilities for the energy industry’s graveyard of spent facilities were spelled out by a high-ranking official of the Alberta Energy Regulator (AER) in a February presentation to a private audience in Calgary.

“We can continue down our current path until the impacts are felt by the public ... or we can start to implement the numerous changes that we now know need to be made,” Alberta Energy Regulator vice-president Robert Wadsworth said in February.

The estimated liabilities for the oil-rich western Canadian province are far higher than any liability amount made public by government and industry officials.

The official who delivered the new estimates is Rob Wadsworth, vice president of closure and liability for the AER. He said that a “flawed system” of industrial oversight is to blame for a problem that ultimately could leave taxpayers on the hook to cover a portion of the costs.

He also called on all stakeholders to accept tougher regulations and move away from a system that now allows the largest companies to take centuries to clean up their toxic well site graveyards.

“We can continue down our current path until the impacts are felt by the public ... or we can start to implement the numerous changes that we now know need to be made,” say notes from Wadsworth's presentation. He added that the liabilities are underfunded and the collection of security funds from industry is “insufficient.”

Until now, the public has been told the liabilities have been calculated at $58 billion, far less than Wadsworth’s estimate. The presentation did not spell out what he based his estimate on and Wadsworth declined an interview. The government meanwhile has only collected $1.6 billion in liability security from companies.

The liabilities include costs that companies must assume to shut down aging and inactive oil and gas exploration wells, facilities and pipelines once they are no longer needed. Another significant part of the liability is the clean-up of toxic tailings ponds from oilsands extraction mines near Fort McMurrray. The ponds have sprawled to cover an area the size of Kelowna.

The tailing ponds are used by companies to dump the waste from the mining of bitumen. The process normally requires hot water to separate bitumen from the oily deposits of sand beneath the boreal forest in Alberta.

Global News chief investigative correspondent Carolyn Jarvis reports on the new documents revealing provincial estimates of liabilities in Alberta's oil and gas industry. Global News video

'We have known these programs were flawed'

The AER said its vice president’s comments were “a snapshot in time of estimated total liability” and based on a “worst-case scenario” of a complete industry shutdown.

This explanation contrasts with statements in Wadsworth’s presentation that the estimates are “likely less than the actual cost.” He also warned in his presentation that liabilities from conventional wells were getting larger due to an “increasing number of licensees with questionable financial capacity to meet closure obligations.”

The AER also says that “industry companies are responsible” for the costs in Wadsworth’s estimate.

On the industry side, a spokesman said that the liabilities might not be as high as they appear.

Lars De Pauw, executive director of the Orphan Well Association — an industry-funded group that assumes responsibility for the inactive wells of bankrupt companies — said the association's work is getting done this year at a cost that was 30 per cent below the public estimates made by the regulator.

A screenshot from a private presentation delivered by Alberta Energy Regulator vice-president Robert Wadsworth in Calgary on Feb. 28, 2018 outlining the financial liabilities in the province's oilpatch. Image from AER presentation

But in his February presentation, Wadsworth said that the current rules are so weak that companies can delay setting aside money to cover cleanup costs until they are out of business and can no longer afford to pay anything.

“Even though we have known these programs were flawed, there has been no proactive change to the liability programs,” according to speaking notes accompanying the first presentation, delivered on Feb. 28 to the Calgary-based Petroleum History Society. “Until recently, the implications of our flawed system had not been realized.”

Robert Wadsworth, vice-president of closure and liability management at the Alberta Energy Regulator, warned in February 2018 that the oilpatch in the province was facing a $260 billion liability. Photo courtesy of the AER

Who will pay for it?

National Observer obtained the documents from the February presentation and another Wadsworth gave in June as part of a joint investigation with Global News, the Toronto Star and StarMetro Calgary for the ongoing Price of Oil series. The documents were released after requests under freedom of information legislation.

Wadsworth, who previously worked for nuclear power generator Bruce Power, had a 28-year career in the military that included a stint as a colonel in Afghanistan and deployments to Cyprus, Angola, Mozambique and Bosnia, the AER said. His presentation underscored the importance of being transparent with the public about the sector’s liabilities.

“Despite our best efforts, there are liabilities that are no longer owned by a company, or are not addressed by existing liability programs,” Wadsworth said in February. “We must ensure that the costs of these liabilities is retained by industry and not passed on to Albertans.”

Nearly half of the liability — an estimated $130 billion — is what the AER puts in the “mining” category and involves oilsands and coal mines. Most experts contacted by the Price of Oil team said that this mining amount mostly related to liabilities in the oilsands, especially tailings ponds, with only a small fraction related to coal.

