Canada's orphan oil and gas well problem runs a billion dollars deep

Some Canadian companies are spending public funds to clean up their oil and gas wells at a time when the industry is raking in historic profits, yet many wells remain abandoned or unplugged, raising concerns about environmental and health impacts on communities.

As the industry prepares to reinvest the profits from 2022, advocates say not enough is being done to ensure the companies, not taxpayers, cover the cost of remediating and reclaiming wells.

"We haven't been doing it properly for so long now, we're at this kind of crisis moment where we have so much that needs to be cleaned up, and not enough action happening," Vanessa Corkal, policy analyst with the International Institute for Sustainable Development (IISD), told CTVNews.ca in an interview.

And as the number of unplugged, abandoned and orphaned wells rises, so do the opportunity costs, environmental costs and the likelihood that governments will need to spend increasing amounts of money to fund their cleanup, Corkal said. Then, there are the under-studied health implications for people living near wells.

The factors contributing to the issue go beyond any single good or bad financial year for the industry, experts say, and solving the problem will take the co-operation of the industry, regulators and the provincial and federal governments.

THE STATUS OF CANADA'S WELLS

Most – 91 per cent – of the onshore oil and gas wells dug in Canada are located in Alberta and Saskatchewan. Of the Prairie provinces' 600,000 wells, only 35 per cent in Alberta and 39 per cent in Saskatchewan were actively producing oil and gas as of 2020, according to a 2022 report by Canada's Parliamentary Budget Officer (PBO).

The same report found there has been a significant increase in the number of inactive and unplugged wells in Alberta and Saskatchewan over the past decade.

Of the roughly 17,500 orphaned and abandoned wells in the two provinces as of 2020, 15,700 still needed to be plugged and reclaimed. The number of orphaned wells in both provinces grew at a rate of 35 per cent each year between 2017 and 2022. According to the report, this growth was likely driven by a drop in oil prices that began in 2014 and a subsequent industry downturn.

Based on the Canadian Environmental Protection Act's "polluter pays" principle, oil and natural gas companies are required to fund the cost of well cleanup.

A chart published by the Office of the Parliamentary Budget Officer shows the number of orphan and abandoned wells in Saskatchewan and Alberta from 2007 to 2020. (Parliamentary Budget Officer)

Wells owned by a solvent company that are inactive but haven't yet been reclaimed or remediated are considered abandoned.

"In the case of insolvency or bankruptcy, it is required that a company address environmental liabilities before paying back creditors," the PBO's report reads. "When there is no known, financially viable operator capable of cleaning and closing a well, it is considered an orphan well."

WHAT'S AT STAKE

Unplugged oil and gas wells continue to leak harmful chemicals into the air and groundwater long after they have ceased to be productive. For this reason, they impose heavy environmental costs, risk to local environments and public health and safety concerns.

"An abandoned well can still be releasing emissions…in particular contaminating the groundwater, but also in the release of methane," Corkal said. "So that's significant. And we talk about climate change in particular because methane is a very potent greenhouse gas."

A chart published by the Office of the Parliamentary Budget Officer shows the number of oil and gas wells in Alberta between 2002 and 2020 by lifecycle status. (Parliamentary Budget Officer)

Per tonne, methane can have up to 86 times the global warming potential of carbon dioxide over a 20-year period, and 34 times the impact over a 100-year period, according to the PBO's report.

The U.S. Environmental Protection Agency estimates each unplugged, inactive oil and gas well emits 0.13 metric tonnes of methane on average annually. By this metric, Alberta and Saskatchewan's 120,000 unplugged inactive wells produce a total of 16,000 metric tonnes of methane annually on average.

According to a Elementa: Science of the Anthropocene in 2021, little research exists on the relationship between abandoned or orphaned oil and gas wells and human health.

However, methane and benzene are known to be harmful to human health, and the study's authors say unplugged, inactive wells leak both pollutants.

Research from 2013 has also shown that some private water wells within three kilometres of natural gas wells in the U.S. contained levels of arsenic, selenium, strontium and total dissolved solids that exceeded the U.S. Environmental Protection Agency's drinking water maximum contaminant limit.

In addition to the environmental and health costs, unplugged inactive wells also present an opportunity cost, since the land surrounding them is unsuitable for other uses until they are reclaimed.

THE COST OF CLEANING UP

Plugging oil and gas wells and restoring the land around them to its pre-development state is very, very expensive.

For example, both Houston Oil and Gas Ltd. and Wolf Coulee Resources Inc. went bankrupt in 2019. At the time, the companies had 1,422 and 177 wells left to be plugged and reclaimed respectively, primarily in Alberta. The cost to clean Wolf Coulee Resources' wells is estimated to be $16.4 million, or $93,000 per well on average. The cost to clean Houston Oil & Gas Ltd.'s well is estimated to be $81.5 million or $57,000 per well.

