{"id":60196,"date":"2023-07-13T11:38:30","date_gmt":"2023-07-13T18:38:30","guid":{"rendered":"https:\/\/energi.media\/?p=60196"},"modified":"2023-07-13T11:38:30","modified_gmt":"2023-07-13T18:38:30","slug":"30-year-old-deal-means-industry-pays-100-of-well-clean-up-costs","status":"publish","type":"post","link":"https:\/\/energi.media\/markham-on-energy\/30-year-old-deal-means-industry-pays-100-of-well-clean-up-costs\/","title":{"rendered":"30-year old deal means industry pays 100% of well clean up costs"},"content":{"rendered":"

“…the public purse should not be at risk because of orphan wells.\u201d JR Nichol, senior ERCB executive<\/strong><\/h2>\n

Three decades ago, the oil industry cut a deal with the Alberta government that it would pay to clean up orphaned wells. Not just newer orphans, not just low-cost wells, but every last one of them. Now the UCP is trying to modify that deal to put taxpayers on the hook for tens of billions of dollars.\u00a0<\/span><\/p>\n

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Premier Danielle Smith standing with Energy Minister Brian Jean. Photo: CTV News.<\/em><\/figcaption><\/figure>\n

Premier Danielle Smith\u2019s July 10 mandate letter<\/a> to Energy Minister Brian Jean includes developing \u201ca strategy to effectively incentivize reclamation of inactive legacy oil and natural gas sites, and to enable future drilling while respecting the principle of polluter pay.\u201d This sounds exactly like Smith\u2019s RStar proposal<\/a>,\u00a0<\/span>which would have provided $20 billion of drilling credits to oil companies that and cost the public purse between $6 billion and $12 billion of foregone revenue depending upon how the program was designed.<\/span><\/p>\n

RStar would violate an agreement between the Energy Resources and Conservation Board (ERCB) and industry from the early 1990s. The regulator ended reclamation security requirements in 1986 and struggled afterward to design regulations that would force oil and gas companies to clean up their depleted wells. Representatives from the ERCB, industry, the energy and environment departments, and the financial community worked for years on the Orphan Well Task Force to find a solution.<\/span><\/p>\n

The negotiations and the deal cut by the parties is described in detail by senior ERCB executive JR Nichol in a presentation to a 1991 drilling conference in Calgary.<\/span><\/p>\n

\u201cThe Board has taken and continues to take the position that the public purse should not be at risk because of orphan wells,\u201d Nichol told his audience. While it was not called \u201cpolluter pay\u201d then, the principle was long accepted in Alberta that oil companies, not the government, should pay to clean up their old wells.<\/span><\/p>\n

\u201cThat led the ERCB to a philosophical approach that, in essence, said those who benefitted from the well should be responsible to look after its proper abandonment,\u201d Nichol said.<\/span><\/p>\n

This is a critical point.\u00a0<\/span>Industry was allowed to shape Alberta\u2019s policy on well cleanup because they had agreed to accept the financial risk of orphans.<\/span><\/p>\n

For decades, the big producers drilled most of the wells in Alberta. When production fell, making the wells less profitable, they were sold to smaller companies. The wells\u2019 final home was often with \u201cstripper\u201d operators, mom and pop operations with shoestring budgets that squeezed the last few drops from the wells. Stripper well businesses often failed during oil and gas price downturns, orphaning their wells and associated infrastructure, like facilities.<\/span><\/p>\n

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JR Nichol, “Orphan Wells: Who Is Responsible – For How Long and At What Cost?” 1991, AER archives.<\/em><\/figcaption><\/figure>\n

The ERCB wanted to put the responsibility for clean up back on the big producers who had profited most during the early life of the well. The Board proposed a \u201cchain of responsibility in descending order\u201d (graphic on right). Numbers four through six would have captured previous beneficiaries of an orphan well\u2019s revenue.<\/span><\/p>\n

\u201cAs could be expected,\u201d Nichol said, \u201cindustry was extremely concerned about the length of this chain of responsibility, particularly the idea that one would continue to be responsible for a well even after selling that property to another individual or company.\u201d<\/span><\/p>\n

Here is the most important point.<\/span><\/p>\n

\u201cIndustry has thus recommended that the chain be limited to the current licensee and working interest participants and the receivers on behalf of any or all of those parties,\u201d Nichol said, \u201c<\/span>and that an industry-sponsored fund be established to pay for the share of abandonment costs of bankrupt owners<\/i><\/b> [emphasis added].\u201d<\/span><\/p>\n

This is the heart of the deal between the Alberta public and Alberta oil and gas companies: in return for not making previous owners liable for wells they had sold, often many years before, industry agreed to be responsible for orphan wells.<\/span><\/p>\n

The ERCB had already created a $3 million Special Well Fund after it stopped taking security. This morphed into the Abandonment Fund in 1993. In 2001, the Alberta government created the Orphan Fund, and the non-profit Orphan Well Association (OWA) to do the decommissioning work, the set up as it exists today. Under current legislation, wells only become orphans when the AER transfers them to the OWA inventory, which today contains about 7,000 wells.\u00a0<\/span><\/p>\n