Orphan wells: Alberta’s $47 billion problem

As energy sector companies fail, landowners wonder who’s on the hook for reclamation costs of wells and pipelines

TABER, Alta. — As farmers drove to the March 8 Action Surface Rights meeting, the news had just broken that Calgary-based Sequoia Resources Corp. had ceased operations.

Its demise, if it occurs, would add at least another 2,300 oil and gas wells and possibly as many as 4,000 to the list of energy infrastructure sites on Alberta farm and ranch land that will require reclamation.

The trouble is that Sequoia, like many other energy companies that have entered receivership or gone bankrupt in recent years, cannot cover the cost of that reclamation.

The Orphan Well Association, a non-profit organization funded by the energy industry and the province, can’t either. As of Feb. 28, it had 1,038 wells on its list for reclamation and a plan, using existing funds and a government loan of $235 million, to clean up about 700 wells in the next three years.

It also has a list of more than 1,900 orphan wells on its list for abandonment or suspension, along with more than 3,600 pipeline segments.

What of those, the newly abandoned energy assets, and others that might fall to economic ruin in coming years?

Landowners — Alberta farmers and ranchers — could be left with the problem.

Many are reluctant to discuss problems they’ve had with energy companies, fearing land devaluation in the case of orphan wells or contamination, or risk to future compensation from those companies if they go public.

“It’s been my concern for many years, as an advocate for landowners and farmers, that diligence by government and the oil industry was required to ensure that farmers and ranchers don’t get left with the legacy problems of old oil and gas wells,” said Keith Wilson, a lawyer known for his work on property rights.

He quoted a report by the C.D. Howe Institute that estimates more than 155,000 Alberta energy wells have no economic potential and will eventually require reclamation.

He also quoted Orphan Well Association figures that it costs an average of $304,448 to reclaim a well.

That math leads to a big number: $47.19 billion in future reclamation costs.

“Who has $46 billion right now to go deal with this problem? No one. Who’s likely to be left with the problem? You,” Wilson told landowners at the Taber meeting.

“My real concern is that what’s going to end up happening is that the government and industry are going to say, ‘we just don’t have the money.’ The capital that existed and the profits that the oil companies made, that should have been put into cleaning up these wells on farmland, have fled, and left the country or been consumed by other things,” he said in a later interview.

Daryl Bennett of My Landman Group, who is also a director with Action Surface Rights, has experience representing landowners in disputes involving resource companies.

He said energy companies with more liabilities than assets are required to provide a deposit that is held by the Alberta Energy Regulator for use on well reclamation. Now the money on deposit is insufficient.

“The cost to reclaim all these assets is now far higher than the value of those assets,” he said.

A ruling from the Supreme Court of Canada on the Redwater case, expected this spring, could have a major effect on the situation, Bennett added.

It will determine whether lenders can sell off profitable assets from a bankrupt company and essentially renounce the rest. In the case of Redwater, that could put the cost of reclaiming unproductive energy assets onto the government and possibly landowners. If previous court rulings are upheld, it would essentially negate the “polluter pay” principle, said Bennett.

Back at the local level, as energy companies go into bankruptcy or receivership, they stop paying landowners their annual rental fees. Landowners can apply to the Surface Rights Board for payment through the government, but the process is now backlogged with claims, Bennett said.

In the meantime, the banker may be asking landowners for loan payments and lenders might impose lending restrictions due to environmental contamination of land.

Wilson said the provincial government is well aware of the extent of the orphan well problem, though he speculated that it might be paralyzed by the magnitude.

The general public, on the other hand, doesn’t understand that most oil and gas wells are on private property, nor do they realize that in Alberta, landowners cannot refuse to allow energy development.

That unique law, said Wilson, came with a social contract balancing the rights of landowners with the rights of companies to develop the resource.

In the early days of Alberta’s energy development, attitudes were different, he added.

“The whole philosophy of government and the industry was that the oil and gas industry is a guest on farmers’ land, and that we have to behave that way.”

Bennett stated it baldly.

“The social contract is broken. What are we going to do about it? This never was supposed to happen. Government promised us that this would never happen.”

Wilson said he and others involved in the issue had considered calling for a moratorium on new oil and gas development in the province as a way to sound the alarm.

They decided against it, he said, noting landowners have benefitted from the energy industry and generally continue to support it as an important economic driver.

However, landowners can take some action to prevent the problem of insolvent energy companies and lack of well site reclamation from worsening.

“If an oil company approaches them for a new well site on their land they should object, to the Alberta Energy Regulator, to that well site and they should demand that the Alberta Energy Regulator impose requirements on the oil company to protect the landowner so that if the company goes bankrupt, the landowner’s not left holding the bag, as they are today,” said Wilson.

“I also strongly recommend, for some complex legal reasons, that landowners do not voluntarily sign surface leases or right of way agreements for pipelines. Instead, force the oil company to obtain a right of entry order from the Surface Rights Board because it will provide additional protections to landowners in the case of a problem in the future.”

Wilson said there might be a window of opportunity in which big oil companies and farmers could seek solutions together. Big oil is frustrated with smaller companies that enter and exit the sector, exacerbating the orphan well problem.

“There’s an opportunity for ag groups to reach out to the larger organizations in the oil industry and say, ‘how can we work together to solve some of these problems?’ And I think if there can be some movement there, and they go to government with some solutions, it will be an easy sell.”

Provincial politics create another hurdle, both Wilson and Bennett said.

The NDP government is pushing for pipelines to tidewater and is sensitive to any suggestions that it is hindering Alberta’s energy industry because of its importance to the economy.

At the same time, it has adopted policies it says are designed to show greater environmental responsibility, among them a tax on carbon emissions.

The United Conservative Party, the official opposition, is critical of policies that it deems to hinder the energy sector and is opposed to the carbon tax.

The scenario doesn’t bode well for a solution regarding energy site abandonment and reclamation, which will be costly no matter how the expense is shared.

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