Redwater Energy orphan well Todd Korol

Alberta delays $65 million in oil and gas company payments for orphan well cleanup

The Orphan Well Association has received $535 million in government loans in recent years, raising questions about whether taxpayers are ultimately going to end up on the hook for orphan oil and gas liabilities

Alberta has quietly delayed its collection of $65 million in industry payments owed by oil and gas companies to a fund that pays for the cleanup of orphan oil and gas infrastructure.

The news comes just weeks after the federal government announced a $200 million loan to fund the cleanup of orphan wells across the province.

Last week, The Narwhal reported the B.C. government had also suspended some $11 million in payments owed by oil and gas companies for that province’s orphan well fund.

These levies are supposed to serve as the primary funding for the province’s Orphan Well Association — and to ensure that industry is paying for the cleanup of its oil and gas infrastructure, even when companies go belly up.

Last year’s orphan well levy was due on June 3, 2019.

This year, those payments — totalling an expected $65 million, according to the regulator — will be “delayed.”

Shawn Roth, a spokesperson for the Alberta Energy Regulator, which administers the levy, confirmed by email that “the timing for collection of the 2020/2021 orphan fund levy is delayed and under review,” noting that more details would be provided “when available.”

That’s not enough for advocates keeping a close eye on taxpayer money going toward industry.

“In recent months, hundreds of millions of dollars in loans were given with the understanding these costs would be recovered and the polluter-pays principle would be upheld,” Nikki Way, a senior analyst with the Pembina Institute, told The Narwhal by email. 

“The government needs to provide clarity — an indefinite delay without a repayment plan is not acceptable.”

The Alberta government previously announced that taxpayers would cover another levy owed by industry to the regulator. “We’re funding the Alberta Energy Regulator industry levy for six months, achieving $113 million in industry relief,” it said in a press release in April.

Nigel Bankes, a professor of law at the University of Calgary, isn’t surprised the levy is being delayed, given the pressures the industry is facing from the COVID-19 pandemic and a global supply glut. But he is worried about the trend of public money going toward the Orphan Well Association. 

“It compounds the socialization of what should be a private indebtedness,” Bankes, who is the university’s chair of natural resources law, told The Narwhal.

“I don’t like saying this, but we just have to hope like hell that the price of oil is going to go up,” he added.

“If it doesn’t, [orphan wells] are going to become completely socialized.”

‘Increasingly the recipient of public funds’

The delay of the orphan well levy raises questions about whether industry will increasingly rely on public funds as it struggles to pay its bills.

“[The Orphan Well Association] is increasingly the recipient of public funds, whether by way of loan or by way of grants,” Bankes said. 

This is of concern, he added, in part because the association’s board is primarily made up of industry representatives.

“I don’t think it’s acceptable that there’s a majority of decision makers being drawn from industry,” he said.

Every year, the regulator — in consultation with the Orphan Well Association, the Canadian Association of Petroleum Producers (CAPP) and the Explorers and Producers Association of Canada — sets a total levy to be paid by the oil and gas industry to fund the cleanup of wells left behind by defunct companies. 

It’s intended to act as a mechanism to ensure industry pays for the cleanup of wells, rather than foisting the liability on the public.

Last year, companies were required to pay a total of $60 million into the orphan well fund (Roth confirmed that $163,000 of that is outstanding, while the rest has been paid.)

The total levy is then divided amongst companies that hold licences and approvals to drill for oil and gas in the province, based on their share of the total estimated liabilities in the province. The more wells a company holds, the more they pay toward the orphan well levy.

Bankes is concerned that’s not enough to clean up the thousands of orphan wells across the province. The Orphan Well Association, he says, is facing “an incredibly slow rate of tackling the problem.”

In 2018, work was officially completed on 93 orphan well sites.

According to the association’s 2018 annual report, it spent nearly $90 million cleaning up and sealing orphan wells and related infrastructure in that fiscal year.

As of May 1, the Orphan Well Association reported its inventory included 2,963 orphan wells that need to be abandoned, 3,116 orphan well sites that need to be reclaimed and another 939 orphan well sites that have had reclamation work done but are not yet officially certified.

Lars De Pauw, the executive director of the Orphan Well Association, declined to answer specific questions from The Narwhal about the orphan well levy, saying questions would be better answered by the Alberta Energy Regulator.

“I can tell you that the [Orphan Well Association] is completely funded for our budget for this year as a result of the previously announced loans,” De Pauw said by email, referring to the $100 million loan from the Alberta government announced in March, and the $200 million loan from the federal government announced last month as part of a $1.7 billion funding package to clean up orphan and inactive wells.

Alberta loans industry-funded association $100 million to ‘increase the pace’ of orphan well cleanup

‘No solid plan’ to repay government loans 

The recent loans from governments are just the latest in a growing list of government funds allocated to orphan well cleanup.

The Alberta government has given the Orphan Well Association more than $30 million in grants since 2009, and loaned the organization $235 million in 2017.  

In 2017, the federal government allocated $30 million to the cleanup of Alberta’s orphan wells.

“The loans to the [Orphan Well Association] cause me concern,” Barry Robinson, a Calgary-based lawyer with Ecojustice, told The Narwhal.

“There’s now $535 million in loans to the Orphan Well Association since 2017,” he said. “And from what I’ve seen, there’s no solid plan on how those get paid back.”

“The industry is paying $60 million a year now into the Orphan Well Association,” Robinson noted. Even if companies paid an additional $10 million on top of that, he explained, “that’s 50 years before those loans get repaid.”

“The reality is these loans are likely to turn into non-repayable loans.”

Bankes is also concerned the Orphan Well Association may never be able to pay back its loans from governments.

“If it is a loan, then in theory it should be repaid,” he said. “That money has got to come from industry. The only way it’s going to be repaid is if the levy were to be increased, so that in addition to covering current liabilities in any year, there was a surplus that could then be sent back to the Government of Alberta.”

“It just doesn’t seem to me that that’s a very likely scenario,” he added, noting that in the current oil-price environment trying to get money from a lot of companies is like “trying to get water from a stone.”

Advocates worry the loans will eventually be forgiven, meaning taxpayers are increasingly paying to clean up orphan wells.

“In the current context, we understand industry is facing significant pressures, and a delay on payment of the levy may be appropriate,” Way of the Pembina Institute said. 

“But the orphan well issue is a longstanding problem created by inadequate policy, and had been growing well before this crisis.”

‘Booted down the road’

Advocates have long been calling for the province to put in place tougher regulations to prevent wells from becoming orphans, or from sitting on the landscape for years, or even decades, before being cleaned up.

The Pembina Institute has argued for full securities or bonds when a company applies to drill a new well. 

But the province has long relied on the orphan well levy as the primary mechanism to ensure industry pays for the cleanup of wells left behind by defunct companies.

Roth, the regulator spokesperson, told The Narwhal that companies that don’t pay the orphan well levy usually face penalties.

“Companies that are unable to pay the orphan fund levy by a specified date are typically subject to a 20 per cent penalty of the originally invoiced amount,” he said by email. “Additional enforcement actions may also be applied for non payment.”

For advocates, this has not been enough to ensure the polluter-pays principle is upheld in Alberta, as they note the number of orphan and inactive wells has continued to balloon.

“There have been debates going back 20 or 30 years on this,” Bankes said. 

“The problem is being consistently booted down the road.”

Report ‘buried’ by Alberta government reveals ‘mounting evidence’ that oil and gas wells aren’t reclaimed in the long run

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