The Alberta government will provide a $235-million loan to accelerate the work of cleaning up “orphan” oil and gas wells that have come with a rash of bankruptcies connected to the global crude-price drop.
The sizable cash injection is a sign both the government and industry believe the long-term buildup of old wells, amassed over decades of development, is a significant issue in the oil-producing province.
Alberta’s inventory of orphan wells jumped to 2,084 as of March of this year, in comparison to 768 one year earlier. That number was just 162 in March of 2014, before global oil prices dropped and economic activity in Alberta slumped.
The government argues that there are many benefits to the loan: It will alieve the concerns of farmers and landowners who have had to live alongside neglected wells on their property; it will help guard against leaks or other environmental issues; and it will create up to 1,650 new jobs over the next three years, during a period of low activity for the oilfield service sector.
“We know there’s a big liability. There’s no getting by that,” Premier Rachel Notley said, making the announcement Thursday at the site of an orphaned well near Carstairs, Alta.
“So the question is: How do we get a handle on that in a way that is balanced and responsible?”
To help protect the province from the financial risk of a massive environmental cleanup, the government requires companies to have enough assets or keep enough funds on hand to decommission their own sites. If this system fails, Alberta’s oil industry collectively funds an Orphan Well Association that works to close and “reclaim” the land around old, unwanted wells.
The government loan, which will be directed to the association, still abides by the polluter pays principle, the Premier said. Earlier this year, industry said it would double the annual levy it pays to the association, to $60-million, by 2019. On Thursday it became clear those increased levies will be used to pay back to the loan to the province over a decade.
Ottawa’s infusion of $30-million, announced in the federal budget in March and earmarked for well cleanup in Alberta, will pay interest costs on the $235-million, the Premier added.
The government said it expects the $235-million loan will greatly accelerate the pace of the cleanup, reducing the liability facing the association by approximately one-third. Last year, the association closed 185 wells.
The issue of orphan wells has become particularly pronounced with the pivotal Redwater Energy Corp. bankruptcy case, which has seen the successive court rulings come down on the side of federal laws that protect the interests of secured creditors over the cost of cleanup under Alberta’s provincial environmental laws. The fallout means the least economical assets of bankrupted companies can be foisted on the Orphan Well Association – and there are concerns that liability could eventually fall to the government and taxpayers.
Gary Leach, president of the Explorers and Producers Association of Canada – a lobby group for small and mid-sized oil producers – said his members didn’t ask for this money.
“But the loan idea is a smart way to accelerate these projects, supplement the annual funding already provided by industry, and put some Albertans back to work on these projects sooner – which we like,” Mr. Leach said.
“I think it’s well understood in industry that given the economic slump, and the uncertainty created by the Redwater bankruptcy case, the list of orphan sites was going to increase and the levy to pay for this work would grow apace.”
A lingering question is how fast the number of orphan wells continues to grow. Alberta has about 180,000 wells currently in operation, according to the government, but also counts another 83,000 “inactive” wells – where there is still an owner but activity at the well has stopped due to technical, or economic, reasons. Earlier this month, the province announced the beginning of discussions to improve the management of historic, current and future liabilities associated with upstream oil and gas development – while maintaining the competitiveness of the industry to attract new investment.