On its website, the regulator says the mining liability in Alberta is right now calculated at $28 billion, far less than what the regulator’s liability vice president has estimated.

The estimated liability figures are based on the regulator's internal assessments while the calculated liability that the public has been told about is based on numbers reported by companies to the AER.

After the $130 billion estimated mining liability, the next largest category is the $100 billion cost of cleaning up conventional oil and gas wells. The third group of liabilities, provincially regulated pipelines, came in at about $30 billion, according to Wadsworth’s presentation.

Together, the new estimates appear to contradict government and industry statements that Canada — home to the world’s third largest reserves of crude oil after Saudi Arabia and Venezuela — is managing its fossil fuel industry in a responsible and sustainable manner.

Overall, the province has seen an increasing number of inactive wells becoming “orphans” — a well at the end of its useful life that needs to be cleaned up but which no longer has an owner who can pay for this job.

The total number of orphan wells designated for abandonment has climbed from fewer than 800 in 2016 to more than 2,000 in 2018, according to industry data. This number appears likely to continue climbing, according to Wadsworth’s presentation.

At least 60 companies have become insolvent since 2014, he indicated.

'Mind-blowing numbers'

Wadsworth’s estimates are so high that several experts who reviewed the presentations have described the situation as an economic and environmental crisis that raises questions about the financial health of a province that prides itself on strong fiscal management.

“It’s a big deal,” said Thomas Schneider, an accounting professor from Ryerson University who has tracked liability management issues in the oilpatch for years. “I mean $260 billion is a lot of money… We’re sitting on a huge liability, and then it’s just a matter of who’s going to end up having to pay for it.”

“These are mind-blowing numbers,” said Amin Asadollahi, an environmental consultant who previously worked as a senior policy advisor at Natural Resources Canada. He added that the liability problem needs attention now because the industry will face challenges as some countries try to lessen their dependence on fossil fuels.

“I have never come across anything like this before where the known risk estimated by decision makers is so much larger than the publicly available estimates,” said economist Robyn Allan, a former president and chief executive officer of the Insurance Corporation of British Columbia who reviewed the presentations.

The numbers come at an awkward time for industry and government officials who are trying to make the case that they are developing natural resources responsibly and need new pipeline projects such as the Alberta-B.C. Trans Mountain expansion to support an increase in production.

In Ottawa on Oct. 29, 2018, environmental consultant Amin Asadollahi examines speaking notes and slides from a Feb. 28, 2018 presentation by Alberta Energy Regulator vice-president Robert Wadsworth. Photo by Alex Tétreault

'Slow speed financial crisis'

While Wadsworth warned in February that the liability numbers were "expected to grow," Alberta Environment Minister Shannon Phillips characterized his estimates as a “worst-case scenario” in which the industry shuts down overnight.

“The fact is that there are certainly liabilities with orphan wells, with tailings ponds and with other activities on the landscape, but our government from day one has taken these matters seriously and we’ve actually seen pretty good progress on this,” Phillips said. “There’s no question there’s more to do, but we’ve taken it very seriously from the beginning.”

The presentation from February also indicated that some decisions could “potentially” be made in the spring of 2018.

When asked about this, the regulator pointed to a voluntary area-based closure program, in partnership with industry lobby groups, that encourages operators to work together to close inactive oil and gas infrastructure.

Phillips said that Alberta, ruled by Progressive Conservative governments for 44 years before the New Democratic Party was elected in 2015, had previously failed to take this issue seriously but that her government was considering whether to force industry to set aside more money as a security deposit.

“We certainly can — that is one of the tools in our toolbox as we review the Mine Financial Security Program (MFSP) and other industry association levies that have to do with (orphan wells.) There is no question that this is an ongoing conversation.”

The Mine Financial Security Program (MFSP) sets provincial rules for collecting security deposits from oil and coal companies that need to manage tailings ponds. To date, the MFSP and other levies have collected about $1.6 billion from industry.

Schneider, the accounting professor from Ryerson University, said the liabilities have the potential to affect Alberta’s balance sheet and its credit rating.

“There’s no way industry could fund that right now,” he said in an interview. “I don’t see imminent collapse tomorrow. I don’t see it being like the financial crisis (of 2008) as such. But it’s more like a slow speed financial crisis… and it’s a matter of when are we going to deal with it. Are we going to deal with it now? Are we going to deal with it in 50 years or 100 years? What kind of legacy is going to be left?”

Alberta Environment Minister Shannon Phillips answers questions in an interview in her Edmonton office on Oct. 30, 2018. Photo by Dave Carels, Global News

Industry will be held to a 'higher standard now'

Wadsworth said that tougher regulations would be needed to prevent the problem from getting worse while ensuring that “we don’t trip economic growth” for a sector that is an important engine in Canada’s economy.