The PBO estimates the cost for onshore orphan well cleanup in Canada will reach $1.1 billion by 2025. In order to manage these costs, provincial energy regulators across the country have established liability management programs. These programs require oil and gas companies to pay a refundable security deposit to cover decommissioning and reclamation costs in case their wells become orphaned --hence the "polluter pays" principle.

2020 FUNDING

In 2021, the PBO estimated Alberta should have $415 million in security deposits on hand to cover the cost of cleaning existing orphaned wells. Alberta only had $237 million on hand; creating a gap of $178 million. By 2025, the PBO projects that gap in funding will grow to $642 million without additional funding.

As for that $178 million gap, that was what remained after the federal government provided $1.7 billion to the governments of British Columbia and Alberta, Saskatchewan in 2020 to help solve the problem, according to the PBO report.

The money was intended to fund inactive well cleanup and create opportunities for energy sector workers who were laid off due to the pandemic as part of the federal government's COVID-19 Economic Response.

"In an ideal situation, the funding would have been allocated to orphan wells, to plug and eventually reclaim the land around the orphan wells, those for which no viable company was responsible or could be expected to pay," Yves Giroux, Canada's Parliamentary Budget Officer, told CTVNews.ca in a phone interview.

One billion dollars of that funding went to the government of Alberta for site cleanup and $200 million went to the province's Orphan Wells Association (OWA) in the form of a loan. The OWA is an industry-funded collaboration among the Alberta Government, provincial regulators and oil and gas producers founded to manage the cleanup of the province's orphan wells.

The remaining $520 million went to Saskatchewan and British Columbia.

Giroux's 2022 report said the $1.7 billion should have been enough to cover the cost of cleaning up the industry's inactive oil and gas wells, however, just under half of the traceable funds in Alberta – $222 million – went to 10 financially viable companies. In other words: to companies that could have paid to clean their own wells.

As a result, the report said, there likely won't be enough funding left to clean up the province's actual orphan wells.

Regan Boychuk of the Alberta Liabilities Disclosure Project (ALDP) says the federal government missed an opportunity to attach conditions to the funding that might have ensured it was better used – conditions his organization recommended. The ALDP contributed some of the research used in Giroux's report and had previously urged the federal government to make the entire $1.7 billion a loan or use it to leverage industry regulation reforms that might ensure all companies cover the cost to clean their own wells in the future.

"We told them it would be a slush fund if there weren't strings attached. We told them to lend the money, not give it as a grant," Boychuk said. "We were begging for reforms."

In hindsight, Giroux said more of the funding might have gone to remediating and reclaiming orphan wells if the federal government had had more time to work on the policy surrounding the transfer.

"The fact that some of the assistance went to companies that were financially viable and could have paid for the plugging and reclamation of their own wells, I think that was probably a byproduct of a policy that was developed with a big sense of urgency," Giroux said.

A joint study by Oxfam and the Parkland Institute has since concluded that the funding failed to move the needle on orphan well cleanup, since so much of it went toward cleaning wells owned by solvent companies who would have been obligated to clean them anyway.

"It essentially showed government was subsidizing activity that would have happened otherwise, and there was not a lot of evidence to show that it was going above and beyond including more cleanup than would normally happen," Corkall said.

Boychuk has come to the same conclusion.

"At the end of the day, there's no reason to expect anything extra got cleaned up that would not have been cleaned up anyway," he said.

A YEAR OF HISTORIC EARNINGS

According to public records kept by the Government of Alberta, Canadian Natural Resources Limited (CNRL) and Cenovus Limited were two of the biggest recipients of the 2020 funding, taking $168.9 million and $65.5 million in grants respectively.

How did these companies perform in 2022? CNRL reported an annual profit of $10.9 billion, while Cenovus reported an annual net income of $4.9 billion, a 1018 per cent increase compared to 2021.

They weren't the only Canadian oil and gas companies for whom 2022 was a historic earnings year.

On March 1, the Canadian Association of Petroleum Producers (CAPP) said it expects oil and natural gas investment in upstream production to surpass pre-COVID levels, reaching an estimated $40 billion this year. That figure represents an increase of $4 billion, or 11 per cent, compared to 2022.

That's not to say the industry isn't doing any work to reduce its environmental impact. In Alberta a large chunk – $28 billion – of this year's upstream investment is forecast to go toward environmental protection and emission reduction technologies, according to the CAPP.

Richard Wong, the CAPP's vice president of operations, told CTVNews.ca the industry has invested $2.8 billion into well closure activities since 2018, and has increased its contribution to Alberta's orphan well fund over the past 10 years.

"This year, the levy increased to $135 million, which contributes to the reduction of the orphan site inventory in Alberta," he said in an email. "While there is more to be done, CAPP is confident we are on the right track."

For its part, Cenovus said it aims to reclaim 3,000 decommissioned well sites by the end of 2025.

"Between 2019 (and) 2021, we received 1,455 reclamation certificates from the Alberta Energy Regulator and we continue to progress our well site reclamation inventory to closures," Cenovus said in an email to CTVNews.ca. "We're now more than half way to our target."

Cenovus did not answer questions about whether it raised, or plans to raise, its site reclamation targets in response to the 2022 PBO report or to reflect its increased profits in 2022. CNRL did not respond to a request for comment by publishing time.

HOW DID THIS HAPPEN?

Despite "polluter pays" laws and the work of orphan well associations, the number of wells in need of reclamation seems to chronically surpass the industry's ability to reclaim them.

Corkal and Boychuk both blame an inability – or unwillingness – on the part of provincial energy regulator to enforce laws enshrined in the Canadian Environmental Protection Act and the Alberta Environmental Protection and Enhancement Act.

"It's not that there isn't regulation in place," Corkal said. "One of the biggest issues is simply a lack of enforcement. It's not enough to have a law and a regulation, you need to enforce that regulation."

Boychuk agrees, calling energy regulations developed and fine-tuned between 1971 and 1992 under Alberta premiers Peter Lougheed and Don Getty "the world's premier energy law."

"Everything you can imagine has a clear, equitable path to a solution that respects industry's rights and the public's right," he said. "The problem is, outside of 1971 to 1991, Alberta has not been able to get the regulator to follow the law.

When presented with these arguments, AER spokesperson Teresa Broughton told CTVNews.ca the regulator is in the process of developing “a broader security framework that will be implemented in phases.” In January 2022, it introduced a new minimum mandatory spend as part of the closure quotas for all oil and gas companies with inactive liability in January 2022.

Closure quotas specify the minimum amount of money licensees are required to spend on closure work each year and are based on an industry-wide closure spend target set by the AER.

"Minimum mandatory spend will help increase the amount of closure work that is occurring in the province because companies will now be required to spend a minimum amount of money on closure work each year," Broughton said in an email to CTVNews.ca. "The industry-wide closure quota for 2023 is $700 million."

However, according to Corkal, smaller oil and gas companies have discovered that their best shot at avoiding security and reclamation costs is to go bankrupt and skirt rules that require them to address their remaining environmental liabilities before paying back creditors.

She cited the Redwater decision, a legal case that began in 2016. Redwater Energy was a small Alberta-based oil and gas company founded in 2009. When the company declared bankruptcy in 2015, its creditor and receiver became responsible for paying to clean up the company's facilities and pipelines.

Lenders argued that they should be able to collect profits from the sale of Redwater's remaining assets, rather than have those profits cover the cost of site reclamation. In that case, the OWA would be left to cover the cost of cleanup. The Alberta Court of Queen's Bench ruled in the lenders' favour in 2016.

Although the Supreme Court overturned the ruling in 2019, Corkal said the case demonstrates how easily governments can choose to enforce – or not enforce – "polluter pays" laws when an oil or gas company files for bankruptcy.

Broughton said it doesn’t fall within the AER’s scope of responsibility to “control or prevent a company from going insolvent,” but that the Redwater decision did lead to some change in the way it manages any money left over when a company goes bankrupt.

"Following the Supreme Court of Canada’s Redwater decision, the regulator works to ensure that any remaining funds in the estate are used for site cleanup on remaining assets before creditors are repaid," she said.

When there isn’t enough money left over to reclaim an insolvent company’s remaining wells, the AER designates them as orphans and they become wards of the Orphan Well Association.

THE WAY FORWARD

For a problem that has grown so far out of hand, Corkal and Giroux say the solutions are pretty self-evident.

One solution they both proposed is that governments hold the industry more accountable by applying strict conditions to any public funding they provide in the future.

"How they want to operationalize that, whether it be by providing financial guarantees that are released once wells are certified to have been properly closed, that's up to people who are more knowledgeable about the technicalities surrounding plugging and reclaiming wells," Giroux said.

Like the Alberta Liabilities Disclosure Project, Corkal said the IISD has advocated for the federal government to loan the money, rather than give it away. Some loan conditions could include requiring companies to have net-zero carbon plans in place, ensuring the funds are used to subsidize activity that is above and beyond what companies would have paid for on their own and ensuring the funds are only provided to companies that can't afford to reclaim their own wells.

Other solutions include setting stringent security bond requirements, "so companies have to demonstrate in some financial capacity, before they even start to drill a well, what they're going to do to clean it up within a certain amount of time," Corkal said. She said more work should also be done to monitor bankruptcy courts and stay on top of companies teetering on the edge of insolvency.

"Are we tracking which companies are going to go bankrupt and being more proactive about identifying where those liabilities are? I think that would help to prevent the problem from getting worse," she said.

The way Giroux sees it, if Canada's energy regulators can't figure out how to enforce "polluter pays" laws and orphan well associations can't afford to plug and reclaim all the orphan oil and gas wells, governments will need to step in and pay the cleaning bill. The alternative, he said, would be to leave the wells unplugged.

"If they end up orphan wells, it's very unlikely that a company will volunteer to clean them up unless there is enough oil and gas left to be extracted for it to be worth the company's while," he said.

"So two big options are to leave them as they are, or more public funds are put into plugging and reclaiming."