But he told the industry executives in June that the current pace of cleanup was too slow. The 15 largest companies, for example, would need about 300 years to clean up all of their wells — more than 150,000 — in the absence of new regulations to make them accelerate their efforts.

The overall industry average is lower, but it would still take them about 50 years to abandon their current inventory of inactive wells, he explained.

“You are going to be held to a higher standard now,” he said to the industry leaders, according to the notes from his presentation. “We are going to be implementing abandonment targets to slow the growth of inactive wells.”

A slide from a presentation delivered by AER vice-president Robert Wadsworth on Feb. 28, 2018 shows the growth in the number of inactive wells in Alberta. Screenshot from AER presentation

He said that the new targets would be needed to make a dent in the total liabilities, while introducing "more credible" standards.

The internal documents also indicated that the regulator was working with officials at the highest levels of the Government of Alberta (GOA) to solve the problem.

"Two shoes need to drop before we can really move in a deliberate, integrated and collaborative way to change the system with industry, GOA, creditors and stakeholders and to ensure success," he told industry executives in June.

Stronger rules in Texas and New Mexico

Wadsworth’s February presentation also noted that Alberta and B.C. had weaker regulations for collecting security deposits and managing the cleanup of oilfield sites than other oil-producing jurisdictions such as Texas and New Mexico.

“While we could have made improvements to security collection, the financial backstop mechanism and implementation of targets, why have we not done so?” he asked.

He added that recent developments have provoked efforts to change the regulatory system, including a legal case involving a bankrupt company called the Redwater Energy Corporation, which went out of business before it could clean up its inactive wells to prevent environmental contamination. The provincial regulator has taken the case to the Supreme Court to challenge existing bankruptcy rules, in order to get permission to collect money needed to clean up Redwater’s wells from its creditors, instead of using taxpayer dollars.

A slide from a presentation on Feb. 28, 2018 by Alberta Energy Regulator vice-president Robert Wadsworth compares the management of liabilities in different jurisdictions. Screenshot from AER presentation

'Have a great weekend!'

Alberta has also been lobbying the federal government to change the national bankruptcy law so that companies can’t walk away from their cleanup obligations.

While the presentation noted that industry has decreasing capacity to pay for higher fees or taxes to cover these types of costs, it also said something must be done to address a rising number of inactive wells:

“We must understand and share information about our work as we make difficult decisions. We will be open and transparent in our liability facts; telling a compelling, accurate story of the liability across all sectors, including contamination, to Albertans that is clear, timely and easy to understand.”

The Canadian Association of Petroleum Producers (CAPP), an industry lobby group that represents most of the country’s oil and gas industry, declined to comment on estimates from the newly-released documents, suggesting instead that the regulator should be asked to explain them.

In recent months, CAPP has lobbied against efforts to increase federal oversight of companies through new legislation — the Trudeau government’s Bill C-69 — arguing that the “Canadian oil and natural gas industry is regulated by some of the highest regulatory standards in the world.”

The lobby group also declined to say what the regulator’s views say about the state of oversight of the industry. It also declined to answer questions about whether it believed its member companies were well-positioned to cover the cost of their liabilities and whether they were doing a good job of managing these liabilities to ensure that taxpayers would not be left on the hook.

Phillips, the Alberta environment minister, said the solution involves partners at other levels of government, including municipalities, First Nations and the federal government.

“We have a number of liability questions that remain unanswered because this is a long term problem and we did not see leadership from the previous (Alberta) government for 44 years,” she said. “There’s no question that there is more work to be done.”

Asadollahi, the environmental consultant who is a director of policy research at Horizon Advisors, made similar comments, noting that the Alberta government has its work cut out for it after previous governments failed to take action.

“So the current government is essentially (inheriting) bad policies and poor decisions of previous governments that were trying to make a buck or two in the short term.”

The office of United Conservative Party Leader Jason Kenney declined an offer to review the new estimates and documents released by the regulator, and to comment on the issue.

“Thanks for the opportunity but we’re going to pass,” wrote UCP spokeswoman Christine Myatt in an email to Global News, National Observer and the Toronto Star on Oct 26. “Have a great weekend!"

Editor's note: This article was updated at 5:16 p.m. on Nov. 1, 2018 to correct an error. Lars De Pauw, executive director of the Orphan Well Association said the association's work is getting done at a cost that was 30 per cent below public estimates by the regulator.

Copies of presentations delivered by AER VP Robert Wadsworth on Feb. 28 and June 7, 2018 about Alberta's fossil fuel liabilities. Documents released through freedom of information legislation